In this explainer, Santosh Nair dispels some of commonly-held myths around the Future-Amazon legal dispute.
American retail giant Amazon is attempting to block the takeover of the assets of Future group by Reliance Retail. It has obtained an emergency injunction from a Singapore arbitrator for an interim stay on the scheme of arrangement for Future’s slump sale of assets to Reliance for nearly Rs 25,000 crore. Future group, which is in a deep financial crisis, has requested the Delhi high court to ask Amazon to stop interfering in the approval process for the asset sale scheme.
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Amazon bought an indirect stake in Future Retail, a listed entity. It did so by acquiring a 49 percent stake in Future Coupons, which in turn owns a 9.83 percent stake in Future Retail. Future Coupons received Rs 1,431 crore from Amazon and it invested the exact same amount in Future Retail for the 9.83 percent stake.
In this explainer, Nazim Khan
dispels some of commonly-held myths around the dispute:
Myth: Future Retail’s shareholding agreement among itself, Kishore Biyani Group and Future Coupons, as well as the Future Coupons shareholding agreement among itself, Amazon and KB Group are part of a single integrated transaction.
Fact: Amazon is not a party to the Future Retail shareholder agreement and Future Retail is not a party to the Future Coupons shareholder agreement. The Future Coupons shareholder agreement clearly states that Amazon’s investment is in Future Coupons only and there’s no agreement or understanding whatsoever in relation to the acquisition of shares or voting rights in, or exercising control over, Future Retail. Also, Future Coupons, the promoters and Amazon otherwise do not intend to act in concert with each other in any way whatsoever.
Myth: In its suit, Future Retail has not challenged the Singapore Emergency Arbitrator’s order. The order injuncts Future Retail from proceeding with the scheme. The court cannot intervene in any manner.
Fact: Future RetaiL participated in the Emergency Arbitrator’s proceedings ‘without prejudice’ to their argument that the arbitration agreement in Future Coupons shareholding agreement shall not apply to them, since they are not a party to that agreement.
Future Retail has challenged the exercise of jurisdiction by Singapore International Arbitration Centre (SIAC), and the SIAC is yet to take a view on it. So the Emergency Arbitrator’s order is not final in that regard. The Emergency Arbitrator’s proceedings and order are not recognised by India’s Arbitration Act.
Clause 25.1 of the Future Coupons shareholder agreement mandates that the agreement shall be governed and construed in accordance with laws of India i.e. the Arbitration Act. Clause 25.2.1. only mentions that the arbitration will be conducted in accordance with SIAC Rules. Needless to say, this means that, SIAC Rules will also be applicable, subject to it being consistent with the Arbitration Act.
Myth: Since the parties (Amazon and Future Group) have accepted SIAC Rules under which the definition of Arbitral Tribunal includes emergency arbitration, the interim award of the Emergency Arbitrator would be akin to an order under Section 17 of the Arbitration Act and binding on Future Retail.
Fact: SIAC Rules (in relation to the Emergency Arbitrator and its proceedings) as long as not consistent with Indian laws i.e. the Arbitration Act, will not be applicable for India seated arbitration proceedings, governed by Indian laws.
Myth: As long as the Emergency Arbitrator’s order is not challenged and set aside lawfully, it will continue to be binding.
Fact: The concept of Emergency Arbitration and relief(s) from Emergency Arbitration are not provided for in any manner in the Arbitration Act. If Amazon wants to rely on the Emergency Arbitrator’s order, the onus is on Amazon to seek its enforcement lawfully.
Myth: The Emergency Arbitrator’s order is an award and is legal and binding. Amazon’s decision not to enforce it formally has no bearing on whether the award is valid or not. Lack of enforcement never detracts from the binding nature of the award.
Fact: Amazon has not stated any reason as to why they have not sought to enforce the Emergency Arbitrator’s order. Till such time the Emergency Arbitrator’s order is upheld lawfully, it cannot be relied upon.
Myth: Conflating of the Future Retail shareholder agreement and Future Coupons shareholder agreement does not amount to giving control to Amazon. The rights given to Amazon are in the nature of investor protective rights and does not amount to control. Future Retail having agreed to these covenants cannot now allege that it is a transfer of control and are in violation of FDI policy, etc.
