Future Retail’s Independent Directors Say They’ve Been ‘Misled’. By Whom?
It was a little over a year ago that U.S. e-commerce major Amazon.com NV Investment Holdings LLC won an emergency award against Kishore Biyani’s Future Group.
Since then, the dispute has progressed at the Singapore International Arbitration Centre and Indian courts have passed several judgments and directions to both parties. So, it’s curious why Future Retail Ltd.’s independent directors have chosen to share their side of the story now.
In a letter to the Competition Commission of India this week, Future Retail’s independent directors have urged the regulator to revoke its 2019 approval granted for Amazon's investment in Future Coupons Pvt. The letter was sent on behalf of the three independent directors on Future Retail’s board—Ravindra Dhariwal, Gagan Singh and Jacob Mathew.
“This is the first time we’ve heard that the three agreements are going to be read together,” Future Retail’s independent director Ravindra Dhariwal told BloombergQuint.
Dhariwal is referring to the 2019 agreements:
Future Retail’s shareholders agreement with Future Coupons.
Future Coupons’ shareholders agreement with Amazon.
Future Coupons’ share subscription agreement with Amazon.
It’s for the first time on Oct. 21 that the SIAC arbitral tribunal said that three agreements have to be read together, Dhariwal explained.
Until now, the issue was not decided. Last year, the Delhi High Court’s Justice Mukta Gupta had opined that if you combine the three agreements, you’ll be non-compliant, it is illegal. Only she opined on it, nobody else did. So, we were comfortable with our position that actually they can't combine the three agreements. They [Amazon] can't have control over the company.Ravindra Dhariwal, Independent Director, Future Retail
Besides the timing of the letter, the other curious bit is what the independent directors knew or didn’t know at the time the shareholder agreements were signed.
BloombergQuint attempted to get that understanding from Dhariwal.
Edited excerpts below:
In their letter to the CCI, the independent directors have claimed they were not aware that strategic rights over Future Retail were being acquired by Amazon through the Future Coupons shareholders agreement. And that they had not approved the FCPL SHA. Were you aware that Amazon- FCPL SHA existed?
Yes, we knew that the agreement existed.
Did you go over the FCPL- Amazon agreement to understand what it could mean for Future Retail?
Not the exact agreement. We don't read through…the board doesn't read through all the hundreds, whatever pages there are. A presentation was made to us by the lawyers and by the management about what are the salient features of the agreement.
Okay, specifically, did you know that there’s a list of restricted persons to whom Future Retail cannot sell its assets without prior consent of Amazon?
The board knew that there was a negative list. Yes to that extent the board knew but there was absolutely zero realisation that this was a strategic, material, special investment by Amazon by which they could control everything that Future Retail did. That is exactly what Amazon deposed before the Competition Commission, they said they had no strategic rights.
Did you know of the covenant that to create any encumbrance on its assets, Future Retail required prior consent from Amazon?
To transfer retail assets, yes. We knew that Amazon had a right and that there was a negative list. We knew that Future Retail could transfer assets as long as it’s not mapped to the negative list. Reliance was very much a part of the negative list. In fact, I think it headed the negative list.
So restrictive parties is one aspect of it. But were you aware that Future Retail could not encumber, transfer its assets to anyone without Amazon’s prior consent?
We didn't know that Amazon had a right. We were told about the negative list saying that these are the restrictive persons to whom the Future Retail assets can’t be sold to. There is no way that you can put hindrance on the retail assets with this negative list.
Did you not think with these rights, Amazon had negative control over Future Retail?
There was a negative list. We were told about the negative list, means that you needed Amazon's approval to sell Future Retail’s assets to the negative list.
If you knew that, it means you're reading the agreements together.
No, we are not. Let me explain it to you. When you know that there is a negative list that you can't sell to, you ask the management to go and first talk to Amazon and say that okay, this is a problem what is the solution? When we had a problem of survival, the first attempt was to go to Amazon and say, hey guys, this is the problem and Amazon agreed that it was a problem and they tried for five months to figure out a solution to it and they could not. That’s what we were very clearly told in board meetings that listen, Amazon cannot, this is what the solution is and we believe that yes, that solution will save the company and there were three days left for us to be in default.
