Jeff Bezos vs Kishore Biyani 2.0: RIL may pick up FRL through insolvency

The tactic is not new for Reliance. In 2020, Reliance Industries acquired 37.7% stake in textile manufacturer Alok Industries Ltd for Rs 250 cr.

Jeff Bezos-led Amazon may continue fighting the legal battle with Future Retail Limited (FRL) related to the $3.4-billion merger deal between Future Group and Mukesh Ambani’s Reliance, according to people familiar with Amazon’s strategy. This is despite the development where Reliance Industries on Saturday told BSE its agreement to buy Future Retail for almost Rs 25,000 crore cannot be implemented after lenders to the retail company rejected the deal.

But this is all optics, according to people familiar with Amazon’s strategy. They said that Amazon's legal team is expecting that the lenders to Future Retail or the company would drag the issue to National Company Law Tribunal (NCLT), which would further complicate the matter for Amazon and then Reliance would actually bid and buy the assets of Future for half the price.

“There is a high possibility that Reliance may decide to further play it dirty and may pick up the remaining assets of Future through insolvency if the lenders and the FRL are not bringing back the 850 stores that were given to Reliance,” said a person with knowledge about Amazon’s legal strategy. “If FRL may still go into insolvency, there again is a high possibility that Reliance may decide to bid for the company. But then this would make it very clear that there was collusion between lenders, FRL and Reliance to swindle  Rs 7000 crore of public money.”

Indeed, this tactic is not new for Reliance. In 2020, Reliance Industries acquired 37.7 per cent stake in textile manufacturer Alok Industries Ltd for Rs 250 crore. Reliance had jointly with JM Financial Asset Reconstruction Co Ltd bid for acquiring Alok Industries which was auctioned under the insolvency and bankruptcy law by lenders to recover their unpaid loans. This year, Sintex Industries' lenders approved the joint bid of Reliance Industries (RIL) and Assets Care & Reconstruction Enterprise (ACRE) to acquire the debt-ridden textiles firm under the insolvency resolution process.

The person said that through insolvency Amazon may also get back the investment of Rs 1500 crore that it made in FCPL (Future Coupons Pvt Ltd), the promoter entity of FRL in 2019. But analysts said that Amazon would only get the “seeds back” that it sowed in 2019 to tap the Indian retail market through its investment in Future and not get the fruits that it was expecting to get from the full-grown tree in future. “Amazon would also take a haircut, but is very less compared to what lenders would lose,” said a person.

Legal experts such as Vedika Shah, associate at law firm Pioneer Legal, said that the non-implementation of the scheme of arrangement could potentially have an adverse impact on Future, given that Future Retail Limited (Future Retail) has already defaulted in the repayment of its debt to its lenders coupled with the fact that Bank of India has initiated insolvency proceedings against Future Retail against section 7 of the IBC.

“Whilst, for Amazon this may seem as an initial win given that the scheme of arrangement with Reliance was the bone of contention between Amazon and Future Retail, if Future Retail is eventually dragged into insolvency it could be injurious to Amazon’s interest in the long run,” said Shah. “This new development does stir up and change things for Amazon to a large extent,” said Shah.

This year in March, Reliance took possession of about 850 stores out of the entire 1,500 Future Group stores for allegedly non-payment of rents for months altogether by the beleaguered retailer. Now Reliance has said that its arrangement with Future Group for the transfer of the latter’s assets can’t be implemented after the secured creditors of the entities that comprise the Kishore Biyani-led group voted against the deal.

“With the rejection of the scheme by the lenders and further intimation by Reliance that it would not pursue it's scheme shows Reliance in a poor light,” said K Narasimhan, advocate, Madras High Court. “It appears that FRL colluded with Reliance which has resulted in depletion of value of FRL. This merits action by relevant regulators specifically the RBI,” said Narasimhan.

Commenting on FRL voluntarily surrendering assets to Reliance and then Reliance backing out of the scheme, K Giri, director, General Empower India, a think tank promoting corporate governance in the country, said that the regulators must act quickly and swiftly before the value of FRL is completely eroded. “One should not be allowed to make mockery of the law and the Indian courts. These acts must be punished,” said Giri.

Shah of Pioneer Legal said the non- implantation of the scheme of arrangement would be a potential blow to Reliance, given that Reliance seemed to be fairly confident of the scheme going through and in anticipation thereof had commenced the process of taking over stores of FRL. “It will be interesting to see the next steps taken by Reliance in this regard.”

Shah said the most feasible option to the lenders of Future would now be to commence corporate insolvency resolution process (CIRP) proceedings against Future as per the mechanism under IBC Code, 2016. “The CIRP process will be intriguing given that we may see Amazon and Reliance in locked horns once again, this time in the capacity as resolution applicants, for the takeover of the business and assets of Future Retail,” said Shah.

Further, if the application for CIRP is admitted by the NCLT against Future Retail, as per section 14 of the IBC a moratorium will be imposed against Future Retail. As a result thereof, institution of suits or continuation of pending suits or proceedings against Future Retail will be prohibited during such moratorium. “Therefore, we may see the proceedings before SIAC (Singapore International Arbitration Centre) being stayed as a result of the admission of the CIRP proceedings against Future Retail.”

"Will the lenders exercise rights to bring back the stores? Promoters of FRL may face possible legal actions tantamount to criminal negligence by voluntarily surrendering the store to Reliance," said a person with knowledge about Amazon's legal strategy. "Lenders may face scrutiny by the RBI and SEBI if they do not pursue actions to bring back alienated stores."

The issue between Amazon and Future goes back to August 2019, when Amazon acquired 49 per cent in FCPL (Future Coupons Pvt Ltd), the promoter entity of FRL, for around Rs 1,500 crore. One year later, in August 2020, Future Group struck a $3.4-billion asset-sale deal with RIL.

In October 2020, Amazon sent legal notice to Future for doing the deal. It alleged it breached Future’s agreement with Amazon. It cited its non-compete agreement with Future. The deal specified any disputes would be arbitrated under the Singapore International Arbitration Centre (SIAC) rules. The same month, October 2020, Amazon got a favourable ruling for its plea at the SIAC. In November 2020, Future moved the Delhi High Court (HC) against Amazon, alleging interference by the US firm in the deal with RIL. Since then, Amazon has been fighting a legal battle with FRL to stop Future’s $3.4-billion deal with RIL.