Fact: The material rights of Future Coupons over the management and affairs of Future Retail, in terms of the Future Retail shareholder agreement, have been surrendered to Amazon in the Future Coupons shareholder agreement and are being exercised by Amazon. Also, under clause 13.1.1 of the Future Coupons shareholder agreement, Amazon dictates the manner in which the entire promoters shareholding should be voted on the reserved matters in Future Retail shareholder agreement. Thus, the voting rights of each and every person , as regards any and all reserved matters pertaining to Future Retail, are subject to Amazon’s prior consent.
This amounts to Amazon taking over control over the management and affairs of Future Retail.
This is in violation of SEBI Substantial Acquisition of Shares and Takeovers rules, which state that no acquirer shall acquire, directly or indirectly, control over a target company unless the acquirer makes a public announcement of an open offer for acquiring shares of such target company.
Myth: Control can either be de jure (according to rightful entitlement or claim) and de facto (in fact, whether by right or not). In both cases, the key ingredient is positive control. If a party agrees not to do certain acts and deeds, it does not then qualify as de jure and de facto control.
Fact: The rights being claimed by Amazon, would amount to exercise of positive control within the meaning of SEBI SAST, and the same would constitute both de jure and de facto control.
Myth: Under the Foreign Portfolio Investor (FPI) Policy, any foreign investor registered with RBI can invest up to 10 percent in any Indian entity and that includes multi-brand retail trade business. Amazon’s investment is below 5 percent in Future Retail (through its 49 percent stake in FCL). Effectively Amazon’s holding in Future Retail qualifies for and within the FPI threshold.
Fact: Amazon has admitted to the Competition Commission of India that it invested in FCL as FDI in a non-multibrand retail trade business. Foreign portfolio investment technically means any investment made by a person resident outside India through equity instruments in a listed Indian company. Such “foreign portfolio investment” must be made by an FPI defined in Rule 2(u) as “a person registered in accordance with the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014”.
Myth: The exchange of communication between Future Group and Amazon regarding the disputed transaction with Reliance and Future Retail’s financial turmoil does not amount to Amazon’s acquiescence or consent. It only establishes that Future Retail gave Amazon to understand that some discussions are being pursued, but nothing has fructified.
Fact: The exchange of communication between Amazon and Future Group reveals that Amazon was aware of Future Group’s discussions with Reliance as early as May-June 2020. Also, Amazon was aware of Future Retail’s precarious financial position but did nothing about it till October 2020 when it issued the notice of arbitration.
Reliance also had informed Amazon about its discussions with Future Group, and all that Amazon said was, it was interested in protecting the business agreements with Future Retail.
Amazon cannot invest directly in Future Retail since that would require permission from Government of India, subject to a maximum of 51 percent equity stake, and subject to various related conditions. Amazon’s change of stance is aimed at derailing Future Retail’s scheme of arrangement, in the process pushing the entire Future Group to bankruptcy.
Myth: Reliance Industries is in breach of Amazon’s agreement, and Amazon’s conduct does not amount to interference with the disputed transaction.
Fact: With Rs 1,431 crore in investment, Amazon is trying to kill a Rs 30,000 crore asset, which is what the Future Group is worth.
Future Retail’s scheme of arrangement is pursuant to and under section 230-232 of Companies Act, 2013, which allows a company to enter into a scheme of compromise or arrangement between the company and its creditors or any class of them. As part of the scheme approval process, three-fourths of shareholders and creditors must approve the scheme, in addition to approvals from SEBI, Competition Commission of India and the National Company Law Tribunal.
The scheme allows for variation of shareholders’ rights, subject to the approval process. Amazon cannot stifle the progress of the scheme through enforcement of contractual rights, in any manner, even if it is considered as a shareholder in Future Retail. In the current case, less so because it does not hold a direct stake.
Amazon’s intent is more directed at ensuring Reliance does not get access to the Future Group’s assets, since that would stifle its competitive advantage.
Myth: In another five weeks, the Arbitral Tribunal will be constituted. The parties can determine their remedies in the arbitration proceedings. Hence, there’s no need for any court’s intervention in the Future Retail suit.
Fact: There’s a concerted effort being made to drag Future Retail into arbitration under the Future Coupons shareholder agreement, to which Future Retail is not a party. If Future Retail is dragged into arbitration, the scheme automatically gets stifled, and that’s the sole agenda of Amazon. Future Retail’s need of the hour is for the court’s intervention with a mandatory injunction directing Amazon from delaying the scheme.
First Published: IST