Flipkart board grants freedom to PhonePe, to fully divest over time

We all are aware of how the change in FDI policy in e-commerce affected Walmart’s plans for Flipkart in the country, and the disappointment of the US retail giant surrounding the same.

It bought Flipkart, PhonePe, Myntra, Jabong, and other Flipkart group companies collectively for a massive $16 billion, but a couple of changes in the country’s foreign investment policy issued by DPIIT created major havoc in the FK-WM house.

This disappointment of Walmart was bound to make the US company seek a monetizing opportunity that could generate whatever Return on Investment (ROI) possible since the original plans now have to be revamped to suit the laws. Given it is highly difficult to give an exit to Walmart due to the magnitude of investment required, exit opportunities in smaller of the group companies become a sensible route.

For PhonePe, that is looking to onboard a new set of investors, its own board, and independence in operations, this became a win-win opportunity.

As per ET’s sources, the Sameer Nigam, Rahul Chari, and Burzin Engineer founded firm is looking to raise a $1 billion round of its own. It wants to become a bigger player in the Payments space, fighting deep pocketed competitors. Rather, I should say deep-er pocketed Paytm and Google Pay. And for this, it requires more and more money to spend on promotion, consumer acquisition, discount and cashback activities.

Now Walmart, that has already deployed huge funds, and has no visible solid ground for appropriate ROI, cannot invest more money. Why? As Vivek Durai, Founder of paper.vc pointed out, it is a US-based public company, to maintain and grow its market value there, it has to show numbers. It cannot spend more money and has to reflect gains. Doug McMillan has to maintain his leadership.

Flipkart has already invested the $500 million it committed to PhonePe at the time of acquisition. The last tranche of this agreement came 5 days ago in a Rs 743 crore cheque.

On the other hand, for PhonePe it would make no sense to miss out on opportunity growth in Indian digital payments industry that is slated to touch $500 billion by the end of next year, as per a report by IBEF.

Especially when PhonePe already is amongst the top three names in this space in the country, has a monthly active user base of 50 million, and claims to be doubling its volume every three months.

It even announced its plans to invest Rs 500 crores in promotional activities themselves, to capture this market potential over the year.

Hence the appeal by PhonePe to be allowed to operate as an independent entity with a different set of board members and investors, as well as to raise a fresh round worth billion dollar.

The company’s existing backers such as Tencent and Binny Bansal are already interested in participating in this new round, as this is a familiar and worthy opportunity for them to cash in on the payments space.

All PhonePe needed to start the actual fundraising activities in a full-fledged manner was the Flipkart board’s approval. Till now the company functioned like any acquired company, with the same board as the parent.

Now, the FK-WM board has given its approval to “hive-off”, rather disinvest from PhonePe gradually. While it is not certain if Flipkart will divest 100 per cent stake right now, it seems to be okay with doing it over time.

To explain why this is not a hive-off and more of a de-acquisition, hive-off means transferring assets and or functions that already existed within a part of the company to a new or existing entity. PhonePe already operated as a separate entity with its separate assets and functions from Flipkart, only the investors and decision makers were the same.

That being said, this development has a significant impact on all the stakeholders as well as the industry itself. With PhonePe functioning as an independent entity, and having the freedom to raise money from multiple sources without reliance on and governance of Flipkart, the competition in the market is expected to skyrocket. Especially for Paytm and Google Pay.