BUSINESS

After All That Snapdeal Says Jabong Did Not Clear Compliance Bar

A curious take on the deal

28/07/2016 2:47 PM IST | Updated 29/07/2016 2:06 PM IST
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Anindito Mukherjee / Reuters
Kunal Bahl, co-founder and CEO of Snapdeal

Just days after e-commerce player Snapdeal lost out to rival Flipkart in the $70 million acquisition of online fashion portal Jabong, Snapdeal CEO Kunal Bahl has said the latter didn't meet the governance and compliance standards of the company.

Bahl told Hindustan Times, "We have a high bar when it comes to governance, regulations, and compliance. Unless a company can clear that bar, we have issues."

That's an odd take on the deal as Snapdeal is tied to a logistics provider, GoJavas, which also serves Jabong, and has been the subject of an internal investigation on corporate governance and compliance issues. Snapdeal executives didn't respond to requests for comment.

Earlier this year', Jabong and GoJavas became part of an internal "forensic" audit commissioned by Jabong's previous financial backers, Rocket Internet, following a string of questionable operational deals carried out by certain former Jabong promoters including the spin-off of GoJavas from Jabong in 2013.

According to media reports, Snapdeal, invested more than $20 million in GoJavas in 2015 for a minority stake, and late last year further increased its share to about 42 per cent for an additional investment of Rs 117 crores in a bid to strengthen its logistics capabilties.

The audit, code-named, Project Flush, conducted by PricewaterhouseCoopers, shed light on several alleged financial irregularities that happened during the spin-off of GoJavas in 2013 and it's unclear if Rocket Internet plans to pursue legal actions against those executives.

A tale of two deals gone sour

The investigation notwithstanding, Snapdeal had been recently seeking to separately buy out GoJavas entirely but deal talks collapsed over differences in valuation, according to a Business Standard report.

Following the result of the Jabong deal, which surprised many in the industry, Bahl explained in an e-mail to employees the challenges of mergers and acquisitions, adding that Snapdeal is better off saving the money it would have spent on the Jabong acquisition. It plans to invest $100 million in building its own fashion business, he told HT.

"M&A is very exciting when you are doing it. The real work begins after that, and the surprises come after that. I am happy for the people (the sellers) who got all this cash for a company that has all these issues," Bahl said in the e-mail, reported HT.

However, Bahl's recent comments do raise questions on how big a role the corporate governance investigation played in Snapdeal's interest in pursuing Jabong and GoJavas, and if it, in fact, even played a role at all.

An industry source pointed out the PwC investigation has been going on for a while when Snapdeal was still in the race for Jabong. GoJavas handles nearly 70 per cent of the logistics for Jabong, according to the source.

Should Snapdeal choose to retain its stake in GoJavas, it does create the potential for conflict of interest as GoJavas will now ultimately serve a company owned by rival Flipkart.

The industry source noted that such apparent conflicts in the Indian e-commerce space are fairly common but aren't particularly problematic, citing Flipkart-backed logistics provider eKart which also now serves Paytm, which in turn is backed by rival Alibaba. And most of e-commerce players in India use Amazon's cloud services AWS while Amazon is the biggest competitive threat for both Flipkart and Snapdeal.

ALSO READ: Sold: Flipkart's Myntra Has Bought Jabong To Massively Pump Up Its Fashion Wardrobe

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