Highlights of the Amazon-Future Group dispute

July 17, 2021

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This article is written by Pranav Sethi from SVKM NMIMS School of law, Navi Mumbai. This article deals with highlights of the Amazon-Future dispute.

Table of Contents

Introduction

“The courts of this country should not be the places where the resolution of disputes begins. They should be the places where the disputes end after alternative methods of resolving disputes have been considered and tried”.

-Sandra Day O’Connor

With the advancement of technology, society has grown more cosmopolitan and commercialized. People may now communicate with one another and solve commercial deals and conflicts even if they are on different sides of the world. Many people would no longer have had the opportunity to go to the courtroom and file papers, then wait for a hearing. Owing to the difficulties and downsides of litigation, we are gradually reaching a point where it will be superseded by alternative dispute resolution (ADR). Although India has not yet passed the limit where ADR approaches have completely replaced litigation, the judicial framework is starting to recognize the advantages of ADR. In this article, we analyze the amazon-future group dispute.

Background of the case

Amazon NV Investment Holdings (“Amazon”) purchased a 49 percent (forty-nine percent) equity position in Future Coupons Limited (“Future Coupons”), which is a promoter group entity of Future Retail Limited (“Future Group”), in November 2019. The transaction was estimated to be worth Rs. 2000 crores. Future Coupons owned 7.3 percent (seven point three percent) of Future Retail, implying that Amazon would indirectly own 3.5 percent (three point five percent) of the company as a result of the acquisition.

Expansion of retail operations

The main rationale for Amazon’s investment in Future Coupons was to expand its retail operation in India by combining the two companies’ technologies with the supply chain efficiencies and inventories of Future Groups. Amazon planned to employ the Future Group’s 15,000 (fifteen thousand) grocery stores as distribution centres to carry products in tier-1 and tier-2 cities on time. The agreement permitted Future Retail to sell its products on Amazon’s e-commerce website while also reducing the company’s debt problem which was estimated to be between Rs. 3,000 and 3,500 crores at the time.

The 3 agreements involved

The transactions triggered three agreements:

Future Coupons’ shareholder’s agreement with Amazon (FCPL SHA)
FCPL’s shareholder’s agreement with Amazon (FCPL SHA)
FCPL’s share subscription agreement with Amazon (FCPL SSA)

Apart from the transactional component, Amazon had gained some credibility because of the ‘call option’ it was given. The ‘call’ granted Amazon the right to purchase all or a portion of the assets of marketing business Future Retail. According to reports, the arrangement also included a list of 30 businesses with whom the Future Group would not be able to do business, namely Reliance Retail, a Reliance Industries Limited affiliate. This was meant to be another special arrangement with Future Group, similar to the one Amazon signed with Shoppers Stop in 2017 when it bought a 5% interest for INR 180 crore.

The deal’s major highlights

The clause on Restricted Companies/Competing Businesses: One of the requirements was that Amazon would present a list of industrialists/businesses, and Future would not sell the interest to these entities without Amazon’s permission. The agreement prohibited 15 (fifteen) corporations from engaging in or purchasing holdings in Future Group’s retail assets, including Reliance Industries, Walmart, Alibaba, Softbank, Google, Naspers, eBay, Target, Paytm, Zomato, and Swiggy.
Call-option: Amazon was offered a call option to purchase all or part of Future Coupons’ stake in Future Retail, which may be exercised from the third year onward till the tenth year of the deal.

Future Group and Reliance industries limited deal

Reliance Industries Limited (“Reliance”) generates around one-fourth of its overall income from its retail division. Mukesh Ambani first stated his ambition of enticing partners to build Reliance Retail and conducting an immediate public offering for Reliance Retail in the years ahead at Reliance’s Annual General Meeting in 2020. According to this, Mukesh Ambani’s Reliance Industries Limited purchased Future Group’s retail and wholesale divisions, as well as the logistics and warehousing companies, as a going concern on a slump sale basis in August 2020 for a lump sum aggregate value of Rs. 24,713 crores. Future Retail, which holds Big Bazaar, FBB, Foodhall, Easyday, and Nilgiris, Future Lifestyle Fashion Limited, which operates Brand Factory, a fashion discount chain, and Future Consumer Limited were also bought as part of the agreement. Future Groups’ finance and insurance operations, on the other hand, were not included in the acquisition. Reliance’s investment in Future Group was primarily motivated by the need to grow its offline retail footprint and boost profitability through economies of scale.

