Zomato and Blinkit Deal

Mergers and acquisitions have become key strategies for business growth and market expansion. One such landmark deal is the acquisition of Blinkit (formerly Grofers) by Zomato Limited. Announced in June 2022 and completed by August 2022, this all-stock transaction was valued at approximately ₹4,447 crore (around $568 million).

This deal is significant not only for its commercial implications but also for the complex legal framework it navigated, spanning corporate governance, securities regulations, competition law, and taxation. This article aims to provide a detailed yet readable analysis of the Zomato-Blinkit deal from a legal perspective, offering insights into its structure, compliance requirements, and broader significance.

Background of the Parties

Zomato Limited

Founded in 2008 by Deepinder Goyal and Pankaj Chaddah, Zomato began as a restaurant discovery platform and evolved into a comprehensive food delivery and logistics company. Over the years, Zomato expanded operations to over 23 countries and successfully raised more than US $2.5 billion through equity funding.

Zomato is listed on Indian stock exchanges and has actively pursued acquisitions to consolidate its position in the food delivery space. Notable among these was the acquisition of Uber Eats India in January 2020.

Blinkit (Formerly Grofers)

Blinkit started as Grofers in December 2013, founded by Albinder Dhindsa and Saurabh Kumar. It positioned itself as a pioneer in the instant grocery delivery sector in India. Over time, it expanded to major cities, raised around US $1 billion in funding, and acquired smaller players like Mygreenbox and Townrush.

In mid-2021, Grofers rebranded as Blinkit, focusing on quick commerce—promising delivery of groceries within minutes. However, due to operational and financial challenges, Blinkit faced a cash crunch, leading it to agree to be acquired by Zomato.

Strategic Rationale Behind the Acquisition of Zomato and Blinkit

Entry into Quick Commerce

Zomato had previously attempted to enter the grocery delivery space, particularly during the COVID-19 lockdowns, launching grocery delivery services that were later discontinued due to logistical difficulties.

With Blinkit’s established quick commerce model and network of “dark stores” (warehouses for rapid delivery), Zomato found an effective way to establish a presence in this rapidly growing market segment. Quick commerce platforms have been growing faster than traditional e-commerce, largely driven by consumer demand for instant deliveries.

Increasing Customer Wallet Share

The acquisition allows Zomato to integrate grocery delivery within its existing food delivery app, increasing the “wallet share” of customers. Plans included adding Blinkit and Hyperpure (Zomato’s B2B food supply business) tabs on the Zomato app, allowing users to order groceries, food, and restaurant supplies all from one platform.

Cost Efficiency Through Shared Logistics

By combining delivery fleets and logistics infrastructure, the companies aimed to reduce delivery costs. Quick commerce demands faster deliveries within shorter time windows, leading to higher order density and potentially lower per-order costs.

Boosting Gross Order Value (GOV)

The deal was expected to increase Zomato’s Gross Order Value, a key metric for profitability, since grocery deliveries involve consumer packaged goods with higher order volumes. Blinkit’s GOV was reportedly catching up with Zomato’s in several key markets, indicating strong growth potential.

The Deal Structure: All-Stock Acquisition

The acquisition was executed through an all-stock deal. Blinkit shareholders received one Zomato share for every ten Blinkit shares held. This share swap avoided cash outflows but raised important valuation and shareholder protection questions.

Prior to the acquisition, in March 2022, Zomato had invested $100 million to acquire a stake of over 10% in Blinkit. The board of Zomato authorised the purchase of up to 33 million shares for this transaction.

Additionally, Zomato’s B2B arm Hyperpure acquired Blinkit’s warehousing subsidiary, HOTPL, for ₹60.7 crore, facilitating greater integration of supply chain operations.

Legal Framework Governing the Zomato and Blinkit Deal

Companies Act, 2013

The acquisition was governed primarily by the Companies Act, 2013, which sets out provisions for mergers, acquisitions, and related-party transactions.

