Future Vs Amazon: CCI Scores A Self Goal?
Once upon a time, a seemingly naïve regulator met a twisted FDI policy, a canny foreign investor and a desperate Indian promoter.
And nobody lived happily ever after. Except, the lawyers maybe.
That’s how the 57-page order by Competition Commission of India in the Future Group versus Amazon case reads.
In its order CCI has done two things:
Put in abeyance the approval it had given in 2019 for Amazon’s acquisition of 49% of Future Coupons Pvt. Ltd (FCPL).
Fined Amazon Rs 202 crore for filing violations and "willful omission" of actual purpose of the deal with FCPL.
Because, according to CCI, Amazon pretended it was interested in coupons whereas actually it was interested in retail, and the investment in FCPL was with an eye on its subsidiary Future Retail Ltd. (FRL).
It’s taken CCI two years to figure that out.
What Changed Between 2019 And 2021?
Maybe Amazon didn’t fess up its full desires in clear terms in the regulatory filing. Fine, pay the fine. But what does it say of the regulator that bought the coupon story?
After all, in its November 2019 order CCI acknowledged that FCPL’s coupon business was barely a few months old. Before that it traded fabric.
It noted there were three transactions constituting the combination and that Amazon’s purchase of 49% in FCPL was contingent on the other two getting done (issue of FCPL shares to Kishore Biyani’s promoter entity Future Corporate Resources Pvt. Ltd. and transfer of FRL shares owned by FRCPL to FCPL).
It also noted that just before Amazon invested in FCPL, the latter had purchased equity warrants of FRL.
And, it did a competition assessment involving Amazon India’s businesses and those of Future Group entities, including FRL.
The Commission observed that the presence of FRL and Acquirer Affiliates in overall B2C retail or in any narrower segment stated above is not such as to raise any competition concern.CCI Order - Nov. 28, 2019
In short, FRL was always at the centre of the Amazon - FCPL deal. As even the media reported back then.
What has changed then for the CCI to find that Amazon “misled” it through “false statements and material omissions”?
Frankly, nothing material.
▶ CCI was aware that the three transactions (involving FRL, FCPL and FCRPL) were connected. Its own 2019 order noted that.
▶ CCI was aware that Amazon invested in FCPL and FCPL was the promoter and single largest shareholder of FRL. It’s own order said so.
▶ CCI was aware that via the 2019 transactions Amazon had gotten certain rights in FRL, namely right of first offer as well as restriction on share transfer by FCPL and Future Group promoters, the Biyanis. These restrictions barred sale of FRL to specified entities, including Reliance Industries Ltd.. All this was disclosed publicly.
To be clear, it is exactly this right Amazon is seeking to enforce and thus block the sale of FRL assets to Reliance Industries. Rightly or wrongly is for courts and arbitrators to decide. Not CCI.
CCI’s mandate is to check if mergers and acquisition may cause an “appreciable adverse effect on competition”. It did that in 2019 with FRL in the mix. By its own admission.
A Right By Any Other Name...
Why then is CCI crying foul?
In its order this week the regulator says new information has come to light. It has been shown internal communication of Amazon which reveals the e-commerce major was less interested in FCPL and more in FRL.
CCI says, the rights Amazon got in FRL were described by the U.S. retail giant as protective rights in all its filings. Whereas now, CCI finds, that in its pre-deal internal notes Amazon refers to them as strategic rights.
The expressions used by Amazon to describe the rationale behind the indirect rights over FRL varied from time to time: ‘strategic rights’ in its Internal Correspondence; ‘protection to investment in FCPL’ in the Notice given to Commission; and ‘rights derived from FRL SHA are to protect the interest of the investor [Amazon]’ in the response to SCN (show cause notice).CCI Order - Dec. 18, 2021
Here’s a question to CCI?
Wouldn't a rose by any other name smell as sweet?
Rights are what rights do. And, the nature of Amazon's rights in FRL hasn't changed between 2019 and 2021.
No matter what the latent ambition behind a commercial deal – it is only as good as what extant law, policy and contractual terms permit parties to do.
Amazon may very well want to rule Indian retail. But until foreign direct investment policy changes, it is limited to being a bit investor in FCPL with certain limited, protective rights in FRL. Any violation of that would draw central government and RBI action. Not CCI.
So, Why Is CCI Taking Punitive Measures?
CCI says Amazon never explicitly said in its filings that it did the deal with FCPL to get a “foot-in-door” in the Indian retail sector, as expressed in the company’s internal notes.
Well, surely that one CCI could figure on its own.
CCI says Amazon’s valuation of FCPL was arrived on the basis of the indirect interest and rights in FRL. And that shows FRL was key to the deal.
But, of course. CCI itself noted in its 2019 order that the coupons business was barely three months old. Evidently, the only thing of value at FCPL then (and later!) was its stake in FRL.
CCI says despite regulatory requirements, in its regulatory filings Amazon did not submit the internal communications revealing its interest in FRL. It should have.
Sure. But one of the two internal notes dates back to May 2018, more than a year before the Amazon-Future deal. In that note, Amazon officials discuss a very different deal structure – to invest $400-500 million for a 9.99% stake in FRL. Eventually, Amazon invested just over $200 million for 49% in FCPL. Companies are now going to wonder how far back their filing inclusions should go.
CCI says while Amazon shared the FRL shareholders' agreement, that contained the share transfer restrictions, it was not disclosed in the manner it ought to have been procedurally.
Here, Amazon is in trouble. In fact, in one response to a CCI query in 2019, Amazon asserted that the FRL shareholders’ agreement was “independent” of the deal with FCPL. That’s untrue.
Amazon claims it made an omission. CCI doesn’t buy that.
...the mentioning of FRL SHA in footnote 3 of the Notice can, in no manner, be considered a notification of the same as a part of the Combination either in substance or form.CCI Order - Dec. 18, 2021
CCI says various other commercial agreements between Amazon and Future Group entities — such as listing FRL products on the Amazon marketplace — should have been disclosed as part of the deal and not as independent agreements.
Here too, Amazon (and its lawyers) may be in procedural violation.
These two procedural violations have given CCI grounds to suspend its 2019 approval of the Amazon-FCPL deal, impose a Rs 202 crore fine on the U.S. retailer and order it to refile for the regulator’s approval once again.
Approval that CCI will find tough to deny – unless it’s willing to admit that all this time it thought Amazon was interested in coupons not retail.
Menaka Doshi is Managing Editor at BloombergQuint.