We absolutely knew about the negative list and therefore, Reliance wasn't the first option that the company chose.
Amazon wasn't putting in money, didn't give us any solution to solve our problems of cash flow, of being in default on our loans. We had a letter from FCPL which said very clearly that this is an agreed position. Future Retail's management, Mr Biyani claimed that they had a verbal agreement with Amazon to go ahead with the Reliance deal. We were given a letter by FCPL, who is a minor shareholder in FRL, saying they are okay with this deal.
And Future Retail went by Amazon's oral word to FCPL?
We as independent directors have a much simpler charter. Our simple charter is to protect the interests of the shareholders, the bankers, the lenders, employees and of all the stakeholders in the company. Amazon was a very small stakeholder in the company and we were going to go bankrupt, the company was going to go down.
I’ll ask it again. Were the independent directors (made aware by the management) that any transfer or license of all or substantially all of the assets of Future Retail or material assets requires prior permission from Amazon?
We didn't realise that it was actually Amazon which was driving Future Retail. Amazon had 49% interest in Future Coupons. They had deposed in front of the Competition Commission that their interest was in Future Coupons becoming bigger and bigger and the only way that they would become bigger and bigger was if they had a small shareholding in Future Retail.
We were not made aware that the promoters had to do everything that Amazon wanted or that Amazon's interest was strategic in nature. We were misled by Amazon, we were blinded to commit an illegal act.
When you were being made aware of these agreements by these presentations, surely Amazon was not supposed to be in the room. So, it is the promoter/management who misled the board then?
It was not the promoter who made the presentation, it was the legal counsel. That apart. I think the promoters also believed what we believed that they [Amazon] didn't have any strategic rights. That's why their whole argument has been that you can't conflate the three agreements. You can't say that A leads to B, B leads to C, C leads to D and therefore, A is equal to D. If they actually believed this, they did something illegal.
The promoters told us that they had Amazon’s tacit approval for the Reliance deal. They’ve showed us emails. FRL’s negative list agreement is with FCPL. So, FCPL can waive that right. That’s what we acted upon.
You knew that these three agreements existed. You knew Amazon’s investment will flow into Future Retail. Yet you say you were misled. What was your understanding of what Future Retail was giving up?
We didn't know that the promoters had to act in concert with Amazon and this was never disclosed to us as a whole.
Secondly, Amazon's interest was something totally different. They wanted to buy Future Retail whenever the law permitted. So, here we are sitting with the responsible job of an independent director and we believe that we were actually misled, the Competition Commission was misled by Amazon when they said to them that this is an investment in FCPL, it's an economic investment.
Their indirect investment in Future Retail was less than 5% and they had rights, which are special rights, and if they combine the three agreements, Amazon had the rights; not FCPL. They had the rights because they could dictate Mr. Biyani how to act and what to do. They had all the rights and we were blind to it.
When we found this, we realised two things. That we don't have a power over this company. We don't decide what to do and what not to do. We cannot exercise an independent decision because the promoters and Amazon are going to work in one way. Second thing that we didn't want to happen that we actually had committed or were blinded to commit an illegal act. The illegal act was that if we had known that the three agreements could be conflated, or if we had known that three agreements were interconnected, we were falling foul of India's FDI and FEMA laws that no foreign investor can control an Indian entity without the government's permission and for that they needed to trigger a stock buyback option, and a whole host of things.
When did we realise? On Oct 21, the implications were brought home to us very clearly when we talked through the whole process with the help of advisors to us, saying that, oh my God, what have we gone and done? So, actually the agreements we’ve agreed to are interconnected, which is illegal. So, we are writing to CCI saying we believe that we may have been misled. You have been misled about their [Amazon's] intent, and therefore please re-examine it.