Amazon isn’t smiling about the proposed Reliance-Future deal, arguing that it will call into question the enforcement of contracts in India. Freny Patel finds out whether its arguments hold water
The world’s richest man, Jeff Bezos, and Asia’s richest man, Mukesh Ambani, are locked in a bitter legal battle that will eventually decide the future of India’s biggest brick-and-mortar owner, Kishore Biyani, whose retail business is heavily in debt.
The fate of Reliance Industries’ US$3.4 billion acquisition of Biyani’s Future Retail – which operates more than 1,500 stores, including 290 budget outlets and the Big Bazaar retail chain in the country – will be decided largely by the courts in New Delhi.
The Jeff Bezos-led US giant, Amazon, had won an emergency award from the Singapore International Arbitration Centre (SIAC) to temporarily restrain the sale of Future Retail to Reliance Industries, owned by Ambani. However, the parties paid little heed to the SIAC ruling and statutory authorities in India gave the multibillion-dollar transaction a clean chit.
In another twist to the ongoing feud, Amazon responded by petitioning Delhi High Court to jail Kishore Biyani (chairman of Future Group) and seize the assets of the cash-strapped Future Retail for disobeying SIAC’s ruling.
“The scramble to try and enforce the order of the emergency arbitrator through Delhi High Court comes in the wake of the SIAC having constituted the final arbitral tribunal,” says Ajay Thomas, independent arbitrator and member of the International Chamber of Commerce (ICC) Commission on Arbitration and Alternative Dispute Resolution in New Delhi. “As upon application, the parties would have the opportunity to revisit the order.”
The emergency arbitrator would have no powers to act after the tribunal is constituted and the body could reconsider, modify or vacate an interim order issued by the emergency arbitrator as per SIAC rules. The interim order of the emergency arbitrator, which was valid until 23 January, has been extended pending further modification by the constituted tribunal.
“There was an award and one expects it to be abided by,” says Percival Billimoria, counsel and head of chambers at Chambers of PS Billimoria in New Delhi. “As the parties took steps to proceed, despite the Delhi High Court ruling recognizing the award of an emergency arbitrator, it means Future Group wants to close the deal. Hence the only possible consequence would be claiming damages.”
Hanging in the balance
In its petition, Amazon has questioned India’s willingness to respect the enforceability of contracts, the rule of law and the administration of justice, including the arbitral process governed by India’s Arbitration and Conciliation Act, 1996. The petition says if Future were to renege on a contract, it would mean business contracts are not sacrosanct and investments made in India could be at risk.
The arbitration tribunal proceedings are expected to commence shortly, while Delhi High Court will hear Amazon’s appeal in February.
Although the stock market watchdog and the stock exchanges gave the deal a clean chit in January, it came with a caveat. The Bombay Stock Exchange cautioned the parties to ensure that the details of the complaints, and submissions made by Amazon and those of the parties, as well as details of the ongoing court and arbitration proceedings, are made known to the shareholders.
The multibillion-dollar deal hangs in abeyance after obtained an emergency arbitral award that has put the brakes on the closure of the transaction.
Amazon argued that the deal was in breach of the 2019 contract signed between the US e-commerce major and Future Coupons, another Future Group company. Since the arbitration was under SIAC rules, with the seat of arbitration in New Delhi, it was possible for Amazon to invoke emergency arbitration provisions.
Future challenged the validity of the emergency arbitral award and sought an interim injunction, restraining Amazon from interfering in the Reliance-Future deal on the basis of the interim order passed by the SIAC.
While it seems as if the court ruled in Amazon’s favour, stating that the emergency award was valid, it also pronounced the validity of the Future-Reliance transaction.
In August last year, Reliance had announced its plans to acquire Future Group’s retail and wholesale business, as well as its logistics and warehousing business, on a slump-sale basis. Future Retail is in dire need of funding, with promoters having pledged 64.76% of their shareholding and reducing their equity stake to 28% as on 31 December 2020.
Staking a clam
Amazon, however, claims that its indirect stake in Future Retail gives it the right over the retail business of the Future Group, and that the parties had not sought its approval. It alleges that its 49% stake acquisition in Future Coupons in 2019 gives it not only a call option to acquire all or part of the promoter’s shareholding in Future Retail, but also in the fine print there is “a negative list of 30 entities with which Future Group cannot transact”.
This list includes the Mukesh Dhirubhai Ambani Group of companies. Amazon’s 49% shareholding in Future Coupons gives it a 3.58% stake in Future Retail, and a call option to acquire all or part of the owners’ shareholding in Future Retail between the third and 10th year post-acquisition, when the law permits.
“These kinds of disputes are typical in the tech sector,” says Tomas Furlong, Singapore-based partner at Herbert Smith Freehills (HSF), who specializes in cross-border and regional Asian disputes. “[In this sector] provisions around first refusal, and prohibitions on taking investments from competitors, are often heavily negotiated. It looks like the process is working as it should.” The arbitrator and the Indian courts have spoken and no doubt there’s more to come, he adds.
It has been one legal battle after another since this transaction was announced, a transaction that could make or break Future Retail. It’s not surprising that Amazon filed for emergency arbitration when the average duration of arbitral proceedings can take anywhere between 11 and 15 months from the date of commencement of the arbitration until the issuance of the final award based on the SIAC’s historical data.
Future Retail also took matters to court and petitioned Delhi High Court to restrain Amazon from writing to statutory authorities and urging them not to review the transaction until the tribunal had given a ruling. It questioned the validity of the emergency arbitral award and sought an interim injunction.
