If 'control' is read, as sought by Amazon now, its investment would be violation of FDI policy

The Future Retail shareholders agreement, the Future Coupons shareholders agreement and the Future Coupons share sales agreement are not an integrated transaction and if these agreements were to be treated as a single integrated transaction, it would tantamount to Amazon’s investment in FCPL being actually an indirect investment in FRL, and Amazon’s exercising control over FRL, both of which would be held illegal.
It is precisely for this reason that Amazon chose to invest in FCPL, i.e. FDI in a non-MBRT business venture, where FDI is allowed under the automatic route.
Amazon, as part of its notice to CCI regarding its investment in FCPL, while calling out the background to FCPL SHA (and FRL SHA), expressly stated that the investment is in FCPL for promoting its interest in FCPL business only. Thus, the CCI, while approving Amazon’s investment, studied the FCPL business alone to assess if there’s any appreciable adverse impact on competition. The MBRT business was not there in the scope of CCI’s study at all.
It is for this precise purpose the FCPL SHA in Clause 15.17 specifically calls out that that Amazon’s investment is in FCPL only and there’s no agreement or understanding whatsoever in relation to the acquisition of shares or voting rights in, or exercising control over, FRL and that FCPL, the promoters and Amazon otherwise do not intend to act in concert with each other in any way whatsoever.
Without the clause 15.17 of FCPL SHA, a conflated (combined) reading of FRL SHA, FCPL SHA, and FCPL SSA will reveal that Amazon’s rights to dictate and direct FCPL (and the Kishore Biyani Group) together holding in excess of 50 percent equity in FRL, as on August 2019, to ‘act and not act’, and ‘to vote and not vote’ regarding each and every matter concerning FRL’s affairs, would amount to Amazon exercising ‘control’ over FRL.
If ‘control’ is read, as is sought by Amazon now, its investment would be treated as a violation of the FDI policy for FDI in MBRT business.
Apart from this, it would have also triggered an obligation on both Amazon and the promoters of FRL to make an open offer to all the FRL public shareholders, as at the time of Amazon’s investment under SEBI SAST Regulations. Conspicuously, the approval of 300,000 plus FRL public shareholders was not received.
“Therefore, if these agreements were to be treated as a single integrated transaction, it would tantamount to Amazon’s investment in FCPL is actually an indirect investment in FRL, and Amazon exercising control over FRL, both of which would be held illegal,” experts said.
Amazon was well aware of the FRL’s transaction with Reliance, and did nothing about it.
Amazon was well aware of the fact that FRL was engaged in talks to transfer its business to Reliance as far back as June/July 2020 and discussions between the representatives of FRL and Reliance have been acknowledged and discussed in WhatsApp chats between the representatives of Amazon and FRL.
Despite this, Amazon has falsely represented to the authorities that it only found out about the transaction on September 16, 2020.
In fact, informal discussions were also held between Amazon and Reliance in which Reliance informed Amazon that it was acquiring the assets of FRL. Amazon did not raise any objection and only sought an assurance that certain supply agreements would be honoured. Amazon has not disputed this.
Amazon contends that it could have invested up to 10 percent in FRL under the Foreign Portfolio Investment (FPI) route and that under the current transaction, if conflated, Amazon merely held 4.81 percent in FRL through FCPL (i.e. 49 percent of FCPL’s shareholding in FRL, i.e. 9.82 percent).
Amazon further contends that along with the 4.81 percent, it only held “protective rights”/”passive rights” in FRL, which do not amount to “control, as held in the case of ArcelorMittal India Pvt Limited vs Satish Kumar Gupta”.
Amazon’s submission that it only acquired “protective rights” in FRL is false contrary to its submissions before the Emergency Arbitrator where Amazon contended that it has “protective, special and material rights” with respect to FRL’s retail assets through FCPL.
If as Amazon contends, it had made its investment directly in FRL (which it did not) and had been granted the same protective, special and material rights (as contained in the FCPL SHA) in a shareholders agreement to which FRL was joined as a party, then such an investment would not have been permissible even under the FPI route without government approval, experts said.
Amazon now claims that any and every matter concerning FCPL’s rights in FRL could not be taken up or tabled before or decided by the Board of FRL without Amazon’s consent. Clearly, Amazon’s arguments, as canvassed now, are nothing but control over FRL, and not mere protective rights (of the negative nature), which apart from being illegal, as could be seen from the above legal provisions, were also never the intention of the parties.
The judgment in the ArcelorMittal case is only in the context of investor protection rights in the form of negative rights which have been held not to constitute control. In sharp contrast, the conflated (combined) reading of the two agreements canvassed by Amazon would confer positive control on Amazon to dictate how the promoters of FRL may vote their shares in FRL. ArcelorMittal’s case therefore does not apply to this case in any manner.
It is also pointed out that the Emergency Arbitrator was not empowered to join FRL to Amazon’s application for emergency relief.
Experts say that the Emergency Arbitrator is not therefore an “arbitral tribunal” under the provisions of Part I of the Act.
The Emergency Arbitrator erroneously joined FRL as a party to the proceedings initiated by Amazon despite the fact that FRL is not a party to the arbitration agreement contained in the FCPL SHA.