Structure of the deal

Future Ventures is formed through the merger of listed firms Future Retail Ltd., Future Lifestyle Fashions Ltd., Future Consumer Ltd., Future Supply Chain Solutions Ltd., and Future Market Networks Ltd.
Future Enterprises will sell its retail, wholesale, and warehousing businesses to Reliance Retail and Fashion Lifestyle Limited, a fully operated subsidiary of Reliance Retail Ventures Limited, as part of a slump sale.
Reliance Retail and Fashion Lifestyle will contribute Rs 1,200 crore in a preferential stock offering and Rs 400 crore in Future Enterprises warrants. Such modifications are being made to mitigate the negative impact of the Covid-19 pandemic on Future Group’s operations.

It’s worth noting that Future Group lost Rs. 7,000 crore in income during the first four months of the pandemic, and the sale of the company was a result of the loss of revenue caused by the global pandemic. Future Group is not the only company compelled to sell its business as a result of the Covid-19 outbreak; this is a widespread trend. Currently, there is a worldwide boom in mergers and acquisitions.

The legal conflict in the case

According to a reputable business lawyer who spoke with a media organization on this issue, India’s Arbitration and Conciliation Act, 1996 will serve a decisive part in this issue. The issue is that even if the Singapore-based arbitrator rules in Amazon’s favour, the ruling will not be legally binding in India. In India, however, both parties will be supposed to follow the choice made by themselves. However, because there will be no pressure, the position in India may get more complicated.

Amazon has also appealed to SEBI, demanding that the deal be cancelled. Another aspect of the case is that the BSE (Bombay Stock Exchange) has stated that it will approach SEBI before proceeding. Amazon also has the alternative of knocking on the doors of India’s highest court, the Supreme Court, if it so desires. The Arbitration and Conciliation Act would then be invoked.

Reliance Industries Limited and Future Group’s stand

While Amazon has put a stumbling barrier in the way of the historic Reliance-Future Group merger, Reliance and Future Group remain optimistic. They are, in reality, working in mutual support with one another on this issue. Both parties have made different statements to the media, stating that they just need this settlement to go forward and that they’ll do everything possible to ensure that it does. It has been rumoured that talks with Amazon have already been initiated, but this would be a difficult nut to crack.

Furthermore, it has been reported that Future Group has set aside a sum of 1000 crores as a war chest. The problem is that even if Amazon wins the legal battle because all it can demand (expectably) is monetary reimbursement. Future Group is claimed to be prepared for such an event. Future Group is said to have an escrow account with Rs. 1000 crores saved in it, according to reports. Indeed, someone from the Future Group’s management has notified the reporters that this cash might be raised to the extent of Rs 1500 crores if necessary.

Legal concerns that arise after future group sells the firm to Reliance

Singapore International Arbitration Centre (SIAC) role

Amazon decided to file an urgent arbitration case against Future Group in October 2020, asserting that Future Group and Reliance together violated the agreement to sell Future Group’s retail, wholesale, and logistics businesses without Amazon’s permission, as mandated by an agreement signed between Future Group and Amazon in August 2019.

Amazon claimed that the Future Group-Reliance acquisition was illegal because it violated an agreement reached between Amazon and Future Coupons in 2019. The deal, according to Amazon, disturbed with Amazon’s call right to purchase Future Coupons’ shareholding in Future Group, which could have been implemented between the third and tenth anniversary of the agreement, and it was also in violation of the competitive company clause in the agreement, which stated clearly Reliance as a restricted corporation for the reasons of the competing business clause.

