How Reliance got the Keys. What Mukesh Ambani did at Future Retail can be a B-School Case Study

How Reliance got the Keys. What Mukesh Ambani did at Future Retail can be a B-School Case Study

#suprioghatak #amazon #relianceretail #futureretail

Amazon’s claim to ownership rests primarily on paper. Reliance has legal arguments of its own too, based on another set of contracts. But with one key difference—Reliance also owns the keys to the building.

In terms of legal brilliance it would be hard to top what Amazon had done. But that was before we understood what Reliance did. Because that is just something else altogether. And it makes for an even better story. Let's find out what happened on the night of February 25.

The fight over Future Retail’s assets had a surprise finale — when a billionaire just took over the shopping aisles.

In the unexpected climax, Mukesh Ambani decided who gets to own the assets of Future Retail Ltd. not in an arbitration tribunal in Singapore or in a courtroom in New Delhi, but in a shopping aisle.

Future Retail had been subleasing store space from Reliance Industries Ltd. It was operating only on Ambani’s endurance as Future couldn’t come up with the rent. But with Amazon continuing to block Reliance’s $3.4 B purchase of Future’s assets, Ambani decided to make the acquisition a fact of life. He terminated the leases and is taking control of the properties.

It was a dramatic epilogue to a three year old narrative. Amazon initially helped Future by investing $192 M in Future Coupons Private Limited, a gift voucher unit of founder Kishore Biyani for him to use the funds to steady the debt-laden Indian retailer.

The 2019 deal's condition was that assets in the 1,500 stores pan India wouldn’t be sold to Ambani, who owns India’s largest retail empire. Biyani did exactly that after Covid-19 decimated operations. Amazon began proceedings against Future for breach of contract. The Reliance deal was on hold until Ambani decided he has had enough. 

Future Retail was living under a rock. Its bailout by Ambani was a commercial deal and not a humanitarian mission. It was Future’s job to take care of all its stakeholders, most importantly the creditors.

And where’s Amazon in all this? It has learned the hard way that taking on Ambani on his home turf was impossible. So Amazon offered an out-of-court settlement over its funds invested in Future Coupons Pvt. Ltd. which had been its first move in the drama. Amazon couldn’t have rescued Future Retail as India’s draconian foreign direct investment (FDI) rules were a big roadblock. So it did the next best thing. It funded privately held Future Coupons indirectly holding some control over Future Retail.

That control proved to be fragile. After agreeing to Reliance’s deal, Future wanted to come out of the contract with Amazon. Its independent directors complained to Competition Commission of India (CCI) that Amazon had deliberately misled the true nature of the Future Coupons deal, which effectively put Amazon in the driver’s seat at Future Retail, violating India’s 2018 FDI law. CCI promptly suspended its earlier approval of Amazon’s investment, and the Delhi High Court halted the Singapore arbitration panel’s work.

But if Future with a net worth of negative $280 M was betting that Reliance would wait patiently as it sorted out its legal troubles with Amazon, it misjudged the situation. 342 of its large stores and 493 of smaller outlets — constituting 55% to 65% of retail revenue — have so far received termination notices of sub-leases from Reliance entities.

It’s dishonest for Future to now appear shocked, that Amazon is moving in before concluding the formal purchase. Possession is nine-tenths of the law. Amazon had given Future an option in January for a further $914 M bailout, but Future's independent directors found it inadequate, given the astronomical debt. Now it’s for Future’s 2025 dollar bondholders to figure out if they’ll be made whole. Trading around 60 cents to the dollar through the stealth acquisition, it doesn't indicate any creditor confidence.

How does a physical takeover work? There’s inventory, furniture, lighting and point-of-sale equipment, all pledged to creditors.

There’s nothing left at Reliance to discuss. The outcome is this. On the urging of Future Retail, the Indian judiciary put a bullet through the arbitration law, never allowing it to settle a simple commercial dispute. The consequences are for Future — and India — to bear.

When faced with heavyweight opponents, the odds of enforcing a contract in the country are slim. Nobody should complain if foreigners are skeptical of India’s growth in “ease of doing business." But then, it’s a fast-modernizing market of 1.4 B consumers. Amazon can’t give up on it. It alleged that Future was trying to remove the “substratum of the dispute" by transferring its stores to Reliance in a “clandestine manner." It informed the Supreme Court that truce talks had failed. It’s hard to say if Amazon’s continued protests will discourage Future's lenders from blessing the change of control — or if it’s already too late for that.

As for Future, it doesn’t have much. Going defunct is a feature of capitalism. But the humiliating manner in which an Indian pioneer of modern retail got ripped apart store by store for the wrong choices it made should be a case study.

However, before academics get busy, creditors need to find out where the shopping racks and the cash machines are kept. It’s their collateral, after all, and the comprehensive lesson of this contest has been that everyone should grab what they can. While stocks last.

Updates as of Now

State Bank of India has written to Future Retail Ltd. seeking accountability on the company's stores taken over by Mukesh Ambani-controlled Reliance Industries Ltd. SBI reiterated that the lenders have rights over stock, moveable fixed assets in all the outlets of the company, and in the case of its sale, the entire proceeds will need to be used to settle their dues.

Reliance Projects & Property Management Services Ltd. had taken over 835 sub-leased stores of Future Retail after voiding the lease agreements, the company had informed exchanges in March. These included 342 large-format stores including Big Bazaar, Fashion@Big Bazaar, and 493 small outlets such as Easy Day and Heritage. Reliance Group also took over 112 Future Lifestyle Fashions Ltd. stores.

After Reliance took over the stores, Bank of India on behalf of the lenders had issued a public notice warning people against dealing with Future Group's assets. In the notice, the bank had highlighted that lenders have rights over the group's assets owing to the loans they had extended, and any sale without their consent would be subject to legal proceedings.

The lenders are not sure if the value determined nearly two years ago would still hold since significant deterioration has taken place since. Even if the sale were to be concluded now, lenders are unlikely to recover a large part of their Rs 30,000 cr dues against Future.

(Inspired by Andy Mukherjee) 

 

To be continued