Aristotle Consultancy set up a perfect smokescreen for Rocket Internet

New Delhi: Rocket Internet was (and remains) Aristotle Consultancy Pvt. Ltd’s claim to fame. Founded in March 2010, by Deepak Dhamija, Aniket Kumar and Sanjeev Lamba, the company had done similar work before, structuring complex deals for India Hospitality Corp., a hospitality and leisure company.

By 2011, Aristotle had grown into a 20-person company. And then Rocket happened. Between April and October of 2011, Aristotle created more than 10 new entities for Rocket and started to manage some of the other entities that Khaitan and Co. had floated for Rocket during its first stint. Its team was hard-working, efficient, inexpensive and open to doing anything Rocket wanted.

Kumar and Lamba led most of the conversations with the Rocket team in India and Berlin. Eventually, Aristotle would have separate teams working with Jabong, FabFurnish and other Rocket companies.

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There were three sets of companies that Aristotle registered for Rocket: back-end wholesale firms that would be used as a vehicle to get foreign investment into the country (Jade eServices in the case of Jabong and Bluerock E-Services Pvt. Ltd in the case of FabFurnish; front-end entities that would be used to directly sell to the consumers such as Xerion Retail (Jabong), Alix Retail (FabFurnish); a third set of companies created to accomplish everything that was not required to be recorded in the books of the other two kinds of entities (LSD Infosolution and Larissa Apparel and Trading). Aristotle handled finance, accounting and legal functions for all the companies, including GoJavas.

Wholesale entities were largely controlled by investment arms floated by Rocket in Germany. And all the consumer-facing entities were registered under shareholders Ashish Choudhary and his cousin Sanjeev Dhull. It is interesting to note that several Aristotle employees held the position of director in many of these firm. For instance, Aarushi Raturi, an employee at Aristotle, acted as a director in Rocket E Services Pvt. Ltd, LSD Infosolution and Moksha Designs among others.

Jade eServices, Bluerock E-Services and Moonshine Eservices Pvt. Ltd were 99.9% owned by VRB GmbH, a German entity owned by Rocket Internet. These had a mix of Indian founders and Rocket’s German employees listed as first directors. For instance, Jade counted Arun Chandra Mohan, Heavent Sudhir Malhotra and Arnt Jeschke as the first directors in the company in 2011.

Rocket also set up its Indian arm Rocket E Services, a wholly owned entity of International Rocket GmbH. Jeschke and Florian Heinemann were the first directors. Eventually Malhotra was hired and made director. This entity was used to provide consulting services to Jabong, Printvenue, FabFurnish and Foodpanda.

As the law required the B2B (business-to-business) and the B2C (business-to-consumer) entities to maintain an arm’s length relationship, Jade and Xerion (Jabong); Bluerock and Alix Retail (FabFurnish) had completely different sets of directors and owners—at least on paper.

All the companies shared the same office. Jade was the richest and biggest and bore all the costs. The others paid it a small amount as rental.

By mid-2012, Rocket Internet’s businesses in India employed more than 3,000 employees. The companies had by then moved to a large office in Gurgaon’s Udyog Vihar. The building was visible from the Delhi-Jaipur highway and displayed a huge billboard of Jabong on top.

From a legal point of view, Jabong’s structure was more robust than that of Flipkart, Myntra and Letsbuy (an online retailer of electronics that got acquired by Flipkart), all of which at that time had common shareholders and directors in the B2B and B2C entities.

Not that everything was at arm’s length.

Jabong was a brand owned by Jade and further licensed to Xerion for online commerce, but the two companies shared office and warehousing space for a long time. A majority of employees were on the payroll of Jade. Xerion largely took care of customer service, something Jade was not allowed to do under India’s foreign direct investment (FDI) norms. Also, there was a franchise deal signed between Jade and Xerion to protect Jade’s interest.

The B2C company acted as the customer-facing entity for the wholesale arm (read Jade). When a customer ordered a product on Jabong.com, Jade eServices would conduct a “flash sale” with Xerion. Xerion then would bill, pack and ship the product under its name.

What Rocket underplayed was the fact that all the value was being created in the wholesale entity. At the time of a potential sale, a buyer would have to essentially buy the wholesale entity rather than the front-end arm. Buying both together may attract the attention of the Enforcement Directorate.

And such a situation did arise. Thrice. During sale talks with Amazon in 2014, Paytm in 2015 and Snapdeal in 2016, the structure didn’t pass muster. The potential buyers, all of which were operating under the marketplace model, found it difficult to add a wholesale entity within their existing structures. “Buying a wholesale arm would have meant that either the buyer had to create a Xerion like company or figure out a way to work with existing management of Xerion, which most parties were not comfortable with,” a person familiar with the old deal talks said, requesting anonymity.

The close ties between Jade and Xerion also caught the attention of legal experts advising potential buyers.

Their typical questions: Why was Jade selling 100% of its goods to Xerion? If Xerion was an independent entity, why was Jade dictating the prices of products on Jabong? Why did Jade have the rights to take decisions in respect of what kind of goods would be procured and merchandised.

An IFRS (International Financial Reporting Standards) report drafted by EY during the time of Rocket Internet’s IPO stated that Jade had information rights in respect of the management changes in Xerion. “Management of both companies work very well since 2011; a veto right in any party’s management set-up is not agreed, but mutually parties would discuss the necessity of management changes as the relationship is of great significance for either party,” said the report. Mint has seen a copy of the report.

Jade also had the rights to approve any change in the shareholding of Xerion to ensure that the latter did not fall under the control of a competitor, the report said.

In March 2016, the government allowed 100% FDI in online retail of goods and services under the “marketplace model” through the automatic route. The move legitimized an entire sector, which in five years alone had attracted over $10 billion worth of capital despite being closed to FDI. However, the new policy limits an individual seller’s contribution to sales on the marketplace to 25%.

Rocket’s complex web, which can’t stand too much scrutiny, could be one reason why the German company doesn’t want to dwell on lapses at its Indian businesses too much. Any extensive investigation could also unearth skeletons in its own cupboard.

“People here (Rocket’s Indian managers) knew Rocket could not take a legal action given that it was not abiding by the law,” said a senior executive at Rocket Internet who spoke on condition of anonymity. “Complexity of governance made it lose.”

Rocket also underestimated the strong ties between Jabong’s management and Xerion’s promoters. Rocket lacked direct control over the consumer-facing entities. In the early days of Jabong, Rocket was largely dependent on Arun Chandra Mohan for any communication with Xerion’s Ashish Choudhary.

“Ashish Choudhary would only listen to Arun. Ashish was hardly seen in office; we would send Arun’s driver to Ashish’s Gurgaon residence to get any signatures or pick up documents,” said a senior Jabong employee who spoke on condition of anonymity.

However, over the years, Choudhary became fond of Sinha and their friendship strengthened. Choudhary would eventually go on to fund GoJavas. It was Sinha’s idea, Choudhary’s capital and Rocket’s business that made the delivery company valuable. Eventually, though, Rocket would derive no value from its sale.

Mihir Dalal in Bengaluru contributed to this story.