“The key question was whether Indian law recognizes the order of an emergency arbitrator,” says disputes expert Billimoria. “The court arrived at the right decision, holding that it does recognize emergency arbitral awards, but the matter should have been left to the arbitration tribunal to decide.
“The 132-page judgment of Delhi High Court further said that the Future-Reliance transaction was ‘legal’, which should have been for the arbitration tribunal to decide,” he points out. “Once a court of law has expressed its mind on an issue, the question then is whether the arbitration tribunal would be bound to similarly hold that this is the case. While it may not necessarily be constrained to adopt the same viewpoint, it may be persuaded by the view expressed by the court.”
On shaky ground?
The single-bench judge, Justice Mukta Gupta, went on to add that, the Future-Reliance deal being legal and valid, Amazon’s actions then amount to “tortious interference”, and hence Amazon is liable to be injuncted. The judge also questioned Amazon’s “protective rights”, and whether these go far beyond the permissible limits, violating foreign investment laws and India’s foreign exchange policy.
Amazon’s allegations that it has control over Future Retail would require government approval. As it is, Amazon is currently under scrutiny by the Enforcement Directorate for allegedly violating foreign investment norms.
Amazon appealed against the order to a division bench of the same court, pleading that if Justice Gupta had held valid the emergency arbitral award, then Future Retail’s plea should not have been maintainable. Delhi High Court asked Future and Reliance to respond by 12 February.
An emergency arbitral award is only interim in nature until the tribunal is constituted. A three-member arbitral tribunal has reportedly been constituted to look into the matter. Prima facie, Amazon’s claims may not have much merit, given that Future Retail is not a party to the shareholder agreement, which was signed between the US e-commerce giant and Future Coupons.
“The emergency arbitrator has not made any decisions about the merits of Amazon’s claims, while the Indian legal proceedings have focused on procedure,” HSF’s Furlong points out. “It is too soon to make any predictions.”
As the seat of arbitration is New Delhi, although it follows SIAC rules, we can expect all the action to take place in the country’s capital. One can expect the losing party to challenge or set aside the arbitral award, or, should Amazon win, it would need to file for the execution of the award.
While it is always a strategy of losing parties to challenge an arbitral award, they can only make an application based on seven grounds, in accordance with section 34 of the Arbitration and Conciliation Act, “the scope of which is limited,” says Thomas.
Billimoria agrees, saying that the “very limited grounds … do not include reappreciation of the matter on merits or the evidence presented”.
Thomas says parties will have to think twice before challenging the award, “because there are only seven technical grounds, and there is no question of an automatic stay. To avoid frivolous challenges of tribunal awards, courts are imposing conditional stays, wherein they have to deposit a percentage of the award, often as much as 50%.”
A long way to go
Meanwhile, Justice Gupta directed the statutory authorities – the Securities and Exchange Board of India (SEBI) and the Competition Commission of India – to review the deal and decide on the matter in accordance with the law. Both authorities have approved the Future-Reliance deal and that could be seen as another setback for Amazon, which had reached out to the regulators to block the transaction.
While both the Bombay Stock Exchange and SEBI had no objections, they cautioned Future Retail to inform the National Company Law Tribunal – the approval of which is pending – of the ongoing litigation with Amazon.
Arguments so far seem to indicate that Amazon’s plans to block the deal may fail. But as the battle of the retail giants continues to unfold, Furlong says: “We’re still a long way from this being over.” For Future Retail, Reliance is the white knight, having the ability to help double its footprint as India’s largest retailer. Without the Ambani Group company, its future looks bleak, as it may have to shut shop.
Amazon, on the other hand, may be seen to come across like a spoilt child – it cannot make a bid for Future Retail due to Indian foreign investment laws, and yet it does not want Reliance to acquire a stake, even as Future Retail could go bankrupt.
Biyani has reportedly said that Amazon could have provided funding through affiliates or financial institutions, by taking over loans from extending lenders, “but they never did, despite the agreement clause and our request”.
Should Future renege on the contract signed with Amazon, it would suggest that business agreements are not sacrosanct. However, legal experts say that this will have no impact on the inflow of foreign investment, as it is a dispute between two parties and nothing to do with the state. Given the size of the Indian market, multinationals cannot afford to let one contract dictate future investments.
A chronology of the legal battle
29 AUGUST 2020: Reliance Industries announces the acquisition of Future Retail for US$3.4 billion to beef up its growing retail business.
5 OCTOBER: Amazon files for arbitration, alleging its 49% stake acquisition of Future Coupons in 2019 gives it the right to acquire Future Retail.
25 OCTOBER: Amazon wins an emergency arbitration award against Future Group’s sale of retail business to Reliance Industries.
5 NOVEMBER: Future Group files caveat in Delhi High Court to stop Amazon from interfering in the transaction.
20 NOVEMBER: The Competition Commission of India unconditionally approves Reliance’s acquisition of Future Retail.
21 DECEMBER: Delhi High Court recognizes the award of the emergency arbitrator, but also pronounces the Reliance acquisition of Future Retail valid. The court further observes Amazon’s attempt to control Future as being in violation of India’s foreign exchange and foreign investment rules.
12 JANUARY 2021: Amazon appeals to the division bench of Delhi High Court to set aside the single judge’s observations, lest it influences arbitration proceedings.
20 JANUARY: The SEBI and stock exchanges clear the deal, but caution parties to keep shareholders and the National Company Law Tribunal in the loop over the dispute.
25 JANUARY: Amazon petitions Delhi High Court to jail Future Group’s owner, Kishore Biyani, and seize the assets of cash-strapped Future Retail.