The battle for India’s offline retail market betweenReliance and Amazon is beginning to take an indigenous vs foreign flavor.
The last update is the arbitration court in Singapore rulingin favor of Amazon. Reliance claims that it had done its homework, while Amazonclaims the same. The battle for Future Group might take a while to resolve.
Now, some facts which had earlier been hidden are coming tolight now:
1. Has Amazon's JeffBezos disclosed all of the Amazon-Future agreements to Future Retail Ltd (FRL)shareholders?
To this, corporate watchers say no. Bezos has invested 49per cent in Future Coupons Ltd (FCL), a promoter company of FRL. 51 per cent ofFCL is held by Kishore Biyani, an Indian resident. FCL, in turn, has 9.82 percent holding in FRL.
It looks as though that FCL is controlled by Biyani with hisholding of 51 per cent. This is a requirement under India's FDI Regulations.
Bezos cannot hold directly even one share in FRL. On theface of it, he seems to be in compliance with FDI Regulations. But, the realityis different.
In a two-tier structure, Bezos has taken control of FRL,which is prohibited under FDI Regulations:
(i) Tier 1 is a shareholders' agreement between FRL, FCL andother promoters of FRL in terms of this agreement, without FCL's consent, FRLcannot transfer its assets or business to any third party and its board cannoteven consider such a proposal.
(ii) Tier 2 is a shareholders' agreement between FCL, Amazonand other promoters of FRL in terms of this agreement, Bezos has taken over therights of FCL under the FRL shareholders' agreement.
(iii) Thus, effectively Bezos controls FRL.
The Future Retail shareholders agreement and the FutureCoupons shareholders agreement have never been disclosed to any Indianregulator.
If they are disclosed:
(i) SEBI will find that Bezos has taken control of FRL andwill mandate him to make an open offer at a price of Rs 500 per share.
(ii) ED will find that Bezos has invested in and takencontrol of a multi-brand retail company without Government approval andhoodwinked the Government of India.
2. Has FRL amendedits Articles?
Amazon's rights in FCL were carried as part of the amendmentto the Articles of FCL.
FRL Articles have not been amended. This is because, had theamendment been proposed to the shareholders disclosing that Amazon willexercise the rights of FCL under FRL shareholders' agreement, the publicshareholders would have never approved it.
3. Amazon could nothave invested in FRL through FDI route under FDI Policy. Then, how does it haveenforceable rights against FRL?
For this, Amazon has gone through the above mired (andconvoluted) structure;
FRL is engaged in Multi Brand Retail Trade (MBRT); ForeignDirect Investment (FDI) - up to 51 per cent - in MBRT is allowed only withprior permission of the government, which will also be subject to veraciousconditions, including sourcing of materials within India and management controletc.;
Amazon wants to control multi brand retail space, butwithout any of the legal hassles; therefore, in a convoluted manner, it wentahead with the mired illegal structure; if the veil is pierced and thetransaction structure is studied in detail, it will be found illegal, corporatewatchers said.
The fact that Amazon has obtained an interim order from theEmergency Arbitrator injuncting the public company, FRL not to proceed with thescheme, inspite of not having any direct shareholding in FRL, shows that thecontractual rights are nothing but "control", in violation of SEBIand FDI Regulations.
Bezos is learnt to have followed a similar investmentstructure while investing in More Retail; where he invested Rs 4,200 crore;
For FDI violations, the consequence is, apart from annulmentof transactions, Bezos is exposed to penalty of up to three times theinvestment Rs 5,630 crore x 3 times = Rs 16,890 crore, sources said.
For violation of SEBI Takeover Regulations, apart frompenalty, they may also be liable to be prosecuted.
4. How as a foreigncompany Amazon asserted control over FRL and its Board? And on FRLshareholders?
The assertion shows that Amazon has violated FDI and SEBIRegulations. If Amazon asserts control, it needs to make an open offer.
5. Amazon isasserting control over FRL. Does it violate FDI policy?
Yes.
6. Have all of theagreements been disclosed to regulators SEBI, ED, etc.?
No details of transaction selectively provided in anobfuscated manner
Enforcement Directorate, SEBI, Ministry of Company Affairs,and other authorities etc, must direct Amazon to disclose the agreements anddetails of actual arrangements in and commence inquiry.
7. What is the cruxof the SIAC'd Interim Order?
It records that Amazon's entire investment was for itsdirect interests in FRL.
8. Is Mukesh Ambani acompetitor of Bezos?
Bezos cannot carry on multi brand retail in India. He cancarry on only market-place e-commerce in India. Yet, his Amazon is referring toAmbani's Reliance as its competitor. Reliance can be Amazon's competitor onlyif the latter is permitted to do MBRT.
All in all, this corporate battle is a battle of equals as bothReliance and Amazon are deep in cash. Both have immense brand value. Consumerslove both companies. Both companies are led by strong-willed men who areaggressive and astute. This story, however it unfolds, should go down inhistory of India’s business world as one to remember