By Athik Saleh
Two titans of industry, a multinational internet behemoth and a multinational conglomerate based in India, fighting for the crumbles of a fallen Indian retail giant – the Amazon-Future– Reliance saga has everything in it to make it as spicy as a typical Bollywood drama.
In what is touted to be India’s largest retail acquisition, India’s Reliance Retail, a subsidiary of Reliance Industries Limited was about to acquire the assets of its brick-and-mortar rival, Future Retail.
This deal is now embroiled in international controversy, and authorities in two different jurisdictions are now enquiring into the validity of the deal.
The anti-hero of this story is none other than the multinational e-commerce giant, Amazon Inc. Amazon is the only one standing between Indian’s largest bricks-and-mortar chain from acquiring its second-largest brick-and-mortar chain.
One can look at the attempt of Amazon as a last-ditch effort to salvage its master plan for the retail sector in India, but one can’t deny the fact that Amazon has made Reliance Industries’ attempt to (almost)monopolize India’s retail sector a whole lot harder.
A crumbling business empire and two more than eligible suitors vying for its hand, this race for superiority (for Reliance) and a chance to compete (for Amazon) in India’s bricks-and-mortar market will be a story that will be told over and over.
The victors and losers of this battle will always be remembered, and it goes without saying that the losers of this battle, whomsoever it be, will nurse their wounds for a long time because the stakes of this battle are very high – an ever-ballooning Indian retail market (projected to hit 1.3 trillion dollars in 2025).
What was the deal between Amazon and Future?
To understand the background of this spat, we must move a little backward to 2019. It was in this year when Amazon entered into a Share Subscription Agreement with Future Coupons and Share Purchase Agreement with the promoters of Future Retail.
In a deal worth Rs 1,430 crores, Amazon acquired a 49 percent stake in Future Coupons Limited. To understand the situation clearly, it must be noted that Future Coupons Limited holds 9.82 percent of voting shares in Future Retails.
Therefore, by extension, with a minor investment, Amazon acquired stakes in Future Retail Limited. One must wonder at this point about Amazon taking this roundabout way.
That doubt can only be answered if one knows about the law regarding foreign direct investment (FDI) in multi-brand retail. Accordingly, the law related to FDI in multi-brand retail is very stringent.
Firstly, there is a cap of 51% on FDI.
Secondly, 50% of the first 100 million dollars (minimum required amount) of FDI must be invested in back-end infrastructure.
Thirdly, there is a 30 percent requirement of local sourcing to be followed, and lastly, it is only permissible in states that agree to allow FDI in multi-brand retail.
It is not far-fetched to assume that Amazon took the long route because the other option was not an easy one. To ascertain Amazon’s intentions, it is important to allude to another agreement.
In 2019, Future Retails entered into a shareholder’s agreement between Future Coupons Ltd. and KB Group (a group comprising of Kishore Biyani, his family members, and some private limited companies controlled by him).
The agreement between Future Retails, and Future Coupons, and KB Group gave Future Coupons a lot of power. According to the agreement, the retail assets of Future Retails were prohibited from being licensed, transferred, or alienated without the permission of Future Coupons.
The most interesting part of this agreement is that it gave Future Coupons Ltd a veto over sale of Future Retails’ retail assets to competitor including Reliance.
Later, Future Coupons entered into a shareholder’s agreement (SHA) with Amazon and KB Group which in effect gave Amazon the control over Future Retails. According to the SHA, in matters of sale of retail assets and sale to restricted persons, Biyani and his company were required to vote as per Amazon’s wishes.
The agreement also made it mandatory for the board to obtain Amazon’s consent before placing any proposal for the sale of retail assets or sale to restricted persons.
The deal also gave Amazon a call-option on Future Retail’s shares which it can exercise between three to ten years. In other words, Amazon did a duck and weave from Indian law by acquiring 49 percent in Future Coupons Ltd.
Through this operation it became the controlling party in Future Retails without really acquiring any shares in Future Retails.
Why did Amazon approach the Singapore International Arbitration Centre?
It is no secret that the Future group has been racking up losses even before the pandemic began and once the pandemic started, it got even worse as the service sector was/is one of the hardest-hit sectors by the pandemic.
According to the available information, the group owes Rs 7,500 crores to vendors and supplies, 18,000 crores to banks and other financial institutions, and defaulted in payment of 10,000 crores. It is clear from the aforesaid that Future Group was in dire need of an influx of money to keep it afloat.
This is where Reliance Industries comes in. Reliance Retails, the largest retail chain in India, in the month of August in 2020 entered into an agreement with Biyani’s Future Group.
According to this agreement, Future Group will sell Big Bazaar (supermarket chain), logistics, warehouse, and wholesale to Reliance Retail. The deal is valued at close to Rs. 25,000 crores. Along with this, RIL will also take over the liabilities of Future Group.
In October, Amazon approached the Singapore International Arbitration Centre (SIAC) and filed a case for emergency arbitration citing a violation of the agreement between Amazon and Future Group which provided Amazon with a call-option.