This power cannot be exercised by an “arbitral tribunal” and is reserved exclusively for the courts under Section 8 and 45 of the Arbitration Act.
Legal experts argue that the EA Order is a nullity and Amazon is unlawfully interfering in the transaction by masquerading the EA order as an order of a court under Section 17 of the Act.
Further, if Amazon wants to rely on the EA’s order, the onus is on Amazon to seek for its enforcement under Section 9 (1) of the Arbitration Act through the Delhi High Court.
Under the provisions of the Arbitration Act, the only provisions that relate to grant of interim relief(s) are: Section 9(1) of the Act, which requires the applicant to move the high court for any relief(s) prior to commencement of arbitration, or before the Arbitral Tribunal under Section 17 of the Act, after the commencement of arbitration proceedings.
The definition of Arbitral Tribunal under the Act does not include Emergency Arbitrator.
Whereas, almost under all of the laws pertaining to overseas jurisdictions, including in Singapore, the applicable Arbitration Act there specifically provides for Emergency Arbitration, prior to the constitution of the Arbitral Tribunal.
Thus, the concept of Emergency Arbitration is alien to the arbitration proceedings governed by Indian laws, experts argued.
Amazon’s further contention to the effect that some of the Indian arbitration institutions in Delhi, Mumbai and Chennai provide for Emergency Arbitration proceedings, and therefore it is recognised under Indian laws, is also fallacious since these rules are meant for foreign seated arbitrations, where the local laws provide for emergency arbitration.
To explain this, if the arbitration is seated in Singapore, and the arbitration process is provided for in accordance with the relevant Indian institutional rules, and the arbitration award is enforceable in Singapore, then the Indian institutional rules providing for EA proceedings and power for EA’s interim award would be applicable.
Where the arbitration seat is India, and the arbitration agreement is construed and governed by Indian laws, as is the case here, the courts have held categorically that the EA’s interim order is not enforceable in Indian laws, and the entire matter will have to heard de novo (afresh) under Section 9(1) of the Arbitration Act.
“Therefore, the entire Emergency Arbitration proceedings and the EA’s order are void and must be treated as a nullity,” experts said.
In addition, FRL was wrongly impleaded as a party to the arbitration proceedings initiated by Amazon under the FCPL SHA. In Amazon’s application for emergency reliefs, there exists no arbitration agreement between Amazon and FRL.
Accordingly, FRL’s joinder in the proceedings run contrary to the provisions of Part I of the Act and more specifically, Section 7 of the Act.
From a plain reading of Section 7 of the Act, in the absence of an arbitration agreement in existence between Amazon and FRL, no claim by Amazon against FRL or no dispute of Amazon with FRL can be the subject matter of a reference to arbitration.
Amazon’s representations before the regulators are wholly without merit, experts said. The Board of FRL, in compliance with its fiduciary duty owed to FRL, approved the transaction with a view to salvage FRL and its stakeholders, who had been adversely impacted by the Covid-19 pandemic. Thus, the Board approved the transaction in the best interests of the employees, lenders and shareholders of FRL.
The Board of FRL approved the transaction in accordance with Clause 10 of the FRL SHA, i.e., only after FCPL accorded its written consent dated August 29, 2020.
A resolution can only be termed void if it is contrary to law. Since FRL’s Board resolution is not contrary to law, it is not void. Amazon’s contention is that the Board resolution is void on the ground that it purportedly contravenes FCPL’s Articles of Association. There is no principle of law by which FRL’s Board of Directors can be made bound by FCPL’s Articles of Association.
The transaction has been approved in accordance with the terms and conditions of the FRL SHA and FRL’s Articles of Association.
Experts said even assuming without accepting that Amazon was persuaded to invest in FCPL because the latter was assured of certain rights under the FRL SHA, it does not confer upon Amazon any derivative rights under that FRL SHA.
Experts said that 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 FRL. In the instant case, Amazon’s rights, if any, can and only be limited to FCL, and even that may not arise, since the scheme is not a transfer through a private treaty.
Nothing stops a company (whether or not it has contractual obligations otherwise with any third parties) to opt for a scheme of arrangement, and such a right is available to it at all times.
Thus, no breach can be alleged against even FCL, leave alone FRL. At best, Amazon can make its objections to the scheme in a manner, as provided under Section 230-232 of Companies Act.
Amazon has unlawfully interfered and continues to do so with the lawful transaction between FRL and Reliance by masquerading the EA Order (in fact a nullity) to be an order under Section 17(2) of the Act and on the basis of false assertions that would render the FCPL SHA and FRL SHA violative of the FEMA FDI rules.
After procuring the EA order, Amazon has taken steps that unlawfully interferes with the transaction and the business and economic interests of FRL, experts said.
On the Future Group’s financial crisis – the entire fate of Future Group and its stakeholders is dependent on Delhi High Court’s intervention to facilitate the scheme being implemented.
Even prior to the lockdown, owing to Covid 19, physical retail business suffered losses owing to lesser sales/revenues.
After the commencement of lockdown in March, the situation became worse.
This resulted in Future Group defaulting in payment of approximately Rs 10,000 crore plus to financial institutions and lenders, vendors and suppliers, and to landlords in respect of unpaid borrowings, bills and lease rentals, respectively. In addition, there was also reduction and delay in payment of salaries and incentives to the employees.