The deal, announced on Thursday, is the biggest e-commerce transaction so far in the country.
While the deal amount was not disclosed, industry officials said the speculated deal size is about $300 million.
Sachin Bansal, CEO, Flipkart, said, "It's a historic moment for e-commerce business. This first-of-its-kind deal would help us dominate the online fashion segment."
The current $50 million online fashion market is expected to double in next 1-2 years.
"As of today, the combined share of the two companies in the fashion segment stands at around 50%. We want to become the biggest retailer in the next six months," said Mukesh Bansal, Myntra CEO.
The e-commerce industry is expected to see increasing competition from international players like Amazon and Alibaba. Some analysts feel that the bigger domestic players may not face a major threat due to the growing potential of the Indian market.
"These investments showcase the investor confidence within this industry. In books, even Amazon is loss-making. The loss can be attributed to the process of expansion of the logistics and back-end operations. Hence, these long-term investments and the prospects of the industry continue to remain positive," Arvind Singhal, chairman and MD, Technopak, a consulting firm.
The current e-commerce business is estimated at $3 billion, and will grow to $50 billion by 2020, while fashion will contribute about 40% to total sales, according to market estimates. Binny Bansal, COO Flipkart, said, "We want to capture this market, and for this we plan to invest $100 million in Flipkart in the next 12-18 months."
Company officials said the two companies will continue to act as separate entities, managed and handled by different set of teams.
"The main focus will be integration of logistics, with Myntra using Flipkart's customer reach to expand its operations in the country," said Mukesh Bansal.
According to the company, the talks between the two multi-brand retailers were initiated by Flipkart.
The companies declined to comment on the share-holding pattern but said an IPO is on cards in the longer period.
According to analysts tracking the industry, most players in the online retail space are currently in red. Flipkart reportedly lost Rs 281.7 crore in the year ended March 2013, while Myntra reported loss after tax of Rs 134.7 crore for fiscal 2013.
"Fundamentally, nothing has changed in the market. E-commerce platforms still need to figure out how to make money, because the scale they have achieved so far has been driven mainly by discounts and promotions in a race to the bottom that no one is winning," said Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy.
"Most e-tailers have a low base of repeat customers, so they are constantly having to spend money on getting customers to their websites," he said.