Amazon’s Agreements With Future Group Seem Contrary To FDI Policy, Says Delhi High Court  
Kishore Biyani, chief executive officer of Future Group. (Photographer: Dhiraj Singh/Bloomberg)

Amazon’s Agreements With Future Group Seem Contrary To FDI Policy, Says Delhi High Court  

Rights conferred upon Inc. under its agreements with the Future Group seem to be contrary to India’s foreign direct investment rules, the Delhi High Court said in its order on Monday.

The court, in a prima facie opinion, held the agreements between Amazon with Future Group companies, if conflated, result in the former exercising control over Future Retail Ltd., which would be contrary to foreign exchange management and foreign direct investment rules in absence of government approvals.

The Delhi High Court bench of Justice Mukta Gupta analysed the clauses of three agreements:

  • Future Retail Ltd.’s shareholders agreement with Future Coupons Private Ltd.; Future Coupons’ shareholders agreement with Amazon; and Future Coupons’ share subscription agreement with Amazon.
  • Read together, the high court ruled the covenants prima facie transgress from a protective right to a controlling right in favour of Amazon.

Protective Vs Control: Thin Line Between Veto Rights

Future Retail argued that by claiming that its consent was required for the transaction with Reliance Retail, Amazon was seeking to control its affairs. It is at best a shareholder of Future Coupons and in that garb it cannot exercise control over it, which would also be a violation of the FEMA-FDI rules, Future Retail had argued.

The FDI policy permits foreign investment of up to 51% under the government route in entities engaged in multi-brand retail trading.

Amazon had countered by saying that the company had no control in any manner in either Future Coupons or Future Retail as much as it cannot even appoint the majority directors of Future Coupons. The rights granted under the Future Coupons shareholder agreement were protective, which have also been recognised by the Supreme Court in the Arcelor Mittal case, Amazon’s counsel Gopal Subramanian argued.

The high court didn’t agree with Amazon’s arguments.

Justice Mukta Gupta noted that the line between veto rights which may be protective and ones that may be constituted as exercising control is thin. It noted:

  • Through the Future Coupons shareholder agreement, a control was created even on the voting rights of the promoters of the company in relation to their certain decisions as shareholders of Future Retail.
  • It was clear that Amazon’s consent was required by Future Retail to act upon “reserved matters” and that without the consent of Amazon, Future Retail was only entitled to deal with and carry out “permitted transactions”.
  • For any sale or transfer which is not a permitted transaction, Future Retail would require the express consent of Future Coupons, which would, in turn, require the express consent of Amazon for all such matters.
  • Given the narrow ambit of permitted matters that can be taken up by Future Retail without requiring the consent of Amazon, there is prima facie a very limited discretion available to Future Retail for conducting its own business.

‘Amazon Gets Extensive Rights On Conflating The Three Agreements’

After examining the two agreements, the court noted the rights held by Amazon were extensive and cannot be covered as mere protective rights.

The bench came to a prima facie conclusion that on issues that required the consent of Future Coupons in the Future Retail shareholder agreement, nothing could be taken up or implemented by the majority shareholders of Future Retail or the shareholders of Future Coupons without the consent of Amazon.

These covenants prima facie transgress from a protective right to a controlling right in favour of Amazon particularly in view of the fact that the matters essentially requiring the consent of Amazon are of a very wide ambit, and the matters within the sole discretion of FRL (Future Retail) are very limited.
Delhi High Court Judgment

The court, therefore, found that besides creating protective rights, the conflation of the three agreements showed that it transgressed to control over Future Retail, which would require government approvals and, in its absence, will be contrary to FEMA-FDI rules.

Last year, NV Investment Holdings had invested in Future Group by acquiring a 49% stake in Future Coupons. At the time, Future Coupons and Future Retail also entered into a shareholders’ agreement.

It said Future Retail will require prior approval from Future Coupons on certain matters. These include transfer or licence of all or substantially all of the assets of Future Retail or material assets; transfer of assets above a certain threshold to a related party; amendment of articles of association in conflict with the terms of the shareholders’ agreement, etc.

Besides its observations on Amazon’s rights, in its order on Monday, the Delhi High Court upheld the legal validity of emergency arbitrators and allowed Amazon to make its case before statutory authorities and regulators.

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