The decision delivered in Singapore International Arbitration Centre

The Singapore arbitrator decided in Amazon’s favour and issued an interim injunction, suspending the Future-Reliance deal for 90 (ninety) days but later being extended. Amazon contacted the Competition Commission of India (CCI) and the Securities Exchange Board of India (“SEBI”) as a result of this. It also went to the Delhi High Court to have the arbitration order enforced and to stop the Future-Reliance deal, which the Delhi High Court upheld. Future Group then appealed to the Singapore arbitration to have Future Retail removed from the interim order.

The decision by Justice Midha, Single Judge Bench, Delhi High Court

On February 2, 2021, Justice Midha of the Delhi Court’s Single Judge Bench confirmed the Singapore arbitrator’s decision, noting that the emergency arbitrator is an arbitrator for all reasons under Section 17(1) of the Arbitration and Conciliation Act, 1996. Upon finding some Future Group firms and directors liable of wilful breach of the emergency arbitrator’s decision in benefit of Amazon, it levied fines on them.

It had instructed them to transfer the money in the Prime Minister’s Relief Fund within two weeks of receiving the order, so that it may be utilized to provide Covid-19 treatment to old residents in Delhi’s Below Poverty Line (BPL) category. The emergency arbitrator’s order was determined to be valid and enforceable in India by the Court. The purchase was put on hold by the court, which also directed that no action would be taken in contravention of the arbitration decision. It chose to seize the holdings of Future Retail, Future Coupons, Kishore Biyani, and others, and Kishore Biyani was served with a show-cause notice. Justice Midha had imposed a status quo, thus stopping Future Retail’s sale of retail assets to Reliance Retail.

The decision by a division bench, Delhi High Court

Future Group challenged the Single Judge Bench’s decision to the Division Bench, and the Division Bench stayed Justice Midha’s decision staying the Future-Reliance merger and attaching Future Group and Kishore Biyani’s assets. On February 8, 2021, the Court issued an interim decision recognizing that Future Retail was not a participant in the arbitration agreement with Amazon and Future Coupons. Amazon has sufficient ownership over Future Group, according to the Division Bench, which was a breach of the Foreign Exchange Management Act of 1999.

Three consecutive agreements involving Amazon and Future Group resulted in such control. The clauses of three agreements were scrutinized by the Delhi High Court: Future Retail’s shareholder agreement with Future Coupons, Future Coupons’ shareholder agreement with Amazon, and Future Coupons’ share subscriptions arrangement with Amazon. When taken collectively, the Court found that the agreements in favour of Amazon prima facie crossover from a protecting to a governing right. Such control rights violated the Multi-Brand Retail Foreign Direct Investment Policy, which only allows foreign investment of up to 51 percent (fifty-one percent) with government clearance.

Supreme Court

Amazon appealed the decision with the Supreme Court, challenging the Division Bench’s ruling overturning the Single Judge’s status quo order. The Supreme Court did not overturn the Division Bench’s stay, but it did issue an interim decision urging the National Company Law Tribunal not to approve the acquisition plan. Since the Supreme Court had allowed the case for investigation, the court made it clear that the Delhi High Court’s Division Bench would not continue with the issue. The hearing on the Amazon-Future case has been postponed to 28 June 2021, as the Supreme Court attends to more vital matters during the spreading viral pandemic.

Conclusion

It is critical to recognize that, when examining the Future-Reliance deal, SEBI and other government agencies should take into account the interim ruling of SIAC to protect the sanctity of contracting parties. Amazon has drawn battle lines with Reliance in the battle for India’s estimated USD 1 trillion retail industry, particularly where online retail purchasing is gaining momentum. If the deal with Reliance does not go through, Future, which has over 1,500 locations, will be forced to close up, putting the livelihoods of thousands of workers at vendor enterprises at risk, and will be forced to go into insolvency. In light of this, Future has declared that it will take adequate measures to ensure that the transaction with Reliance goes smoothly, and Reliance has also declared that the deal will be completed. Future has stated that it does not plan to appeal SIAC’s decision and will instead wait for Amazon to seek confirmation from Indian courts.