After Amazon, Apollo Global wades into India's corporate governance jungle

After Amazon.com Inc., it’s the turn of Apollo Global Management Inc. to wade into the jungle that’s corporate governance in India. It has sued a Mumbai-based warehousing firm in which it owns a large stake. The cause of the dispute vanished on Monday when the company dropped a controversial plan to sell its business. But the US shareholder, whose rejection of the deal was given short shrift by the board, must still worry about its rights. After all, when the world’s largest retailer couldn’t enforce contracts in the country, why should a buyout firm fare any better?
 

Amazon and Apollo had made separate investments in private ventures of Kishore Biyani, a pioneer of modern-format stores in a country still dominated by neighborhood mom-and-pop shops. The Seattle-based e-commerce giant had bought stock worth $192 million in his gift-voucher unit so that the founder could invest the money in his retail business. The New York-based asset manager had given a 16 billion rupee ($200 million) loan to some of Biyani’s holding companies.

But after Covid-19 hit, the group’s debt spiraled out of control. Biyani couldn’t hope for a straightforward rescue of publicly traded Future Retail Ltd., his flagship unit, by Amazon because of India’s 2018 restrictions on foreign investment in retail. So in desperation, he hawked his assets to Mukesh Ambani’s Reliance Industries Ltd., even though the terms of Amazon’s investment in Future Coupons Pvt. prohibited a sale to the billionaire tycoon, who also owns India’s largest retailer.

Even as the ensuing legal dispute between Future Retail and Amazon over breach of contract held up the $3.4 billion sale, Reliance took over the lease on Biyani’s stores, and used that to wrest physical possession of the shops when they couldn’t pay the rent on their sub-lease. Worse, India’s antitrust authority suspended its earlier approval for the US firm’s investment in Coupons. It also fined Amazon for allegedly not revealing its true intention of using Coupons to get into the driving seat at Retail. Amazon’s legal case was cut off at the knees.

All this had happened by March. More recently, a similar story began to play out for Apollo. It had received, among other collateral, a lien on shares in Future Supply Chain Solutions Ltd., another publicly traded firm in Biyani’s group. Upon nonpayment, the buyout firm invoked the pledge and became a 24.8% owner. Yet, when Supply Chain recently put a proposal to shareholders to sell, transfer or otherwise dispose of the retail group’s assets, the “no” votes cast by Apollo were tossed aside as invalid. The resolution passed when it would otherwise have been defeated. Apollo may have hoped to improve its recovery rate on the soured loan by influencing the fate of 8.2 million square feet of warehousing space, something the Biyani family could still — directly or via another buyer — pass on to Ambani. That plan has now come a cropper.

As recently as April, when Amazon’s legal challenge had already been rendered moot by Ambani’s possession of the stores, companies in the Future group had polled creditors and shareholders for a proposed transfer of assets to Reliance. At Supply Chain, Apollo had voted against the plan. At that time, its views didn’t matter because Indian lenders to Future Retail — the main business — had scuttled the Reliance deal, balking at the 66% haircut that it envisaged for them. 

Curiously, however, the same vote-scrutinizer that had counted Apollo’s participation as valid back then rejected it five months later. It seems the management of Supply Chain doesn’t believe that the buyout firm has voting rights on pledged shares transferred to its name. Beyond producing an Indian Supreme Court order that allegedly supported such an interpretation in another case, the scrutinizer refused to express its own opinion and sent the question of the votes’ validity to the chairman. And who might that be? Rakesh Biyani, a cousin of Kishore. (My emailed questions to Future Supply Chain on the voting process have remained unanswered. In a Monday evening notification to exchanges, the company said it was rescinding the sale proposal because of an “expected delay in obtaining other requisite approvals.” The broader issue of whether Apollo has rights as a shareholder remains unresolved.)

The Economic Times first reported Friday that the asset manager was contemplating legal action. The outcome of the suit, which has since been filed, may be more important for India than Apollo. For creditors to be told that the stock pledged to them doesn’t carry voting rights is a serious setback to India’s financing-against-shares market; it will hurt genuine borrowers in the future.

Things might have turned out differently had Amazon bought out the loans to Biyani by Apollo, Blackstone Inc. and others, and then tried to enforce its rights as a creditor via the bankruptcy court. (The flagship Future Retail entered the formal insolvency process in July when there was hardly anything left in it for creditors to recoup their $2.7 billion in claims.)

India’s six-year-old insolvency law is far from perfect. Still, when court-appointed administrators take charge at errant debtors, they offer protection from arbitrary action by corporate boards. Amazon was outmaneuvered when directors of Future Retail complained to the competition authority, effectively questioning the legality of their own action in backing the e-commerce firm’s 2019 investment.

Now that Supply Chain has dropped the plan to sell its warehouses, Apollo’s interest is protected. But given the unstinting loyalty business families enjoy from boards, any reprieve could well prove to be temporary. With more than $515 billion of assets under management globally, the buyout firm wouldn’t fret too much about a $200 million loan that’s all but a write-off. Still, to be robbed first of principal and interest and then also of vote and voice is insult added to injury. If a pedigreed investor takes it lying down, the jungle will mark it as easy prey.