Amazon may have become ensnared in a web of its own duplicitousness, finding itself trapped as its attempt to block Reliance’s takeover of the retailer Future’s assets is stymied by legal contradictions.
The US-based online retailer, the largest in the world, has been spinning one set of arguments at an emergency arbitration in Singapore and saying quite the opposite to Indian regulators, a perusal of regulatory filings and legal arguments shows. The consequence is a series of inconsistencies—of Amazonian proportions.
At the emergency arbitration in Singapore, it contended that it has “protective, special and material rights” over the assets of the listed entity Future Retail (which is in the business of multi-brand retail through Big Bazaar, Easyday, eZone and FoodHall) by virtue of its investment in unlisted Future Coupons (which is in the business of wholesale trading of goods and merchandise and marketing and distribution of corporate gifts cards, loyalty cards, and reward cards to corporate customers).
By saying so, Amazon convinced the Singapore emergency arbitrator of its special interest in Future Retail and obtained an emergency injunction to stay Reliance’s acquisition in a slump sale of Future’s retail assets for about Rs 25,000 crore.
Here in India, the US company is telling the Delhi High Court that it only has “protective rights” / “passive rights” over Future Retail. That is because, if it were to make the same claim it made in Singapore, Amazon would be running afoul of Indian laws which do not permit it to own even a single share in Future Retail without government approval.
In August this year, Reliance stepped in to prevent the imminent collapse of Future after the storied retailer found itself dangerously mired in debt, with employees, lenders and suppliers on tenterhooks. Amazon, which dominates online retail in the US and Europe and is the subject of scrutiny for alleged anti-competitive practices there, used the pretext of its shareholding in Future Coupons to block the sale transaction from going through by obtaining a temporary injunction in Singapore with arguments that contradict those it is making in India.
Indian laws allow FDI in multi-brand retail only with stringent conditions, such as using 50 percent of the investment for back-end infrastructure, mandatory local sourcing of goods and services and so on. Most crucially, government permission is needed for such investment.
Thus, what the Seattle-headquartered company did was a two-step duck-and-weave of Indian regulations. First, there was an agreement between listed Future Retail (where FDI would not have been possible) and Future Coupons (where FDI is allowed) that gave the latter effective veto power over the former.
In step two, Amazon invested Rs 1,430 crore for a 49 percent stake in Future Coupons (which owned a 9.82 percent stake in Future Retail), giving itself effective veto power over Future Coupons. Thus, Amazon, with a tiny investment, was able to obtain effective veto powers and control over a multi-brand retail company where FDI is not permitted without government approval.
To try and insulate itself the charge of violating FDI rules, Clause 15.17 was included in the shareholder agreement with Future Coupons. It states that Amazon’s investment is in Future Coupons only and that there is no agreement or understanding in relation to the acquisition of shares voting rights, or exercising control over Future Retail. It also made clear that Future Coupons, the Promoters and Amazon do not intend to act in concert with each other in any way.
What Amazon is attempting now is to claim that it could have invested directly in Future Retail as a Foreign Portfolio Investor. Amazon contends that it could have invested up to 10 percent under the FPI route and that under the current transaction, if the agreements with Future Coupons and Future Retail were conflated, Amazon merely held 4.81 percent in Future Retail through Future Coupons.
Had this investment been done directly in Future Retail, whereby Amazon claims the right to dictate terms on how the promoters must vote as shareholders and how promoter-directors must vote as directors—a position they now claim to be in—government approval would have been required in terms of para 3(a)(iii) of Schedule I of the FEMA FDI Rules.
“Emergency Arbitrator was not familiar with the Indian ecosystem. He fell for the 10% portfolio investment,” Future Retail’s counsel and former Solicitor General of India Harish Salve told the Delhi High Court, where Future Retail is seeking that Amazon stop interfering in the approval process for the asset sale scheme. "I am subject to Indian Courts. If a gentleman sitting in Singapore says something, I can bin that order. It is not to show any disrespect. I'm saying as a matter of law,” Salve said.
Future Retail has chosen to ignore the emergency arbitration award for a number of reasons. One, Indian laws do not recognise an emergency arbitrator. If any of the parties to a contract wants emergency relief, they have to either approach a high court (in case arbitration proceedings haven’t started) or the arbitration tribunal. Typically, courts hear the matter afresh when such applications are filed.
