Amazon-Future case | Government needs to enforce FDI rules in substance rather than form

Rank 4 | Company: Amazon (Image: Reuters)

Foreign Direct Investment (FDI) is a critical component to boost economic growth in a capital starved nation such as India. At the same time, the rights granted to foreign capital should be balanced against the development needs of the country so that foreign monopolies do not take root and destroy local small businesses.

Thus, in an area such as the retail sector, the Indian government – regardless of the political party in power -- has been cautious in allowing FDI. But that has not prevented foreign companies in trying to seek a toehold in this fast growing sector (expected to reach $1.75 trillion by 2026), sometimes by breaking the rules. The government must take these violations seriously.

This issue’s importance is underlined by the Delhi High Court saying that Amazon Inc has violated rules for FDI in multi-brand retailing in its agreements with Future Group companies. This court made this observation while passing judgement on Future Retail-Amazon case.

“This Court is prima facie of the opinion that the conflation of the three agreements i.e. FRL SHA, FCPL SHA and FCPL SSA besides creating protective rights in favour of Amazon for its investments also transgress to 'control' over FRL requiring government approvals and in the absence thereof are contrary to FEMA FDI Rules,” its judgement read.

FRL SHA refers to the shareholder agreement signed between the Kishore Biyani group entities, Future Coupons Ltd (FCL), which among other things provided certain special and material rights to FCL. FCL SHA refers to the shareholder agreement refers to the agreement amongst Amazon, FCL and Kishore Biyani group entities which now transferred the FCL’s special and material rights under FRL SHA to Amazon under FCL SHA. FCPL SSA refers to the share subscription agreement under which Amazon bought a 49 percent stake in Future Coupons (and an indirect 4.9 percent in Future Retail).

On the basis on these agreements, Amazon had won an emergency arbitration against the Future-Reliance Retail deal and was trying to scupper the agreement by writing to Indian regulators.

Although the Court did not grant Future Retail an injunction seeking to restrain Amazon to write to regulators, it noted that the rights granted to Amazon by the conflation of the agreements cited earlier are “disproportionate to the actual shareholding of Amazon.” It said that by “camouflaging of words, the extensive rights held by Amazon…cannot be masked as mere protective rights.”

The Delhi High Court judgement also lends credence to calls by the Confederation of All India Traders to investigate Amazon for alleged FEMA violations by indirectly acquiring Future Retail. Note that CAIT and the All India Online Vendors Association with more than 2000 members have alleged unfair business practices on the part of Amazon. The two associations have alleged Amazon favours a few retailers offering substantial online discounts and blocks the independent vendors. In other words, crores of small traders are being treated unfairly.

This is precisely the reason why FDI rules have to be drafted carefully and also enforced properly. Currently, FDI is allowed in single-brand retail. It is permitted (up to 51 per cent) in multi-brand retail subject to government approval and with a lot of restrictions.

This lack of trust is possibly the reason why Amazon in recent times unleashed a series of advertisement to show its commitment towards small traders. But its action does not reflect its intent as these cases and disregard for Indian law shows.

Now, as per the High Court order, SEBI has to approve the scheme of arrangement with Reliance Retail submitted by FRL so long as it complies with statutory provisions of the Companies Act and other SEBI regulations.

A lesson that the government should learn is that the e-commerce policies and regulations must no longer be reactive but proactive. It cannot allow companies like Amazon to exploit loopholes. Despite the continuous amendments, small traders continue to complain that the likes of Amazon and Walmart carry on multi-brand retailing in India indirectly.

The government has also been enforcing the laws based on form. It is high time its stops this approach and ensure that FDI laws are enforced by looking at substance rather than form.

M. Rajendran is a senior journalist. Views are personal

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