Amazon can own Future Retail Ltd. (FRL) only by violating India’s laws. As it blocks Reliance’s takeover, it finds itself in legal jeopardy by securing indirect hold in FRL.
Future Group has the right to sell its assets to whom it wants. If Amazon has indirect control over FRL, it has breached India’s FDI rules.
It has bypassed mandatory government approvals and is now open to action by ED and SEBI.
By not disclosing its attempt to obtain control over FRL, it has violated FDI rules and mandatory SEBI regulations requiring it to make an open offer to FRL shareholders.
FDI in multi-brand retail (MBR) is allowed with stringent conditions like using 50 percent of the investment for back-end infrastructure, mandatory local sourcing of goods and services, etc. Most important, government permission is a mandatory requirement for such investment.
Thus, Amazon avoided Indian regulations. First, there was an agreement between listed FRL (where FDI would not have been possible) and Future Coupons Ltd. (FCL) (where FDI is allowed) that gave the latter effective veto power over the former.
In step two, Amazon invested Rs 1,430 cr for a 49 percent stake in FCL which owned a 9.82 per cent stake in FRL), giving itself effective veto power over FCL. Thus, Amazon obtained veto powers and control over a MBR company where FDI is not permitted without government approval.
On August 12, 2019, FRL entered into a shareholders’ agreement with the KB Group (Future Group founder Kishore Biyani, family members, private limited companies controlled by him) and FCL. This provided special rights to FCL, which held convertible warrants in FRL. Crucially, it said that retail assets of FRL could not be licensed, transferred or alienated without the approval of FCL. In particular, it gave FCL a veto over sale of FRL’s assets to competitors, notably Reliance.
FCL, having obtained this veto over FRL, 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 FRL 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 FRL and no board position in the listed retail company, Amazon gained indirect control over the pioneer in organized retail.
The amendments made to the articles of association of FCL do not reflect the fact that Amazon had gained control. Moreover, the articles of association of FRL 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 FCL to hold shares of FRL only as long as FCL is owned and controlled by Indian residents.
Similarly, SEBI would have required Amazon to make an open offer to acquire 26 percent of FRL from shareholders at an approximate price of Rs. 550-600 per share.
That has not happened. Instead, Amazon used a transaction with FCL to stall a scheme of arrangement (the merger of group firms and sale of assets to Reliance Retail for Rs 25000 cr) which has been considered by the Board of FRL to be in the interest of all stakeholders. Reliance agreed to acquire the assets of Future in a slump sale in August this year.
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 FRL to file a suit in Delhi High Court asking for issuance of directions barring Amazon from interfering with its contract with Reliance.
Rights being asserted are way beyond shareholders rights. They say they will decide with whom FRL can and cannot do business. 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 FCL categorically claims that its investment is not in FRL and it does not seek to assume any control over FRL. Either this is true or this is subterfuge to deceive the regulators.
Future group was racking up losses even before the pandemic struck. It defaulted on payment of Rs 10,000 cr. It owes banks and financial institutions Rs 18,000 cr and Rs 7500 cr to vendors and suppliers. The deal with Reliance would have helped all stakeholders and prevented a painful bankruptcy.
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.
As a listed company, FRL’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 has claimed that it had arranged a rescue deal for Future group. But the bottom line is that Amazon cannot invest directly in and rescue FRL from bankruptcy under current FDI laws. By trying to impose conditions on FRL such as issuing a list of restricted persons is just a means of stifling competition.
Restricted persons is not minority rights. It is anti-competition rights.
If it won’t get ownership of FRL, Amazon is trying to scuttle competition from owning the same company.
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