CCI’s Order Against the Amazon-Future Deal: Gainers and Losers
Just when one thought the Future-Reliance-Amazon feud was drawing to a conclusion, it reached another peak!
In what can only be termed as the biggest (and the most entertaining) corporate battle in recent years, this is what happened. Until last week, Amazon had seemingly one-upped the other two by receiving a favourable ruling from the arbitration court. The court in question was the Singapore-based tribunal which had blocked the RIL-Future merger.
However, the tables seem to have turned yet again after Amazon received a blow from India’s antitrust watchdog, the Competition Commission of India (CCI). On December 17th, the CCI not only withdrew its earlier approval for Amazon’s investment in the Future Group but it also imposed a ₹200cr ($26.3m) penalty on the e-commerce giant for “providing false information” and “suppressing material particulars”.
Allow us to break down the latest developments and highlight what lies at stake here.
The Un-Love Triangle
In 2019, Amazon entered into a deal worth ₹1,431cr ($188.6m) with Future Coupons (part of the Future Group) by acquiring a 49% stake in the company. This investment forms the basis of the Amazon-Future relationship and lies at the centre of their dispute.
In August 2020, Reliance Retail (wholly-owned subsidiary of RIL) announced that it was acquiring the retail and wholesale business of Future Group (i.e. Future Retail) through a sale of assets in the amount of ₹24,713cr ($3.2bn). Amazon objected to this acquisition saying it was a violation of the non-compete clause and a right-of-first-refusal pact that it had signed with Future.
Amazon, thus, filed a lawsuit and dragged the matter before an arbitral court seated in Singapore (SIAC) which blocked the RIL-Future deal. The Supreme Court sanctioned the arbitration award as well.
So, essentially, RIL’s plans to expand its retail reach through Future’s network were put to rest and those of Amazon’s were strengthened. But not for long, as it turns out, thanks to the disclosure of some of its own internal documents.
The Big Lie
While applying for CCI’s approval for its 2019 deal with Future, Amazon said that it was investing in Future Coupons (Future’s gift voucher unit) because of its “unique business model and strong growth potential”. And that this would help Amazon address the gaps in India’s payments industry.
Be that as it may, following the announcement of RIL’s acquisition of Future Retail and Amazon’s subsequent opposition to the deal, more facts came to the surface about Amazon’s own deal with Future.
The most striking fact being an “email” sent by an Amazon India official to Jeff Bezos referring to the ₹1,431cr-deal as “an investment in Future Retail and not Future Coupons”. The email reveals that the investment was designed in a way so that “Amazon can indirectly hold shares in Future Retail through Future Coupons”, labelling it as a “twin-entity investment”.
Here’s how.
Amazon had acquired a 49% stake in Future Coupons, the promoter entity of Future Group. Future Group, in turn, holds a 9.82% stake in Future Retail. So, effectively, Amazon owned an indirect stake of 4.81% in Future Retail.
Although this math wasn’t disclosed in Amazon’s application to the CCI, it came to light after a number of internal documents were leaked and some company correspondence was tabled in the court during the arbitration proceedings.
Wiping the Smoke Screen Clear
The indirect control of Amazon over Future Retail was described by the former as “investment protection rights”. However, in effect, these were strategic and veto rights which accomplished two things:
- Empowered Amazon to object to the RIL-Future deal along with 11 other companies who were reportedly being considered by Future for retail deals.
- Enabled Amazon to bypass India’s FDI laws that prevent foreign companies from controlling multi-brand retail firms in India.
THIS is the “material concealment” of Amazon as alleged by the CCI. The original intent of Amazon wasn’t to invest and profit from the business of Future Coupons but instead to use its “twin-entity” (i.e. Future Retail) as a vessel to get its foot in the door of India’s retail sector that is heading towards a trillion-dollar plus valuation by 2025.
Future Retail, through its operation of popular and expansive retail chains like Big Bazaar and Pantaloons as well as through its vast retail assets in hypermarkets, supermarkets and convenience stores under brand names like Easyday, eZone, 7-Eleven etc., makes for a perfect vehicle to paddle into the organised retail pool in the country. The pandemic may have torpedoed the company’s business and financials but it still remains a viable candidate for acquisition and expansion owing to its strong retail presence across big- and small-town India with 1,700+ stores.
When there’s a reward so ripe for the plucking, suitors come calling. However, unlike Indian suitors, Amazon had the distinct disadvantage of being a foreign company that is hamstrung with Indian foreign investment laws.
What Laws?
Basically, the Indian law differentiates between foreign- and domestic-funded e-commerce marketplaces. The FDI Policy 2017 and the highly-debated Press Note No. 2 (2018 series) are both designed to prevent e-commerce entities from engaging in multi-brand retail trade.
Why? To protect scores of unorganised brick-and-mortar stores or so-called “mom-and-pop” shops from fading into oblivion as a result of competition against deep-pocketed global e-commerce players like Amazon, Flipkart (Walmart-funded), etc.
Although intended well, the law is shaky at best and discriminating at worst. Foreign-funded e-commerce entities like Amazon and Flipkart not only command a large share of the online retail market, but they have also fallen into the habit of constantly reorganising their structures to blend with the oft-amended Indian laws. If that fails, the next route they take is to bypass these laws, as Amazon did through its covert investment in Future Group.
Secondly, there is an inherent fallacy in discriminating between foreign- and domestic-funded entities because there is no reason to believe that large domestic-funded entities like RIL cannot harm brick-and-mortar stores.
Thirdly, consider the incongruity in the marketplace model vis-a-vis multi-brand retail. The FDI policy permits 51% foreign investment in offline multi-brand retail but none in e-commerce multi-brand retail. Now, multi-brand retail means the sale of different products of different brands through one platform. E-commerce platforms like Amazon sell a diverse range of products from several different brands in addition to running discount schemes, offering a variety of payment options, transactional support and delivery services — all similar to (and arguably, superior to) multi-brand retail stores.
So, could it not be said that foreign-funded e-commerce platforms are not only engaging in prohibited multi-brand retail (albeit online), but they are also evading the compliance required of offline multi-brand retail stores? Point is that e-commerce platforms operating on an inventory-based model are largely disguising themselves as multi-brand retail right under the noses of regulators.
Perhaps, the latest CCI order is an indication for foreign players like Amazon to stop violating the law. The order could also ease the path for the RIL-Future deal to go through seeing as Amazon’s investment in Future may be held void without CCI’s clearance.
Alternatively, it could serve as a massive blow to foreign investors who wished to pursue investments in a burgeoning consumer market such as India (third-largest globally by 2030) seeing as the regulatory environment is largely biased in favour of domestic players, be it small retailers or large corporations like RIL.
Watch out, for the tale of retail dominance in the country is yet to be told in full.
(Originally published December 20th 2021 in transfin.in)
