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How Amazon tried to exercise the rights of a controlling shareholder in Future Retail without owning a stake

Amazon cannot own Future Retail without violating India’s laws. As it tries to block Reliance’s takeover of India’s second-largest retailer, it finds itself in legal jeopardy.
Nov 18, 2020 / 09:39 AM IST

Amazon may have exposed itself to legal danger by its actions in trying to secure an indirect foothold in the owner of the retail chain Big Bazaar, lawyers and analysts believe.

By skirting government approvals, which are mandatory, the US-based online retail giant has laid itself open to action by the Enforcement Directorate and the Securities and Exchange Board of India.

Furthermore, by not disclosing that it had attempted to obtain control over Future Retail through the back door, Amazon has fallen afoul of Foreign Direct Investment rules as well as securities regulations which would have required it to make an open offer.

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.

“A clean-shaven person is trying to join a race only for bearded people saying that it could have grown a beard,” Future Retail’s lawyer, the former Solicitor General of India Harish Salve told the Delhi High Court.

On August 12, 2019, Future Retail entered into a shareholders agreement with the KB Group (comprising Future Group founder Kishore Biyani, his family members, and certain private limited companies controlled by Kishore Biyani) and Future Coupons Ltd. This agreement provided special rights to Future Coupons, which held convertible warrants in Future Retail. Crucially, it said that retail assets of Future Retail could not be licensed, transferred or alienated without the approval of Future Coupons. In particular, it gave Future Coupons a veto over sale of Future Retail’s assets to competitors, notably Reliance.

Future Coupons, having obtained this veto over Future Retail, entered into a shareholders agreement with Amazon and KB Group. Here, it was agreed that Biyani and his firms would be required to vote in the same manner as Amazon in matters concerning the sale of retail assets and sale of assets to restricted persons (read Reliance Retail). The agreement also said that Biyani and his nominated directors could not even place a proposal on these issues in front of the Future Retail board; further the FRL board also cannot even consider proposals on these issues without Amazon’s consent.

In effect, with a tiny indirect stake in Future Retail and no board position in the listed retail company, Amazon gained indirect control over the pioneer in organized retail through Big Bazaar, Easyday, eZone and FoodHall.

The amendments made to the articles of association of Future Coupons do not reflect the fact that Amazon had gained control. Moreover, the articles of association of Future Retail have never been amended.

Had the disclosure of these actions been made, the Enforcement Directorate would have been forced to step in. The term control in the Foreign Exchange Management Act (non-debt instrument) Rules clearly covers control rights taken through shareholder agreements. FDI laws in India allow Future Coupons to hold shares of Future Retail only as long as Future Coupons is owned and controlled by Indian residents.

Similarly, SEBI would have required Amazon to make an open offer to acquire 26 percent of Future Retail from shareholders at an approximate price of Rs. 550-600 per share.

That has not happened. Instead, Amazon used a transaction with Future Coupons to stall a scheme of arrangement (the merger of group firms and sale of assets to Reliance Retail for about Rs 25000 crore approximately) which has been considered by the Board of Future Retail to be in the interest of all stakeholders. Reliance agreed to acquire the assets of Future in a slump sale in August this year.

Amazon, Future Group and Reliance did not respond to emails seeking comment.

Not only did Amazon get an emergency arbitration award in Singapore, it also wrote to SEBI and other authorities to delay the deal. This prompted Future Retail to file a suit against the US company in the Delhi High Court asking for issuance of directions barring Amazon from interfering with its contract with Reliance.

“Rights being asserted [by Amazon] are way beyond shareholders rights. They say they will decide with whom Future Retail can and cannot do business,” Salve told the Delhi High Court. “Amazon has no voting rights or Board position but says that you dare not take a decision without me on saving yourself.”

In any case, Amazon’s shareholder agreement with Future Coupons categorically claims that its investment is not in Future Retail and it does not seek to assume any control over Future Retail. Either this is true or this is subterfuge to hoodwink the regulators, Salve said.

Future group was racking up losses even before the pandemic struck laying waste to service sector businesses. It defaulted on payment of Rs 10,000 crore. The group owes banks and financial institutions around Rs 18,000 crore and another Rs 7500 crore to vendors and suppliers. The deal with Reliance would have helped all stakeholders and prevented a painful bankruptcy, said analysts.

"Future is going through an adverse financial situation. It is not able to pay its vendors and is facing a lot of problems primarily with working capital. It is strapped of cash. So if Reliance takes over Future, it will also take over their liabilities. It is not just good for Future but also for the lenders. In addition what Reliance is going to do is to invest in Future Enterprise Ltd which is going to scale up the brand," said Abhijeet Kundu, Vice President - Research, Antique Stock Broking Ltd.

Experts are of the view that as a listed company, Future Retail’s rights to reorganize itself cannot be stalled by anyone, including the promoters, if it has the approval of the requisite majority of shareholders and creditors.

Amazon on its part has claimed that it had arranged a rescue deal for Future group, according to media reports. But the bottom line is that Amazon cannot invest directly in and rescue Future Retail from bankruptcy under current FDI laws. By trying to impose conditions on Future Retail such as issuing a list of restricted persons is just a means of stifling competition, said legal experts.

“Restricted persons is not minority rights. It is anti-competition rights,” Salve told the court.

Thus, in a situation where it won’t get ownership of Future Retail, Amazon is trying to scuttle competition from owing the same company.

“This is a mischief being played. Object is to be a dog in the manger and delay it," senior advocate Abhishek Manu Singhvi appearing for Reliance, told the Delhi High Court.

“Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.”
Priyanka Sahay
first published: Nov 18, 2020 09:39 am

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