New Delhi/Bengaluru: India’s largest e-commerce firm Flipkart Ltd has bought back its logistics business from WS Retail Services Pvt. Ltd, the largest seller on its platform, and a company with which it has close links, in an effort to simplify its structure ahead of a possible share sale a few years later.

The acquisition has been made through a new entity called Instakart Services Pvt Ltd, according to official documents and five people familiar with the matter.

The deal leaves WS Retail with only a trading business, which is also gradually being wound down as Flipkart shifts to a marketplace model from an inventory-led one, the people cited above said on condition of anonymity. Flipkart wanted to buy back the logistics arm as it is preparing for an initial public offering over the next few years and wants to make its complex structure simpler, they added.

Tax and accounting experts said the deal would have needed to be done at a fair value price to prove arm’s length distance was maintained between Flipkart and WS Retail. Since Flipkart’s logistics arm was moved to WS Retail in 2012, the business would have significantly increased in value, they add.

“We, as a policy, do not comment on specific transactions," a Flipkart spokesperson said by email. “Moreover, Flipkart follows the highest standards of corporate governance for all its business activities. We ensure that every transaction we undertake, adheres to all applicable procedural, legal and regulatory norms, including fair value norms."

Mint couldn’t independently ascertain the value of the Instakart deal.

“In such situations (as the Instakart deal), it is very important to see how the capital gains are treated," a tax consultant said on condition of anonymity.

Since India bans foreign direct investment (FDI) in online retail (this is allowed in the marketplace model), Flipkart has devised a complicated maze of many inter-connected and some purportedly independent entities that receive the massive amounts of money it raises to build an integrated e-commerce business.

WS Retail is one of the most important entities in this structure. To get around FDI rules, Flipkart created WS Retail in 2009 as a seller on its site. As part of a complex arrangement, WS Retail bought goods from Flipkart India Pvt. Ltd, the B2B (business-to-business) arm of the main group holding company, and sold the same goods to customers on Flipkart’s site. WS Retail also owned and ran Flipkart’s key logistics business called e-kart that delivered products to customers.

WS Retail was owned by Flipkart co-founders Sachin Bansal and Binny Bansal, both of whom were also on its board, until September 2012. The Bansals were forced to sell their stake in WS Retail to former OnMobile Global Ltd chief operating officer Rajeev Kuchhal, just weeks before Indian regulatory agencies launched an investigation into Flipkart’s business relationship with WS Retail.

After the stake sale, the Bansals resigned from WS Retail’s board, but two of Flipkart’s early employees, Sujeet Kumar and Tapas Rudrapatna, both of whom are considered to be close to the Flipkart founders, controlled roughly 46% of WS Retail. Kumar was the de facto head of WS Retail and ran the logistics business until he left the company earlier this year.

This logistics business has now been acquired by Instakart Services.

Instakart Services was registered in June with Ankit Nagori and Rajnish Singh Baweja as the company’s shareholders and directors. Nagori is chief business officer at Flipkart while Baweja is Flipkart’s finance controller.

In July, Instakart received 127 crore from Klick2shop Logistics Services International Pte, a company registered in Singapore. Klick2shop was incorporated in February and is registered under the same address as Flipkart Ltd, the group’s holding company, in Singapore.

Since late 2012, the Enforcement Directorate has been investigating Flipkart for alleged violations of FDI rules. The status of the probe is unclear.

Flipkart, which has raised more than $3 billion in funds from investors including Tiger Global Management, Qatar Investment Authority and Accel Partners, is now valued at $15 billion and is targeting gross sales of more than $10 billion this year. Gross sales exclude discounts and returns.

Since 2013, Flipkart has been slowly shifting to a marketplace model, where it connects customers to thousands of third-party sellers rather than sell products only through WS Retail. While the effort took time, Flipkart has been accelerating this shift over the past six months and now has more than 45,000 sellers on its platform.

To be sure, WS Retail still accounts for a significant part of Flipkart’s sales and is unlikely to fade away completely anytime soon.

WS Retail will continue to exist as a seller for the next few years, the five people cited above said.

From the marketplace model Flipkart is considering a plan to move to an advertising-based business. The company is planning to reduce commissions charged to its third-party sellers and diversify its business model by adding advertising, payments and other services starting this year, Mint reported on 24 July.

The company’s plan is based loosely on the business model of China’s e-commerce giant Alibaba Group. The Chinese firm charges low commissions on one platform and offers free listings on another to sellers, but makes money through ads, and logistics, payments and other services.

shrutika.v@livemint.com

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