• Board and Shareholder Approvals: Under Sections 179 and 180, the acquisition required approval by Zomato’s Board of Directors. Since the transaction involved a related party (Blinkit), shareholders had to approve the deal through a special resolution.
• Conflict of Interest and Disclosure: Deepinder Goyal, co-founder of Zomato and a director on both companies’ boards, disclosed his interest under Section 184 and abstained from voting to mitigate conflict of interest concerns.
• National Company Law Tribunal (NCLT) Sanction: The scheme of arrangement required NCLT’s approval after shareholder and creditor consent. At least 75% approval of each class of shareholders and creditors was mandatory.

Securities and Exchange Board of India (SEBI) Regulations

Zomato, being a listed entity, had to comply with SEBI regulations, including:

• Listing Obligations and Disclosure Requirements (LODR): Regulation 30 mandates prompt disclosure of material events such as mergers and acquisitions, along with the valuation rationale.
• Issue of Capital and Disclosure Requirements (ICDR): Governs the issuance of shares in a share-swap deal, including the requirement of a registered merchant banker to validate the valuation.
• Valuation Transparency: SEBI’s circular CIR/CFD/DIL/4/2015 requires public disclosure of valuation reports in share-swap arrangements to protect minority shareholder interests.

Foreign Exchange Management Act (FEMA)

As Zomato had significant foreign investment, the transaction had to comply with FEMA guidelines to ensure sectoral caps and foreign investment limits were not breached.

Due Diligence Obligations

Though Zomato had already invested in Blinkit, fresh due diligence was essential before completing the acquisition. This involved detailed financial, legal, and operational audits to identify liabilities such as tax obligations, contractual liabilities, and compliance risks.

Failure to conduct adequate due diligence could expose the directors and the company to liability for breach of fiduciary duties under Section 166 of the Companies Act.

Competition Law Considerations

Thresholds and Notification

The acquisition did not cross the mandatory thresholds of asset value or turnover for prior notification to the Competition Commission of India (CCI) under Section 5 of the Competition Act, 2002. Therefore, no pre-merger approval was required.

Post-Facto Review and Market Impact

Section 20(1) of the Competition Act empowers the CCI to investigate any combination within one year of its consummation if it has or is likely to have an appreciable adverse effect on competition (AAEC), even if not notified earlier.

Given the rapid growth of digital markets and quick commerce, regulators may consider revising thresholds to better capture such deals in future.

Tax Implications

The share-swap structure was structured to be tax-neutral under the Income Tax Act, 1961, subject to certain conditions:

• Capital Gains Tax Exemption: Shareholders of Blinkit receiving Zomato shares were exempt from capital gains tax, as the transaction was not a transfer under Section 68.
• Asset and Liability Transfer: The merger required transfer of all assets and liabilities to qualify for tax-neutral treatment.
• Shareholder Continuity: At least 75% of Blinkit’s shareholders had to become shareholders in Zomato for tax benefits.
• General Anti-Avoidance Rules (GAAR): The deal was structured to comply with GAAR provisions, avoiding any perception of tax avoidance.

Procedural Steps Followed in the Merger of Zomato and Blinkit

1. Review of Memorandum of Association: Ensured that acquisition activities were within corporate objects.
2. Board Resolutions: Both companies’ boards approved the merger and appointed valuers.
3. Drafting Scheme of Arrangement: Detailed document including share-swap ratio and asset vesting.
4. Stock Exchange and SEBI Filings: Submitted necessary disclosures and obtained approvals.
5. NCLT Petition and Hearings: Filed petition for scheme sanction; conducted shareholder and creditor meetings.
6. Public Notices: Issued 21-day notices to stakeholders in English and regional languages.
7. NCLT Sanction: Obtained final approval and filed certified copies with Registrar of Companies.
8. Completion: Transfer of assets, issuance of shares, and integration of operations.

Operational Challenges in Quick Commerce

• Dark Store Network: Blinkit’s operational efficiency depended on dense dark store locations. Financial stress had forced closures, increasing delivery radii and costs.
• Delivery Workforce: Maintaining a well-paid, on-demand delivery force was capital intensive, causing layoffs and affecting service quality.
• Technology Integration: Aligning order management, inventory, and last-mile delivery systems was critical to seamless operations post-merger.

Conclusion

The Zomato-Blinkit deal is a case study in the evolving Indian digital economy’s legal landscape. It highlights the intersection of corporate governance, securities law, tax regulations, and competition policy in complex M&A transactions.