Amazon also alleged violation of the restrictive clause which enlisted Reliance as one of the companies to whom Future Group was not permitted to sell its retail business without the consent of Amazon.
The Singapore Arbitrator ruled in favor of Amazon and granted a stay on proceedings. This order of the arbitrator was later upheld by a single judge bench of the Delhi High Court. Future had approached the court for stopping Amazon from writing to the regulatory authorities like SEBI, CCI, etc.
The Court refused to stop Amazon from representing itself to the authorities mainly on the ground of the validity of the emergency award.
This order of the single judge was challenged by Future Retail before a division bench. The division bench granted relief to Future Group by lifting the stay on the deal between Reliance Retail and Future Retail.
The order of the division bench of the Delhi High Court was challenged by Amazon before the Supreme Court which stayed all the proceedings before the Delhi High Court. The Supreme Court will decide on the claim of Future Retail Ltd regarding the jurisdictional validity of the arbitrator’s order since they were not a party to the agreement between Amazon and Future Coupons.
Similarly, Future Retail approached SIAC and challenged the interim order passed by the emergency arbitrator on two counts.
Firstly, it challenged the jurisdiction of the arbitral award as it was not a signatory to the contract between Amazon and Future Coupons.
Secondly, it challenged the validity of the order of emergency arbitrator by relying on the rules of SIAC. According to SIAC rules, an emergency arbitrator has no power after the constitution of a tribunal.
Is Future Retails Ltd. bound by the agreement between Amazon and its Promoters?
From the discussion above, it is clear that Amazon tried to circumvent the FDI regulations in multi-brand retailing in India with the contract it made with Future Retail’s promotor group.
The Share Purchase Agreement between Amazon and the promoter of Future Retail is outside the purview of the Companies Act, 2013 and hence will be governed by the provisions of the Indian Contract Act, 1872.
It is important to understand whether the Share Purchase Agreement is a contract or a contingent contract. The call-option provided to Amazon under the SPA is not exercisable earlier than three years and can be exercised till the end of ten years from the date of the agreement.
This agreement does not provide for a consideration, as the consideration has to be tangible. At best, the call-option can be considered as a promise.
Now, if it’s a contingent contract under Section 31 of the Indian Contract Act, 1872, what is the contingency involved? Section 32 of the act declares the voidability of contracts based on uncertain events. In this particular case, Amazon can only exercise its call-option from the third year onwards.
If the current financial state of Future Retails Ltd is considered, it is not ascertainable whether the company will be existence by the time Amazon is able to exercise its call-option. To ask the promoters to wait till the expiry of three years is not fair in that case.
Another clause of the SPA restrains the promoters from selling the shares to any of the 15 entities in the prohibited list. This includes Reliance Industries too. Section 27 of the Contract Act provides that any agreement in restraint of trade is void. Restraining the promoters from lawfully exercising their right of selling to any suitors is clearly a restrain on trade.
It is almost impossible to ascertain whether the SPA between Amazon and the promoter of Future Retail is a contract under Section 10 or a contingent contract under section 31. Although the SPA was signed in 2019, Amazon cannot exercise its call-option until the third year.
If the principle of business efficacy is applied, it is only prudent to let a cash-rich Reliance Retail acquire the financially constricted business of Future Retails.
The uncertainty in the SPA must also be looked at in the light of Section 29 of the Contract Act which declares the contracts of which the meaning is uncertain as void.
Future Retails is an important Indian business. It has become a part of the daily lives of Indians in the form of Big Bazaar or Brand Factory or more. The current financial state it is in is unfortunate for all the stakeholders and a solution that can save it from bankruptcy must be found. As it stands, there is a solution and it is in the form of Reliance Retails, the largest retail chain in the country.
It is prudent to assume that letting Reliance acquire Future Retail will create a monopoly in multi-brand retail, as this deal involves the consolidation and amalgamation of the second-largest retail chain with the largest retail chain in India. However, the other option, to let Future Group wait for its slow death, isn’t viable either.
The current FDI laws make it close to impossible for Amazon to help Future Retails from the peril that it is in now because Amazon cannot invest directly in Future Retail and save it from bankruptcy. What Amazon tried to do by restricting Future Retails from being sold to a group of companies was a way of protecting its interests.
Allowing Amazon to buy Future Retail must have promoted competition in multi-brand retail in India, but the current scenario, as far as the legality of that acquisition is concerned, prohibits that.
Future Retails is a large organization that is spread all over India and provides jobs to so many people. To let their lives be dependent on a tussle between to industrial behemoths is not fitting. This issue needs solving by keeping in mind the business and legal sides of the issue, and the social side.
A fair and equitable solution can be reached only that way. The concerns of shareholders, lenders, vendors, suppliers and the workers can only be addressed by letting the deal between Reliance and Future move forward.
- Priyanka Sahay, “How Amazon tried to exercise the rights of a controlling shareholder in Future Retail without owning a stake”, available at: moneycontrol.com (last visited on July 16, 2021)
- Saloni Sanghi, “Amazon Vs Future Retail: Arbitration Battle At Singapore To Start From July 12“, available at: .bloombergquint.com (last visited on July 16, 2021) ↑