THE FLIPKART- WALMART ACQUISITION DEAL: CHALLENGES FACED BY WALMART IN ACQUIRING FLIPKART

Background:

Wal-Mart International Holdings Inc. (a subsidiary of Walmart Inc.), an American multinational retail corporation and the world’s largest retailer has successfully acquired 77% stake in Flipkart Private Limited, an e-commerce Company based in Bengaluru, India, which was founded by Mr. Sachin Bansal and Mr. Binny Bansal in the year 2007 for approximate value of $ 16 billion (approximate value INR 1 Lac Crore).

Walmart had acquired majority stake of flipkart and boosted the valuation of flipkart resulting it to become the most valued e-commerce retailer in India.

Presently, Flipkart’s marketplace platform is under the operation of Walmart which is not only preserving a successful e-commerce platform but also enhancing the financial strength of the platform. Both the retailers are maintaining separate brands and operating structure.

Issues related to the Acquisition:

This acquisition was the world’s biggest e-commerce deal which has impacted the whole segment of retail marketing. Although there were certain issues which was faced by Flipkart & Walmart during this Acquisition deal.

1. Protest by Indian Traders

In spite of the being the biggest e-commerce deal internationally, the Flipkart- Walmart acquisition faced a lot of criticism from the All India Online Vendors Association (AIOVA) and Confederation of All India Traders (CAIT). They had strongly protested the entry of foreign retailer in Indian market considering it could be a new threat to them.

For the purposes of acquisition of the stake in Flipkart, Wal-Mart International Holdings Inc. had given a notice on 18th May, 2018 to get the approval of Competition Commission of India (CCI) as per Section 6(2) of the Competition Act, 2002 for execution of the Share Purchase Agreement by and between Walmart and certain shareholders of Flipkart and Share Issuance and Acquisition Agreement between Walmart and Flipkart.

During the inquiry of CCI, the All India Online Vendors Association represented by more than thousands of online vendors and Confederation of all India Traders had filed petition with the Competition Commission of India (CCI) raising objections for the purported violation done by Flipkart with regard to predatory pricing or deep discounting, exclusive tie-ups with preferential sellers and entry of foreign retailer into India’s retail sector. There were allegations of denial of market access to non-preferred sellers and abuse of dominant position on Flipkart by CAIT.

However, the CCI had sanctioned the combination by order dated 8th August, 2018 under section 31(1) of the Act stating that the deal is not likely to have an appreciable adverse effect on competition in India resulting in rejection of the contentions of the trader’s associations against Flipkart-Walmart deal.

The relevant Sections of the Competition Act, 2002:

Section 3(4) of the Competition Act, 2002 specifically mentions about Anti-competitive agreements including tie-in arrangement shall not be allowed if it causes or is likely to cause adverse effect on competition in India.

Section 4(1) of the Competition Act, 2002 bars the abuse of dominant position and further Sub section (2)(a) of Section 4 of the Act states-

“(2) There shall be an abuse of dominant position under Sub section (1), if an enterprise or a group-

  • directly or indirectly, imposes unfair or discriminatory-
  • condition in purchase or sale of goods or services; or
  • price of purchase or sale (including predatory price) of goods or service.”

Section 4(2)(c) of the Competition Act, 2002, restricts indulgement in practice or practices resulting in denial of market access in any manner.

Explanation to Section 4 of the Act defines ‘Predatory Price’ as the sale of goods or services at a price below the cost, as may be determined by regulations, of production of the goods or services, with a view to reduce competition or eliminate the competitors.

Section 6(2) of the Act states:

(2) Subject to the provisions contained in sub-section (1), any person or enterprise, who or which proposes to enter into a combination, shall give notice to the Commission, in the form as may be specified, and the fee which may be determined, by regulations, disclosing the details of the proposed combination, within thirty days of—

(a) approval of the proposal relating to merger or amalgamation, referred to in clause (c) of section 5, by the board of directors of the enterprises concerned with such merger or amalgamation, as the case may be;

(b) execution of any agreement or other document for acquisition referred to in clause (a) of section 5 acquiring of control referred to in clause (b) of that section.

Section 31(1) of the Act states:

(1) Where the Commission is of the opinion that any combination does not, or is not likely to, have an appreciable adverse effect on competition, it shall, by order, approve that combination including the combination in respect of which a notice has been given under sub-section (2) of section 6.

2. Claims of violation of Foreign Direct Investment (FDI) norms by Flipkart

CAIT had raised a complaint against Flipkart claiming repeated violation of Foreign Direct Investment norms as per the Foreign Exchange Management Act, 1999 with the Directorate of Enforcement (ED) who are the Adjudicating Authority in FEMA matters.

CAIT had alleged that 80% of the sales on Flipkart’s platform takes place through WS Retail Services Private Limited, a former subsidiary of Flipkart and Walmart would sell its inventory on the Flipkart’s platform either directly or through a web of associated preferred sellers which was prohibited by the Government.

As per the guidelines issued by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry by Press Note No. 3 (2016 Series) on Foreign Direct Investment Scheme, point no. 2.3(v) clearly states that an e-commerce entity will not permit more than 25% of the sales affected through its marketplace from one vendor to their group companies. Also, point no. 2.2 pertaining to guidelines on FDI on e-commerce sector has barred the FDI in inventory-based model which means inventory owned by e-commerce entity is sold directly to the consumers.

CAIT had claimed that no adjudication was done by the ED regarding compliances of FDI norms by Flipkart and subsequently, on 31st August, 2018, it had filed a Mandamus Writ petition in the Delhi High Court seeking directions to be issued to ED to investigate the business model of Flipkart.

