A $170 billion retail bounty is at stake! If Mukesh Ambani drew first blood by signing a $3.4-billion deal to buy several retail assets of the Future Group, Amazon struck legally by mounting a credible challenge before global arbitration panels and Indian courts. But there is no victor in sight yet.
India could revise its foreign investment rules for e-commerce to compel players to restructure their ties with some major sellers... The changes could hurt Amazon.
Even as the battle between Jeff Bezos’ Amazon and Mukesh Ambani’s Reliance Retail for control of the Future Group winds its way through various international arbitration panels and Indian courts, there’s another twist in the tale.
A Reuters report dated January 19 said: “India is considering revising its foreign investment rules for e-commerce, three sources and a government spokesman told Reuters, a move that could compel players, including Amazon.com Inc, to restructure their ties with some major sellers… The changes could hurt Amazon as it holds indirect equity stakes in two of its biggest online sellers in India. Amazon, Walmart and Flipkart did not immediately respond to a request for comment.”
The report quoted a Commerce Ministry official to say that the issue under active consideration and discussions have been on for more than a month.
If this does translate into a concrete policy, it could prove to be another roadblock in Amazon’s ambitions of dominating India’s e-commerce market.
This development comes even as The Delhi High court recently issued notices to Reliance and the Future Group on an appeal filed by Amazon against an order passed by the same court last month upholding the $3.4-billion acquisition by the Mukesh Ambani company of the retail, wholesale and logistics & warehousing business of Future Group, subject to receiving regulatory approvals from the relevant authorities.
Amazon claims the transaction violates the terms of a 2019 agreement it has with Kishore Biyani’s Future Group giving it the first right of refusal – by way of its 9.83 per cent stake in a Future Group company called Future Coupons and related covenants – to any sale of assets by the latter.
It is on this basis that the US e-commerce giant has obtained a stay on the transaction from the Singapore International Arbitration Council (SIAC) on October 25 last year.
India's e-comm market is expected to balloon to $200 billion in five years from $30 billion in 2019. Therefore, the winner will get a chunk of this additional $170 bn of consumer dollars.
The US e-commerce giant is India’s largest online retailer but its scale in the country is dwarfed by Reliance Retail, which has both physical stores as well as an online presence. Combine this with the assets it has purchased from the Future Group and you have a local behemoth with infrastructure, reach and last mile connectivity that no other retailer will be able to match in the foreseeable future.
Dominance over this market is critical for both Ambani’s retail ambitions as well as Bezos’ expansion plans. India is the world’s only billion population-plus market that is open for business – by contrast, China, the only other such market explicitly bars Western retailers like Amazon and Wal-Mart – and its e-commerce market is expected to balloon to more than $200 billion in five years from a relatively modest size of $30 billion in 2019.
Therefore, both Reliance and Amazon are battling for the largest chunk of this incremental amount of $170 billion of consumer dollars.
The Future Group argues that Amazon lacks locus standi in the case as it does not own even a single share in Future Retail. But its stake in Future Coupons does give the Bezos-led company an approximately 5 per cent indirect holding.
There are two other legal arguments against Amazon, both of which it has strongly contested. The first is that Future Retail, in which Amazon has claimed a right to first refusal, has not been sold. Instead, the assets of several Future Group companies have been amalgamated into a company called Future Enterprises and these assets have then been acquired by Reliance in a slump sale – defined as a transaction in which values are not ascribed to individual assets, which are sold en bloc.
The second argument against Amazon is that SIAC verdicts are not legally binding in India, unless both parties voluntarily choose to comply with it – which is not obviously the case here.
"I am entitled to ignore it. I am subject to Indian Courts. If a gentleman sitting in Singapore says something, I can bin that order. It is not to show any disrespect. I’m saying as a matter of law...," Harish Salve, one of India’s leading lawyers, who is appearing for the Future Group, had told the court last year.
But the matter got complicated further when a single bench of the Delhi High Court found that, prima facie, the SIAC order was legal, while at the same time upholding the validity of the sale of the Future Group assets to Reliance.
Even as the battle rages in court over the legal validity of the sale, a secondary battle has broken out between the contending parties over regulatory approvals for the deal. The Delhi High Court, on a petition filed by Amazon, has declined to interfere with the latter’s right to request stock market regulator, the Stock Exchange Board of India (Sebi) not to issue a no-objection certificate (NOC) to the Reliance-Future Group transaction.
The Singapore tribunal has formed a 3-member panel headed by ex-judicial commissioner of Singapore SC,which will pronounce a verdict within 6-9 months.
In a letter dated January 14, 2021, to Sebi, Amazon had said: “In view of the directions in the operative part of the Interim Award (by SIAC), we request your good offices to take action by inter alia:
(i) Suspending review of the impugned transaction as well as the scheme involving the impugned transaction, and not granting any no-objection in relation to the same; and
(ii) Directing the Indian stock exchanges not to issue any no-objection/approval letter to FRL."
The letter is reported to have pointed out that if the regulatory authorities permitted the transaction to go through despite the interim order passed by SIAC, it would show companies across the world that orders by reputed foreign tribunals were not respected in India. Though it has not said so, the implication is clear: Ignoring the SIAC order would be bad for India’s image at a time when it is trying hard to attract foreign investments into India, especially from companies looking at alternatives to China.
Meanwhile, even as Indian courts adjudicate over the legal validity of SIAC verdict and its jurisdiction over companies operating in India, the Singapore tribunal has formed a three-member arbitration panel headed by Michael Hwang, ex-judicial commissioner of the Supreme Court of Singapore. Media reports say both sides have agreed to the names on the panel, which will begin hearing the matter soon and pronounce a verdict within 6-9 months.
Meanwhile, the under consideration proposal referred to at the beginning of this article could create additional headaches for Amazon (and the Wal-Mart-owned Flipkart), which have been accused by domestic traders of using unfair business tactics and steep, financially unviable discounts to win customers from brick and mortar shops. Both companies have vehemently denied the charges.
Under Indian laws, foreign e-tailers can only operate e-marketplaces in this country. They are forbidden from holding inventory and selling them directly on their platforms. There are also severe restrictions on them holding stakes in companies that sell their products through them.
But India’s massive $1-trillion retail industry claims that these e-commerce giants circumvent these regulations via a complex web of agreements with sellers. The proposed new rules are expected to address these concerns.
Thus, the arbitration at SIAC and related court cases in India are only one part of the battle Amazon is fighting for control over the Indian e-commerce market.
Both Ambani and Bezos will, therefore, have to traverse a fair distance before either of them can claim victory.