"Emergency Arbitration is the most important point of law. It is a creature unknown to Indian law and should not be looked at...it may have whatever status in Singapore," said senior advocate Abhishek Manu Singhvi, appearing for Reliance, reinforcing Salve’s arguments.
Moreover, Future Retail has not signed any agreement with Amazon. The US retail giant is not a direct shareholder in Future Retail. All Amazon has is a stake in Future Coupons, a stakeholder in Future Retail. So, legal experts ask how Future Retail can be made party to the emergency arbitration.
What Amazon seems to be doing is treating two separate shareholder agreements as composite transactions to claim rights over Future Retail.
The first agreement was signed on August 10, 2019, between Future Retail with the KB Group (comprising Kishore Biyani, his family and some companies they control), and Future Coupons. It gave special rights to Future Coupons. In particular, it said that the retail assets of Future Retail could not be licensed, transferred or sold without the consent of Future Coupons. It effectively gave Future Coupons veto power over the sale of Future Retail’s assets to competitors such as Reliance.
A second agreement was signed 10 days later between Future Coupons and Amazon. Under this, the special rights Future Coupons had over Future Retail were transferred to Amazon. This agreement enjoined Biyani and his firms to vote in the same manner as Amazon in matters concerning the sale of retail assets. It restricted Biyani and his nominated directors from even placing a proposal on these issues before the Future Retail board; further the Future Retail board could not even consider proposals on these issues without Amazon’s consent.
But here’s the nub, according to legal experts. In case, the two shareholder agreements are treated as an integrated transaction that means Amazon has indirect control over Future Retail which is prohibited by law. Indian law allows FDI in multi-brand retail only under stringent conditions and after securing government permission.
Thus, if Amazon gains control, it would not only have violated India’s FDI policy bringing down the Enforcement Directorate upon it, but also required Amazon and Future Retail promoters to make an open offer to the listed retail company’s public shareholders.
That’s the reason why Amazon bought a stake in Future Coupons with a call option to buy shares of Future Retail in the hope that the law would change. That’s why Amazon expressly told the Competition Commission of India that its investment is in Future Coupons and for promoting its interest in that business. And finally, that’s also the reason why the shareholder agreement between Amazon and FCL had the specific clause—15.17.
“Here (Clause) 15.17 in FCPL SHA (Future Coupons Ltd Shareholder Agreement) is important. Amazon is asserting far and above of voting rights,” Salve told the High Court. “The clause says that Promoters and Amazon will not act in concert.”
Although Amazon could possibly invest up to 10% in Future Retail directly through the FPI route, it would have needed government approval to enjoy the special rights over Future Retail similar to the one in the Future Coupons agreement.
In the current instance there is no principle of law which binds Future Retail’s board of directors to Future Coupons’ articles of association. Even if Amazon invested in Future Coupons on the assurance that the latter had special rights over Future Retail, it doesn’t give the US behemoth any derivative rights over the Indian listed retail company.
“There is a fiduciary duty to shareholders when Future Retail is sinking,” argued Salve. “In a listed company, you cannot by agreement dilute this duty.”
It stands to reason that the board of directors acted in the best interests of the company and to avoid bankruptcy. Because the laws are such, Amazon cannot rescue the Future group from bankruptcy. Perforce, Future talked to other suitors and came to an understanding with Reliance.
“This whole concept of minority rights being protected is nonsense. Thousands may lose jobs, Future Retail may go bankrupt but this great American giant should not be upset,” said Salve
The Future Group employs 50,000 people and owes Rs 18,000 crore to financial institutions and Rs 7500 crore to suppliers and vendors. Amazon’s delaying tactics could well push it into a painful bankruptcy.
Note that the Companies Act provides for firms to go in for a scheme of arrangement provided they fulfil certain conditions such as obtaining SEBI approval and getting a nod from three-fourths of shareholders and creditors. This right supersedes any contractual obligations. Moreover, in this particular case, Amazon’s rights, if any, can and only be limited to Future Coupons.
“In today's day and age, to say that I will kill a (Rs) 25,000 crore company… God knows if Amazon still thinks that it's living during the time of the East India Company,” said Salve.Disclaimer: Reliance Industries Ltd is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.