What Connects Cloudtail, Amazon, NRN Murthy and Rishi Sunak?
The clouds of accountability are gathering around the e-commerce companies in India.
Amazon’s clouds are particularly overcast, by the fact that there is a certain Cloudtail controversy, which arose as a result of its alleged regulatory irregularities in India, but has now spread into the annals of UK’s bureaucracy.
Here is the story.
Cloudtail is a joint venture between Amazon and Catamaran Ventures. Catamaran is a venture capital firm created and owned by NRN Murthy, the founder of Infosys. Murthy is the father-in-law of Rishi Sunak, who is the current Chancellor of the Exchequer in the UK government.
Agreed, the pedigree is elaborate. But hold that thought. There’s more.
Yesterday, The Guardian broke the story about a £5.5m ($7.7m) tax dispute between Cloudtail and Indian tax authorities. The company was allegedly served with notices on a number of issues concerning the interests and penalties on tax-related matters.
The Murthy-Sunak family owns 76% of Cloudtail and Amazon holds the rest. But this is just the recent ownership structure which has been altered over the years with the likely intention of avoiding close regulatory scrutiny.
Scrutiny to find out what? Let’s see.
Cloudtail, Appario and Other Amazonian Acolytes
Cloudtail is a “special merchant” which allows Amazon a substantial control over its inventory. Officially, it is an independent seller that operates on the Amazon platform. Practically, it is a proxy seller for Amazon which is used as a vessel by the latter to sell directly on its platform.
In February this year, a Reuters investigation revealed some internal documents which said that Cloudtail was created by Amazon to “stabilise and grow into a $1bn enterprise”.
Amazon had a 49% stake in Cloudtail back then. But the tides turned in 2016 when the Indian Government brought some changes into the e-commerce rules. Two, in particular, have been tailing Cloudtail’s existence so far:
- E-commerce sites can function as “marketplaces”, meaning they can intermediate and facilitate purchases/sales but NOT act as sellers themselves.
- A single seller can’t account for more than 25% of the sales on e-commerce marketplaces.
Amazon’s response to the first rule was to immediately lower its stake in Cloudtail from 49% to 24%. Reduction in equity interest in Cloudtail’s parent company ensured that it wasn’t a group company and also allowed it to keep selling on Amazon.
This also led to the birth of Appario in 2017, another joint venture between Amazon and the Patni group headed by Ashok Patni. Appario was also named as a special merchant and along with Cloudtail, it got access to Amazon’s “global retail tools” in exchange for “subsidised fees”.
The Grand Indian E-Commerce Thrift
A part of these “tools” mentioned above was access to the inventory of tech firms like Apple, OnePlus etc. Which meant exclusive deals to sell their products like smartphones (which account for a large share of gross sales on Amazon). The tech firms got proprietary sales channels for their products and Cloudtail got a hefty client base. But this also meant that it had a leg up on the countless other small sellers who were selling on Amazon.
And this is what led to Amazon’s response to the second rule. In order to diversify its seller-list and build local partnerships, Amazon went on a tie-up spree with many famous Indian brands like Dabur, Shoppers Stop, Amul, Titan etc. (nearly 60 of them by 2017), so that the 25% limit on single-seller sales could be adhered to.
But it didn’t. The Competition Commission of India (CCI), which has been investigating e-commerce agencies for antitrust violations, submitted this finding to the court recently.
“Some 35 of Amazon’s more than 400,000 sellers in India accounted for around two-thirds of its online sales in 2019.”
The CCI probe is aimed at finding “preferential relationships” that have been extended by Amazon to singular entities like Cloudtail, as alleged by the trader group which filed the charges.
Flipkart is also a party to the CCI probe. Flipkart’s version of Cloudtail is a company called WS Retail which, at its peak, sold almost 30–40% of all the products on its site. It was created by the Flipkart founders — Sachin and Binny Bansal — in 2009 and it used to act as the sole vendor for Flipkart till 2013.
But following the 2016 change in regulations, Flipkart’s dependence on WS Retail declined drastically up until 2018 when the company ultimately stopped selling goods on Flipkart. Another Flipkart subsidiary Myntra has also shown a decline in revenues from one of its largest vendors — Vector E-Commerce — since FY18 and continues to stress that it doesn’t hold equity partnerships with sellers.
Diversification of merchants may be a visible solution to the concentrated-sales-in-a-single-hand problem. But diversification from a single hand to a few hands is still a half-mast solution. An equal playing field only exists when no single or few sellers are favoured with manufacturing, distribution, storage and sales facilities by the platform which facilitates the sales. Unfortunately, that scenario continues to evade the Indian e-commerce market for now.
The Sunak-Murthy Angle
Cloudtail’s parent company, Prione, has more than three-fourth equity interest from Catamaran Ventures, which is owned by NRN Murthy. The tax dispute reported recently has put the operation of Cloudtail under scanner, with one expert even calling it a “model similar to Amazon’s but run on steroids”.
Cloudtail’s revenues have shot up considerably — £798m ($1.1bn) averaged over the last four years. However, its tax payments are paltry in comparison — £830,000 ($1.1m) over the same period.
This is partly driven by the fact that Cloudtail’s profit margins are substantially low — 0.3% over the last four years. In fact, in FY16, the company reported a net loss of ₹30cr ($4m) despite clocking ₹4,591.2cr ($627m) in revenues. Why? Because while revenues were increasing (by 25% in FY19), expenses also increased by 27% for the same period.
The company explained these expenses saying they were used in platform-selling fees, promotion expenses and stock purchases.
Regardless, it shows that Cloudtail is somewhat running at cost. Which explains why it poses enormous competition to other sellers on Amazon’s platform. What’s worse is that it paid £95m ($133m) to Amazon in fees last year which was ten times its profit.
This elaborate financial discrepancy has suddenly become the flavour of UK politics because one of the interested parties in Cloudtail is also the richest Member in the UK Parliament — Rishi Sunak. His wife, Akshata Murthy, has multiple ownership stakes and shares in a number of companies — Infosys, Catamaran, Soroco Private, New & Lingwood etc., which officially makes her richer than the Queen of England! Mr. Sunak has also announced himself as the beneficiary of a blind trust in 2019, whose proceeds are still unknown.
As Chancellor of the Exchequer, one of his jobs is to formulate policies related to corporate taxation, which is now more pronounced in light of the historic agreement on global tax reform reached at the G7 summit recently.
Mr. Sunak is reported to have played a major role in the formulation of this agreement. His closeness to the agreement as well as to Cloudtail (through family association) presents an imminent conflict since digital businesses like Amazon are set to be the most affected by this reform.
In any case, revelations like these are bringing an end to tech companies’ laissez-faireexistence until now. It remains to be seen how Cloudtail’s tax indictment plays out in the case against e-commerce players pending in the Indian courts.
(Originally published June 16th 2021 in transfin.in)
