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Why Amazon Could Benefit From Reliance-Future Group Meltdown

Amazon scored a win that could prevent another roadblock to its Indian expansion efforts. Reliance Industries has called off its $3.4 billion megamerger with in-country retail giant Future Group, putting the latter’s health in doubt as it faces bankruptcy. The deal would have given subsidiary Reliance Retail, whose approximately 12,200 locations make up India’s largest brick-and-mortar retail presence, another 1,800 doors from Future Group, which operates under nameplates including Big Bazaar, Central and Foodhall.

The initial arrangement would have transferred Future Group’s retail and wholesale, logistics and warehousing businesses to Reliance Retail VenturesLimited.

The three parties have been locked  in heated back-and-forth legal battles for more than 18 months, with multiple cases in different courts resulting in injunctions and subsequent reversals.

The cases might be withdrawn since the Reliance-Future deal is now in jeopardy.

In a statement to India’s BSE Limited and the National Stock Exchange on Saturday, Reliance Retail said that while Future Retail Limited’s (FRL) shareholders and unsecured creditors voted in favor of the acquisition, its secured creditors voted against it.

“In view thereof, the subject scheme of arrangement cannot be implemented,” the statement said.

Amazon didn’t respond to a request for comment.

For Amazon, the controversy centered on its minority ownership stake in Future subsidiary Future Coupons. The company invested about $200 million in Future Coupons for a 49 percent stake in late 2019.

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But as part of the deal, the investment included right of first refusal clauses saying Future couldn’t sell its retail assets to anyone on a “restricted persons” list including Reliance Industries CEO Mukesh Ambani. Amazon contended that the sale to Reliance directly violates these terms. The deal specified that any disputes would be arbitrated under Singapore International Arbitration Centre rules, which sided with the tech titan over Future.

In December, the Competition Commission of India (CCI) suspended its approval of Amazon’s Future Group investment, saying the e-commerce giant deliberately sought to suppress information about the deal’s scope and purpose.

Two months later, Reliance further escalated the tension by seizing physical control of more than 200 Future Group stores. The retail giant assumed many of the leases and offered jobs to its employees, citing rent non-payment. That scared away bankers, some of whom have already initiated debt recovery proceedings against Future. Reliance is in the process of assuming control of 900 more Future outlets, without having to go through an official deal.

Amazon subsequently went to India’s biggest national newspapers, taking out full-page ads accusing both Reliance Retail and Future Retail of fraud against regulatory bodies like the CCI and India’s Arbitrational Tribunal.

Future Group, led by billionaire CEO Kishore Biyani, has a very uncertain road ahead, which likely includes bankruptcy court next. The company is currently facing a plea by public sector lender Bank of India, one of the secured creditors that voted against the Reliance acquisition, asking the National Company Law Tribunal to initiate insolvency proceedings and declare a moratorium over the assets.

Future had worried that this scenario would come to fruition after being hit hard by Covid-related shutdowns and long-term debt. Its lawyers argued in court that the Reliance tie-up was crucial for the retailer’s survival and an aborted deal would likely lead to bankruptcy and job losses.

The main assets that remain with Future Group are approximately 30 large-format stores and about 300 small-format outlets, although all are on lease. It also has a fully automated supply chain solutions facility in Nagpur, and about 20 ownership stores pledged with different lenders.

The secured creditors of Future Group’s three flagship companies—Future Retail, Future Lifestyle and Future Enterprises—turned down the plan that would have merged Future’s retail assets with Ambani’s retail operations. Future Group has said the deal would transfer debt on Future Retail’s books to Reliance, but the secured creditors were not convinced that the money would be repaid under the takeover agreement.

Sources aware of the developments told Indian publication The Economic Times that Future Group would likely recover “less than 10 percent” of the assets in a bankruptcy. The total loans of Future Group companies stood at Rs 28,921 crore (approximately $3.77 billion) on Jan. 31.

Lenders will pursue the same route for the other defaulting group companies such as Future Enterprises, which also missed payments in the last week of March.

If Future does in fact go bankrupt, it is possible that the fallout will be fierce as various players, including Amazon, are likely to fight for its remaining assets. One of the subsidiary’s leaders, Future Lifestyle Fashions Ltd.’s chairman and independent director Shailesh Haribhakti, has resigned ahead of the proceedings.

Amazon is likely to be a major beneficiary if Future goes bankrupt. The Seattle company has already sought a bigger piece of an Indian retail market on track to reach $1.3 trillion by 2024, up from $883 billion in 2020, according to Forrester Research data.

Amazon has invested an estimated $6.5 billion in the country, with $1 billion in capital pledged for Indian small businesses.

However, Amazon’s growth strategy in the market has come with a few bumps in the road namely from competitors and government regulators, with the latter overseeing tough e-commerce rules that prevent foreign online retailers from both holding inventories of goods and selling them directly to customers. The policies are designed to ensure a fairer market for India’s own businesses, particularly as they navigate an e-commerce boom still very much in the early stages.

Amazon has also drawn complaints over its alleged anti-competitive business practices. Two separate Reuters reports in 2021 cited internal documents indicating that the e-commerce giant deliberately sought to circumvent the tough regulatory restrictions by giving preferential treatment to a small group of sellers on its India platform. The first report revealed that the e-commerce company misrepresented its ties with major sellers Cloudtail and Appario, both of which are Amazon joint ventures.

The second report caught Sen. Elizabeth Warren’s attention after documenting Amazon’s systematic campaign leveraging third-party data to create its own private-label products and manipulate search results to boost its own products in India.