Amazon’s Future Group deal followed same strategy as its More Retail stake buy to skirt Indian laws

Amazon had bought a 49 percent share in Witzig Advisory Services in 2018 which gave it indirect ownership of More Retail.

The twin-entity investment structure used by Amazon to invest in Future Retail was earlier used by the US commerce giant to buy a stake in More Retail, documents revealed.

Amazon has acquired a stake in Future Coupons, which in turn had holdings in Future Retail, to buy an indirect stake as well as get veto rights over the Indian retail company.

In the two-step process, Amazon had acquired a 49 percent in Future Coupons which had a 9.8 percent stake in Future Retail. However, Amazon had structured its shareholding in the coupons company such that it held 25.1 percent as voting equity share capital and the rest 23.9 percent as non-voting equity share capital, according to an email from Rakesh Bakshi, head - legal and corporate affairs and associate general counsel, Amazon India to Jeff Bezos.

Despite this structure, “we will have all the statutory rights available to a 49 percent shareholder,” the mail had assured Bezos.

“You may recall this structure and voting/non-voting split is also how we resolved PN2 [Press Note 2] for Project Brigade, our acquisition of a 49 percent interest in More Retail Limited (which is also engaged in retail of food and grocery in India),” it further added.

“Given our recent acquisition of a minority stake in More Retail Limited (which is also engaged in the food and grocery retail business), we believe the anti-trust authorities will undertake a detailed review of this transaction, though we expect to ultimately obtain approval within ten to twelve weeks after signing of the definitive investment documents.

Moneycontrol had reached out to Amazon, Aditya Birla Group and Samara Capital on the same, their response is awaited till the time of publishing this story.

The More deal

Witzig Advisory Services, a subsidiary of private equity firm Samara Capital had acquired More Retail from Aditya Birla Group in 2018. The deal was cleared by the CCI in January 2019.

Amazon had bought a 49 percent share in Witzig Advisory Services which gave it indirect ownership of More Retail. According to a filing with the Ministry of Corporate Affairs, Samara Alternate Investment Fund and Samara Alternate Investment Management hold 51 percent Class A shares in Witzig Advisory Services. Amazon, the document showed, holds 32 percent Class B share and about 17 percent Class A shares through its entities Coda Holdings Singapore Ltd and Coda Holdings 3 LLC. Class A shares gives the holding entity more voting rights than Class B shares.

The structure of the deal has been prompted by Amazon’s concerns over Press Note 2 (2018) released by the Indian government to tighten norms for e-commerce companies, said legal experts.

"The ‘twin-entity structure', through which Amazon acquired a 49 percent stake in More Retail was used as a means to work around the restrictions imposed by Press Note-2 issued by the Govt in 2018, which specifically barred a foreign entity from acquiring any stake or control in a retail entity in India,” said Salman Waris, Partner, TechLegis Advocates & Solicitors.

Press Note 2 said that e-commerce marketplaces will not exercise ownership or control over inventory sold on their platforms. Further, entities with an equity stake held by e-commerce companies or its group companies will not be allowed to sell their products on the marketplace

As per some media reports, the Competition Commission of India (CCI) in January 2019 had initially raised concerns about Amazon’s involvement in the deal and sought clarification from Witzig Advisory about Amazon’s role in day-to-day operations and also whether the deal complies with FDI norms.

Further scrutiny

Though the competition watchdog had cleared the deal later, however, with recent revelations by the independent directors, the deal could come under scrutiny again, said experts.

“Paragraph 13 of the approval notice on Amazon-Samara-Witzig deal by CCI, mentions that this order shall stand revoked if, at any time, the information provided by the acquirers is found to be incorrect,” said Dr Manoj Kumar, founder and managing partner, Hammurabi & Solomon Partners.

“On identical grounds and parity, if CCI finds Amazon’s representations faulty in the Future Coupons transaction, the approval granted by the competition watchdog for other investments by Amazon will also be liable to be revoked,” he added.

Other legal experts, however, are of the view CCI would levy a penalty on Amazon in case of a breach.

“Amazon-More Retail transaction happened sometime in late 2018, according to media reports. While the CCI cannot assess a deal after one year of the closing of the transaction, it can always initiate penalty proceedings against companies for failing to notify a reportable transaction. Accordingly, at this stage, the CCI can always examine if parties failed to notify this deal (if it was not notified),” said Vaibhav Choukse, Partner – Competition Law at JSA.

After the assessment, he added, if it concludes that the deal required CCI approval (and was not notified), it can initiate a gun-jumping (penalty) proceedings against the company.

These internal emails from Amazon were part of the second letter written by the independent directors of Future Retail to CCI, asking it to revoke the clearance given to the deal between Amazon and Future Coupons in 2019. In an earlier letter, the independent directors had alleged that Amazon had misrepresented facts while seeking approval for the deal.

The letters from the independent directors comes amidst a feud between Amazon and Future Group. The trigger for the battle was an agreement between Future Retail and Reliance Retail in August 2020, to sell the former’s retail assets including top modern trade outlets such as Big Bazaar, HyperCity, Easyday in August, 2020.

The deal between the two retail giants, however, could not materialise as Amazon moved to the Singapore International Arbitration Centre (SIAC) in October to block the deal. The SIAC has passed an emergency verdict putting a stay on the deal. The two parties – Amazon and Future Group -- have been embroiled in legal battles since then as the deal stands in limbo.