Here is a sentence, which sounds innocuous and laced with bureaucratese at first glance, that may well be read and re-read several times and subjected to rigorous legal interpretation in the coming weeks.
“Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI (foreign direct investment), engaged in the activity of multi-brand retail trading”.
This sentence is from Clause (ix) of Section 18.104.22.168 titled “Multi-brand Retail Trading” of India’s “Consolidated FDI Policy”, an umbrella rulebook that contains micro-details of foreign investment regulations for various sectors in India.
Buried in Page 55 of this 108-page tome, which was updated on 15 October, 2020, is this condition that, prima facie, prohibits any foreign entity with e-commerce operations in investing in India’s brick-and-mortar multi-brand retail sector.
Online retailing giant Amazon.com Inc’s attempt to foil Future Retail Limited’s (FRL’s) decision to sell its retail, wholesale and logistics and some other businesses to Reliance for Rs 24,713 crore will be subjected to scrutiny within this provision.
Amazon on 25 October won a temporary injunction from an emergency arbitrator at the Singapore International Arbitration Centre (SIAC) asking Future Group to hold its sell-out plans to Reliance Group until the arbitration court passed its final judgement.
Amazon had approached SIAC, arguing that the Reliance-Future deal amounted to contractual breach as the US-headquartered e-commerce giant held an indirect stake in Future’s brick-and-mortar retail business FRL.
At the centre of the dispute is Amazon’s 49 percent stake in one of Future’s unlisted firms, Future Coupons Limited (FCL), which it had bought last year. Future Coupons owns a 9.8 percent stake in FRL.
This raises a very pertinent question about the spirit and intent behind Amazon’s investment in FCL and its ongoing attempt to scupper the Future-Reliance deal. Does Amazon intend to get into the brick-and-mortar retailing space, or these investments and legal efforts are tactical moves aimed at scuttling competition to remain a dominant player in one of the world’s fastest-growing retail markets?
Kishore Biyani-led Future Retail has moved the Delhi High Court against Amazon to stop it from interfering in the Reliance-Future deal. Amazon, on the other hand, has sought the immediate intervention of the Securities and Exchange Board of India (Sebi) and Competition Commission of India (CCI) to stop the deal from going through.
The Delhi High Court is hearing Amazon on Future Retail’s plea seeking to restrain the US group from approaching Sebi and CCI against the deal.
All three — FRL, FCL and Reliance — contended that if Amazon’s claim that it indirectly invested in FRL by investing in FCL was accepted then it would flout existing FDI laws for multi-brand retail in India.
In terms of pure interpretation of rules, there is another question that may arise. Can the concept of a “group company” be applied to the Amazon-FCL case, enabling it to own a significant stake in Future Retail Limited?
Future’s contention is that Future Retail and Future Coupons Pvt. Ltd are two separate companies and that Amazon should not interfere in the deal between FRL and RIL.
According to the updated Consolidated FDI Policy of 15 October, 2020, “ ‘Group Company’ means two or more enterprises which, directly or indirectly, are in a position to: (i)exercise twenty-six percent or more of voting rights in other enterprise; or (ii) appoint more than fifty percent of members of Board of Directors in the other enterprise.”
The legal interpretation of this definition will have a decisive influence on policymaking and subsequent corporate marriages in India involving foreign enterprises. At first sight, though, it appears that Amazon is on the wrong side of India’s rule book for multi-brand retail. By persona, as well as operations, Amazon is an e-commerce entity. Rules disallow FDI investors in multi-brand retail to engage in e-commerce activity. The Courts will, of course, have the final call.