Financial terms of the deal were not disclosed but according to one person with knowledge of the development, the transaction is worth about $300 million.
The acquisition is likely to give Flipkart, set up by two ex-Amazon employees in 2007, not just a stronger foothold in the fast-growing online fashion market, but also the additional scale it needs to fight competitors like Amazon, Flipkart co-founder Binny Bansal said.
"This acquisition helps us grab a bigger market share and compete better," he said.
Amazon, which entered India last June, has drawn up the battle lines by slashing prices, launching next-day delivery, adding new product categories and embarking on a high-voltage advertisement campaign.
With growing competition, smaller e-commerce companies would find it difficult to access fresh capital and cope with a price war, forcing them to merge with bigger rivals, retail consultants said.
Only 18 of the 52 e-commerce start ups in India - which raised $700 million in venture capital funding in three years ending 2012 - were able to raise follow-on investments last year, investment bank Allegro Advisors said.
"The smaller companies who are growing and managing their business well face a bigger threat of being acquired by the top few companies than the ones who are not," said Ankur Bisen, senior vice-president at retail consultancy Technopak.
The companies vying for a bigger slice of the Indian online retail market include Flipkart, New Delhi-based marketplace Snapdeal, Myntra, fashion online retailer Jabong along with global giants Amazon and eBay Inc.
Amazon is also looking for smaller acquisition targets in India to boost its presence in the country, several investment bankers said, piling pressure on home-grown players such as Flipkart and Snapdeal.
The Indian e-commerce market was worth $13 billion in 2013, with online travel accounting for over 70 percent of consumer e-commerce transactions. Online sales of retail goods totaled $1.6 billion in 2013, according to research firm Forrester, and are expected to reach $76 billion by 2021, Technopak said.
By comparison, China's business and consumer e-commerce sales may surpass $180 billion this year, with industry leader Alibaba readying an initial public offering (IPO) worth more than $15 billion.
Bangalore-based Flipkart, which is popular for selling books and electronics online, said it would invest over $100 million (roughly Rs. 584 crores) in the fashion business over the next 12-18 months.
Private equity investors Tiger Global Management and Accel Partners are investors in both Flipkart and Myntra.
Flipkart, which hit the $1 billion gross merchandise value (GMV) mark in March this year, a year earlier than the company expected, has received $560 million of funding since 2007.
Myntra, which sells products from over 650 brands like Adidas, Calvin Klein and Levis, has a GMV of about $204 million. GMV is an important e-commerce performance metric as the revenue depends on gross merchandise sold and fees charged.
Both companies will be run independently, said Flipkart co-founder Sachin Bansal.
In a separate deal, Snapdeal raised $100 million (Rs. 590 crores approximately) from five investors including Temasek Holdings (Private) Ltd, its second fund raising this year.© Thomson Reuters 2014