Corporate legal regulation behind takeover of Myntra by Flipkart

Abstract

We havewitnessed many mergers and acquisitions or takeovers of company by another company to enhance their business and to make strong grip in the market. In the year 2014 we saw one of the biggest acquisitions in which Flipkart took over Myntra. Also, article cover back story of this takeover. The takeover is very crucial for any company either for them who is acquiring or for them who is getting acquired. Therefore, it is not fare if we do not talk about regulation for the unlisted company.

In this Article, we will talk about the acquisition or takeover of Myntra by Flipkart and what’s the basic difference between merger and acquisition, corporate legal regulation behind takeover of Myntra, also what were the difficulties and what was the need for the acquisition for both the companies.

Introduction

Todaythe richest person on this planet is the owner of the largest ecommerce company. In India both amazon and Flipkart companies have a strong grip in the Indian ecommerce market and their employees work hard regularly to become the biggest market of India and in 2014 Flipkart made one step towards this by acquiring Myntra who is one of the leading fashion ecommerce sites in India. However, this acquisition was not easily understandable for many reasons. The term acquisition means where one big company acquires or attains a minor company. An acquisition of a company is development of obtained company to assemble the power of the acquiring company whereas the merger is like an acquisition but shows more stringently to merging the interest of both companies into a one stronger company. Both Flipkart and Myntra were unlisted companies and for this type of company’s acquisition are described mainly under the Companies Act, 2013. Though both the companies were very big and covers large market cap in India still their acquisition deal was held secretly and no much information was shared by their directors at the time of acquisition.

What was the reason behind this acquisition?

As per the reports, Flipkart was lacking behind in terms of fashion space in the ecommerce industry and really needed one of the fashion partners to cover the untapped market so that Flipkart can catch the grip of market. If Flipkart built its own fashion industry that would cost very high. Instead of this, Flipkart searched for the company who was already in fashion industry and was holding a good market cap. Flipkart found Myntra to acquire and this was the cost-efficient step for the company.

Whereas Myntra agrees for this acquisition because Myntra’s market cap was only 30 percent on that time and they were undervalued. After the acquisition the Myntra’s market cap is going to jump approximately double. Also Myntra’s sales were strengthening by the capital filled into it by Flipkart. During those years, Myntra was facing the cash burn phase and needed funds to fulfill their essentials and others competitors were going public to raise their funds but were not efficient and they realized that getting acquired is the most efficient option for the company.

What are the regulations for the Acquisition of Unlisted Companies in India?

In the Companies Act 2013, the compromise and arrangement of company is mentioned  under section 230 and the process is described under section 230(11) of the act such as: Application must be filed with NCLT then call for member’s meeting and creditors through the NCLT then Approval shall be given by the members who hold ¾ value of the total value of members and creditors then copy of the application will be send to the concerned regulatory authorities such as registrar of companies, IT Authorities, etc.; and Application can be filed with NCLT to approve the scheme of arrangement.[1]

In the year 2020, new rules were introduced where majority of shareholder or shareholders must hold at least 75 percent of the shares in the unlisted companies and may make an application to National Company Law Tribunal to take over the remaining shares of the company. This must be ensured before the acquiring. There must be fair and reasonable price paid to the remaining shareholder.  

How the deal gets locked?

Regarding this deal the details were never shared by the either side of the companies. However little information was shared as there was not such big problem due to common understanding and common investors for both the companies. Companies agreed on that they will work as a separate entity and founder of Myntra Mukesh Bansal will join Flipkart’s board, will be the head of fashion department and lead Myntra. All the employees of Myntra get the universal stock options. Flipkart and Myntra will share 50 percent in the online fashion market in India before it was 30% for Myntra. If in future, there will be need to raise the funds then Flipkart shall go with the Alibaba not Amazon due to the similarity between the Indian and Chinese consumers. [2]

At the time of announcement, founder of Flipkart Sachin Bansal clearly mentioned that it was 100% acquisition and Mukesh expressed his acceptance over the valuation of Myntra. He gave the fact that Myntra was valued at over the $300 million. Later, the US based Walmart company took more than 19 percent stake in the Flipkart company.

There were challenges faced by both companies such where Myntra always present their own voice and makes vision for upcoming days and work independently but now somewhere Myntra’s top management were not sure if they go with acquisition, are they allow to work independent in their own section. Myntra’s main target was the youth or the youth oriented (the fashion conscious ones) where as Flipkart’s users were base ranges from students to home makers, office goers and retirees. The world will a merged entity speak and target in the same tone of voice and style to different customer types, is any body’s guess.

Similar Acquisitions in India

Ola acquires Taxi for sure before the acquisition Taxi For Sure was active in 47 cities with their 15000 vehicles. Ola acquired Taxi For Sure in the $200 million in the equity as well as cash. Under this deal, the ola and taxi for sure works separately or with the separate entities like Flipkart and Myntra. The COO of Taxi for Sure had been appointed as CEO and other workers worked as same as previously. After Ola acquires Taxi for sure the investors of Taxiforsure will roll over their stock in the ola.[3]

In the year 2014, Tata Consultancy Services one of the leading IT services firm acquired approximately 52 percent stakes. After this acquisition, TCS will able to consolidate CMC’s operation in single company and rationalized structure, greater financial strength, standardization and simplification of business processes and productivity improvements, etc. After this acquisition, the paid-up share capital of TCS had increase from 195.87 crores rupees to 197.04 crore rupees.

Conclusion

Both Flipkart and Myntra shares big market cap in India and after this successful acquisition they definitely dominate the Indian ecommerce market. By this deal, both the companies will support each other to enhance their value in the market in the field of fashion and technology. During the acquisitions, the roles and responsibilities of the regulatory authorities become important to monitor the whole process and watch that the acquired party is not suppressing by the acquiring company. The next year profits of the company clearly shows that how much effective exactly promoters and founders of both companies observe and planned their deal. Also, now it is easy for both the companies to tackle the fight against foreign companies like amazon.

Any company before going for acquisition must determine the market and growth and for this leaders must analyze demand and profitability of company in future after the acquisition. The selection of the best candidate or company for acquisition is the key control the market and Flipkart clearly showed it. This acquisition was best in its own but there must transparency in performing. In this block somewhere Flipkart and Myntra had some grey area where they didn’t much information of acquisition and that was the reason both companies faced problems in finding new reliable investors. The decision that both the companies will work as separate entity results as a good decision of the acquisition.

CREDITS: Arpit Pandey, ICFAI Law School Hyderabad

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[1] Companies Act, No. 18 of 2013, Section 230(11).

[2] Anusha Soni, Flikart Myntra merger to set stage for online combat, https://www.business-standard.com/article/companies/flipkart-myntra-merger-to-set-stage-for-online-combat-114041600144_1.html, (last updated at 16th April, 2014 1:43IST).

[3] BS reporter, Ola acquires Taxiforsure in $200mn deal, https://www.business-standard.com/article/companies/ola-cabs-acquires-taxiforsure-in-200-mn-deal-business-standard-news-115030200354_1.html, (last updated 3rd March, 2016 2:00 IST).

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