The changes in Flipkart’s legal structure came just in time. In September 2012, India’s commerce ministry made it explicitly clear that foreign investment was prohibited in direct online retail or inventory businesses; only marketplaces were permitted to receive foreign capital. Again, there was no defensible rationale for such a distinction. What mattered was that retail was a politically charged space in India; both right-wing and left-wing parties had opposed the infusion of foreign capital in Indian retail.
A few days later, in October, BusinessWorld published its article on how e-commerce firms were violating Indian laws. ‘FDI Escapades’ detailed the dodgy legal ruses adopted by online retailers to bypass foreign investment laws.10 It proved that most e-commerce companies, including Flipkart, Myntra and Rocket Internet, were in fact running inventory businesses rather than marketplace platforms. Holding stock was essential to ensure that customers received original, first-hand products in a speedy manner. Without the inventory model, there would be no consistency in service, which would translate to low sales growth and insignificant valuations. Since the inventory model was prohibited, e-commerce firms pretended to be marketplace platforms, claimed the BusinessWorld piece. It was an indictment of the regulatory failure in the e-commerce space. This would soon change.
Towards the end of 2012, Flipkart and many other e-commerce companies were hit by a shocker. The Enforcement Directorate, the feared regulator in charge of enforcing foreign investment laws and investigating related violations, had sent them notices.11
The ED was inquiring about their legal structures. The regulator was out to prove that the online retailers were operating under the inventory model. While many e-commerce companies received notices, it was clear that the primary target of the ED’s inquiry was Flipkart. This was hardly a surprise: Flipkart had raised more capital than all other internet companies combined.
THE ED INQUIRY came at a troubled time for Flipkart. Three worrying trends had endured at the company since the middle of 2012. It was losing more money with every passing month. While this was expected, what made it a cause for concern was the second trend: Flipkart’s sales growth had nearly stalled for the first time since its inception in 2007. In June 2012, it was generating about ₹100 crore in monthly gross sales. By December 2012, this number had inched up by less than ten per cent.12 Even worse, customer complaints about its service had multiplied. Altogether, these trends established beyond doubt that Flipkart was suddenly in a proper crisis. It was an unusual experience for the company where most employees had only known good times.
The crisis at Flipkart was of its own making. The company had grown overconfident. It had launched many new product categories all at once, believing that it could force its way through any barriers. But categories such as large electrical appliances required logistical expertise that could only be accumulated after several months of trial and error. Others necessitated specialized sourcing and logistics mechanisms. Stretched in too many areas, the company’s sales function was in disorder. Ankit Nagori, who was now at its helm, could not exert his authority the way he had when leading the books and media categories.
There were other problems as well. The company’s new supply chain software, Flo, was found to have flaws that resulted in increased expenditure and troubles with vendors. A new accounting process was introduced with haste, and this caused further disruptions with vendors. Flipkart had also lost many talented senior employees who had suddenly fallen out of favour; executives who had replaced them needed time to acclimatize. Within a year, the company had nearly tripled in size to about 5,000 employees. Older employees were wary of newer colleagues; camaraderie had been replaced with self-interest. Flipkart struggled to impose a uniform corporate culture. In the second half of 2012, the company failed to measure up.
What Flipkart missed the most at this time was the decisive leadership of Sachin Bansal. After the General Atlantic talks fell through, Sachin had loosened his grip on the company. He seemed distant to his colleagues. The Forbes story had also made him less trustful of people. The Core Team had not been meeting frequently. Flipkart’s business and staff had grown at a pace that had made centralization impractical, futile even. But the Core Team meetings were still important. These had been a weekly fixture, a ritual that had helped the management exercise some control over what was becoming an increasingly chaotic environment. At that time, when the company desperately needed direction, the diminished influence of its management team and Sachin’s withdrawal only worsened the situation.
Sachin and Binny finally took action in December. In a sweeping restructuring exercise, they announced a new hierarchy. Mekin Maheshwari was given a new role in Flipkart’s digital products and services unit; Amod Malviya replaced him as the head of engineering. Ankit Nagori was told that his role had been cancelled. He was to now head the company’s fashion category, a far smaller responsibility compared with his earlier position as the leader of all categories. It was a hard fall for him, especially painful as it happened soon after he returned to work from a two-week-long break to get married.
Apart from implementing these measures, Sachin decided to step back completely for some time. He told colleagues that he would take time out to work on new ideas for the business and return to a full-fledged role shortly. He was also supposed to represent Flipkart in the ED inquiry, which would be time-consuming. Until Sachin was ready to return, Binny would run the company. He was to directly oversee sales and operations, and the heads of all other functions would report to him. The reorganization jolted the company. Until now, it had been run in a collaborative, concerted manner by a close-knit group of senior employees. The restructuring
