The Enforcement Directorate (ED) has summoned officials from Amazon India and Future Group on December 6 over alleged violations of foreign investment rules, Reuters reported on November 28.
An Amazon spokesperson confirmed the receipt of the summons and said that the company is “examining it and will respond within the given time frame.”
ED is currently investigating irregularities in Amazon’s investment in Future Coupons in 2019, which is at the heart of the dispute between Amazon and Future Group.
Recap: In November 2019, Amazon received approval to acquire a 49 percent equity in Future Coupons, the promoter entity of Future Retail, which operates 900 stores in India. Since Future Coupons owned a 7.3 percent stake in Future Retail, the deal gave Amazon a 3.58 percent stake in Future Retail. Then, in August 2020, Reliance announced that it will buy most of Future Group’s retail, wholesale, and logistics business in a deal worth Rs 24,713 crore. Amazon objected to this acquisition saying it had the right of first refusal because of its stake in Future Coupons. Both the companies have been engaged in a legal battle over this issue since October 2020, which you can read all about here.
Why this matters: If ED finds that Amazon violated rules when investing in Future Coupons, then it might render the company’s right of first refusal to the Reliance—Future deal ineffective, potentially allowing the deal to proceed.
How Amazon might have violated foreign investment rules?
In a letter to the Competition Commission of India (CCI), the independent directors of Future Retail asked for the Commission to withdraw the approval given to the Amazon–Future Coupon deal citing that Amazon misrepresented facts in seeking the approval and that the company has violated foreign investment rules in the process.
- The deal required government approval that Amazon did not get: According to the directors, Amazon told CCI it wanted to invest in Future Coupons “only due to the unique business model of gift and loyalty cards business of FCPL and its strong growth potential,” but in reality, the e-commerce company wanted to strategic rights of Future Retail through this investment. The directors argue that such an investment would have triggered an obligation on Amazon to make an open offer to the public shareholders of Future Retail to acquire 26 percent of the company at the share prices prevailing at the time of the deal. But since Amazon is a foreign entity, such an open offer transaction would’ve required the approval of the government as per the Foreign Exchange Management Act (FEMA) Foreign Direct Investment (FDI) rules, the directors noted.
- The deal was done to sidestep Press Note 2: The directors further reveal that Amazon initially wanted to invest directly in Future Retail but then the government notified Press Note 2, which prohibited Amazon from selling the goods of Future Retail on its platform if it became a shareholder of Future Retail. Because of this, Amazon modified its strategy and invested in Future Coupons which then invested in Future Retail, the directors noted. The company called this a “twin-entity investment structure” and its intention to bypass the Press Note 2 restrictions is evident in the following email dated 19 July 2019, the directors added:
“Due to the recent PN2 restrictions under Indian foreign investment laws, we will use a “twin- entity investment” structure to invest in Future Retail. Amazon will acquire 49% of Future Coupons, with the other 51% being owned by the promoters of Future Coupons (who are also promoters and single largest shareholders of Future Retail, the “Promoters”). Our shareholding in Future Coupons will be divided into voting equity share capital (25.1%), and non-voting equity share capital (23.9%), though we will have all the statutory rights available to a 49% shareholder. You may recall this structure and voting/non-voting split is also how we resolved PN2 for Project Brigade, our acquisition of a 49% interest in More Retail Limited (which is also engaged in retail of food and grocery in India).” – Email from Rakesh Bakshi, Amazon India’s legal head to former CEO Jeff Bezos
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