Considering the threats in the acquisition deal with Flipkart, Walmart had already filed a Caveat on 28th August, 2018 in High Courts of Delhi, Bombay, Bengaluru and Ahmedabad.

The Writ Petition was disposed off by the Delhi High Court on the representation made by ED stating that they will be probe into the matter.

Mandamus Writ Petition: It is an order issued by a court to compel performance of a particular act by lower court or a governmental officer or body, to correct a prior action or failure to act.

Caveat: It is a warning and is filed by a party who claims a right to appear in the Court if an application for suit has been filed or is expected to be filed against that person. Such person who is claiming is known as the Caveator and the court sends the notice of application to him so that any ex-parte order is not given against the caveator without his knowledge.

3. Traders approaches National Company Law Appellate Tribunal (NCLAT)

Finally, CAIT had decided to file an appeal in National Company Law Appellate Tribunal (NCLAT), which is also an Appellate Authority over the Competition Commission of India against the approval given by the latter for the deal and for reserving the Flipkart-Walmart deal.

An appeal was filed by CAIT against the Competition Commission of India and Wal-Mart International Holdings Inc. before the Hon’ble National Company Law Appellate Tribunal (NCLAT), New Delhi. Advocate Abir Roy and Advocate Prerana De represented the CAIT, the appellant of the appeal whereas Senior Advocate Prashanto Chandrasen with Advocate Balaji Subramanian and Advocate Ishani Banerjee represented the CCI and Senior Advocate Rajiv Nayar with Advocate Anuj Berry, Advocate Yaman Verma, Advocate Malak Bhatt, Advocate Sonali Charak and Advocate Aakarshi Agarwal represented Wal-Mart International Holdings Inc.

CAIT had mentioned in the appeal that CCI has ignored the fact that the predatory activities were being carried out by Flipkart and Walmart in the past.

On 6th September, 2018, the Hon’ble NCLAT had passed an order stating that before going into the merit of the case, it intends to know the manner in which Wal-Mart International Holdings Inc. and Flipkart Private Limited were going to do business in India.

On 24th January, 2019, the Hon’ble NCLAT had dismissed the appeal of CAIT stating that it has failed to establish its allegations against CCI of granting approval for Flipkart-Walmart deal and to show that any major player in the e-commerce market would be eliminated due to such deal. Also, the NCLAT had observed that the allegations were faced against Flipkart but it was not impleaded a party to the appeal.

Law in Context: Other relevant Sections of the Competition Act, 2002

The Competition Act, 2002

The Act has come into effect to provide for establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.

Section 18 of the Act provides the duties, powers and functions of the Competition Commission of India. This section states the duty of the Commission to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India.

 Section 5 of the Act defines Combination as-

‘The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises if-

(a) any acquisition where—

(i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have-

(A) either, in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or

(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have-

(A) either in India, the assets of the value of more than rupees four thou sand crores or turnover more than rupees twelve thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or

(b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if-

(i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have-

(A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or

(ii) the group, to which enterprise whose control has been acquired, or is being acquired, would belong after the acquisition, jointly have or would jointly have-

(A) either in India, the assets of the value of more than rupees four thou sand crores or turnover more than rupees twelve thousand crores or

(B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or

(c) any merger or amalgamation in which-

(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have-

(A) either in India, the assets of the value of more than rupees one thou sand crores or turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or

(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have-

(A) either in India, the assets of the value of more than rupees four-thou sand crores or turnover more than rupees twelve thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees Fifteen Hundred Crores in India.”

Section 6(1) of the Act empowers Competition Commission of India to regulate ‘Combinations’ and specifically states that combinations which cause or are likely to cause an appreciable adverse effect on competition within the relevant market in India shall be considered as void.

Media Coverage of Deal

This Acquisition deal was covered by mostly all leading newspapers, news channels and magazines such as by The Hindu, The Economic Times, The Times of India, CNBC etc.

“What the Walmart-Flipkart deal means for India” – The Economic Times

https://economictimes.indiatimes.com/industry/services/retail/what-the-walmart-flipkart-deal-means-for-india/articleshow/64105363.cms?from=mdr

 “Flipkart-Walmart deal makes strong case for big Indian cos to join etail party” – The Economic Times

https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/flipkart-walmart-deal-makes-strong-case-for-big-indian-cos-to-join-etail-party/articleshow/64118427.cms

“Walmart’s $16 billion deal for Flipkart a sign US companies are looking to India for deals” – CNBC

https://www.cnbc.com/2018/05/10/walmarts-deal-for-flipkart-a-sign-us-companies-are-looking-to-india.html

“Walmart buys India’s most valuable startup, Flipkart in biggest global e-commerce deal”- The Times of India

https://timesofindia.indiatimes.com/companies/worlds-largest-company-buys-indias-most-valuable-start-up-in-biggest-global-e-commerce-deal/articleshow/64102287.cms

 “No sense in Walmart-Flipkart deal: Fabmart founder” – The Hindu

https://www.thehindu.com/business/Industry/no-sense-in-walmart-flipkart-deal-fabmart-founder/article23794758.ece

“Murli Manohar Joshi on Flipkart-Walmart deal: We know Walmart’s history, government should not have let deal happen” – Financial Express

https://www.financialexpress.com/india-news/murli-manohar-joshi-on-flipkart-walmart-deal-we-know-walmarts-history-government-should-not-have-let-deal-happen/1192313/

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