The sitting ducks of e-commerce

Cash-rich companies have been acquiring smaller companies for either technology or marketshare. While entrepreneurs slog it out initially to make the company or the product take root, these global companies acquire them at the drop of a hat. Walmart acquiring Flipkart is billed as the biggest global acquisition in e-commerce space.

The takeover of Flipkart, India’s largest start-up and biggest e-commerce company, by the US giant Walmart, has created concern in some quarters about the future of Indian companies that do not have deep pockets.

Flipkart was not a hostile takeover; it was sold because Flipkart’s owner/founders, Sachin Bansal and Binny Bansal did not have the deep pockets and resources needed to take the online company to the next level. Additionally, its investors wanted to exit the company which was making losses.

The sale has created pessimism in some quarters about the future of Indian companies that are vulnerable and forced to sell as they don’t have the money to go forward. Raghav Bahl, founder and chairman, Quintillion Media, has expressed dismay at the sale of Flipkart, coming as it does on the heels of Google and Facebook already dominating in India. He is in a way right in sounding the alarm but looking to the government to help out is not the answer.

Young lawyer Aditya Pratap is of the view that in this era of globalisation there is no room for complacency. “Let the best player win,” he says, and adds, “It’s a sport.” He prefers the word “sport” to “competition”. The only caution necessary is for the Competition Commission to see that no duopoly is created because that is as dangerous as a monopoly. Prices, he says, need to be monitored.

It is true that the Bansals sold their stake at a hefty premium as they did not have financial support. A country such as the United States helps its entrepreneurs through various forums as it recognises the critical role they play in promoting economic growth and creating jobs. The government has policies and programmes that support the development of talent, entrepreneurial culture and capital for small and medium enterprises. The United States also supports pioneering initiatives to provide women with access to business networks and global markets, to promote women’s inclusion in the economy and to provide training for women entrepreneurs. Interestingly, their work is not restricted to the US but spreads overseas, particularly in  developing economies.

India does not have this innovation-friendly environment. Of course there are institutions for medium, small and micro enterprises and there are trade bodies like the chambers of commerce etc.  But it is not easy for newcomers to get funds.

India does not encourage innovators and this situation has prevailed over the years. One reason could be that sections of people feel threatened by innovation and feel that innovators could scuttle their chances because of their clout with the powers that be. These are people who put self- interest before the country’s interest. Indian investors are hesitant to put in money unless they see profits on the horizon and start-ups are not expected to deliver profits for some years. Foreign investors are different and see potential in and recognise innovation.

When Prime Minister Narendra Modi announced his Swachh Bharat programme, concentrated on building toilets, Indian businessmen failed to see the importance. It was only after the Bill Gates Foundation and other foreign groups came in to support the programme that they woke up to do their bit.

The government can help entrepreneurs in India through creating an environment where business can function. Red tape, which is the hallmark of our bureaucracy, still prevails. The recent push for “ease of doing business” is welcome, but there is still a long way to go before a genuinely business-friendly atmosphere is created. There are so many institutions and local bodies involved in giving permissions that it is a drain on the energies of an entrepreneur. Corruption is also a major problem.

So, how does an Indian entrepreneur strengthen his position so that he can  retain his independence?

He should ensure that he does not dilute his shareholding which should be preferably 51 per cent in a company, says Ambareesh Baliga, an independent market analyst. The minute he goes to the market to raise funds he dilutes his shareholding.  “In a way one has to balance ownership and growth,” Mr Baliga says. Earlier, promoters could issue warrants but this was stopped by the Securities and Exchange Board of India (SEBI), which insisted that the warrants have to be converted to equity within 18 months from the date of issue at current market prices. This acts as a disincentive, Mr Baliga says.

However, entrepreneurs like Facebook’s Mark Zuckerberg and media mogul Rupert Murdoch have meagre shareholding in their companies but retain control through shares that have different voting rights. Zuckerberg and his group have about 18 per cent shareholding. But their Class B shares have 10 votes per share while the Class A shares that are traded have only one vote per share. This way he and the insider group have the majority voting rights. The trick is to have shares that have dual voting-class structure that enables owners/insiders to control voting shares.

The same is the case with News Corp where Rupert Murdoch has all of the voting power in Class B shares while the Class A shares that trade have no voting rights.

After much dilly-dallying, the Companies Act, 2013, now recognises the concept of shares with differential rights, although SEBI has imposed further curbs on the ability of public listed companies to issue shares with superior rights. The regulator’s view is that it is not fair to ordinary shareholders. The advantage of a dual-class structure is that it allows companies to raise capital while allowing founders and insiders to still retain control.

Going forward, SEBI needs to reconsider its position or find a middle path through which both sides can benefit.