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Future's Actions Question The Stability And Predictability Of Contractual Obligations
Foreign investors are closely monitoring the developments around this case with concerns relating to contract enforcement and rule of law re-surfacing in a big way.
Photo Credit : Reuters
A month before Covid-19 hit India, the Boston Consulting Group in partnership with the Retailers Association of India released a report estimating India’s retail market to reach $1.1-1.3 trillion by 2025 with a CAGR of 9-11%. India’s retail market is by no means a winner takes all market, though existing players as well as new entrants have adequate motivation to push the boundaries and stress test the rules of the game. The actions of Future Group may have dented the investor sentiment and brought questions around limitations of contact enforcement in India to the forefront. Foreign investors are closely monitoring the developments around this case with concerns relating to contract enforcement and rule of law re-surfacing in a big way.
The crux of the dispute lies in the fact that the Future Group has decided to sell its stake in the business in contravention of the transfer restrictions agreed under the shareholders’ agreement. Amazon on its part invoked the envisaged dispute resolution process and filed for emergency relief with the Singapore International Arbitration Centre (SIAC). SIAC is the preferred dispute resolution forum as their ability to resolve and enforce commercial contracts transparently and quickly is high.
The background to this dispute is the investment received by Future Group from Amazon and the disclosures made by Future Group. On August 12, 2019, Future Retail Limited (FRL) sent a letter to Securities Exchange Board of India (SEBI) intimating the execution of a shareholders’ agreement with Future Coupons Limited (FCL), Mr. Kishore Biyani and a few other shareholders. Through this intimation, FRL noted that the shareholders cannot transfer or create any encumbrance on any shares held by them except as provided under the limited conditions mentioned in the shareholder’s agreement. The agreement also provided certain restrictive covenants requiring approval in case of transfer of assets and issuance of new securities.
Thereafter, on August 22, 2019, FRL again intimated SEBI that Mr. Kishore Biyani and FCL entered into a share subscription and shareholders’ agreement with Amazon.com NV Holdings LLC (Amazon). Under the amended shareholders’ agreement, Amazon acquired a 49% stake in FCL and a call option that allows it to acquire part of Mr. Kishore Biyani and FCL’s shareholding in FRL. The call option to acquire all or part of the shares could be exercised between the 3rd to 10th year and during this tenure, Amazon would have a right-of-first-refusal (ROFR) on any sale of shares and certain other transfer restrictions.
Amazon approached SIAC for an interim relief and the Emergency Arbitrator passed an award in their favour on October 25, 2020. However, Future Group and Reliance have disregarded the interim relief and plan to go ahead with the transaction.. It is important to note that disregarding SIACs order goes against established commercial best practices and dents India’s reputation with respect to contract enforcement, which is notorious to begin with. SIAC is the most widely recognized dispute resolution forum for foreign investors investing in India. Over the last year, nearly 485 India focused investment disputes have been resolved through SIAC. Even in cases of interim awards, parties to the dispute tend to voluntarily comply with them in recognition of their commercial obligations. In cases of non-compliance, winning parties have moved High Courts for enforcement either directly or indirectly. In the past, High Courts have mostly passed orders which enforced the reliefs granted by the Emergency Arbitrator.
Instances like these inhibit the ability of foreign investors to take greater risk on capital. Boardroom discussions around investment strategy start getting overburdened with considerations relating to litigation risk based on contract enforcement. The Ease of Doing Business Report published by the World Bank places India at the 63rd position. Amongst the ten metrics based on which the ranking is developed, India performs the worst in “Enforcing Contracts”, where it is ranked at a dismal 163rd out of the 185 economies surveyed.
Amazon and large private equity funds have the appetite to see such burdensome litigation through. However, the chilling effect on investments by smaller corporate houses and venture capital funds is a natural consequence of such a systemic shock. Several VC/ PE funds are in the process of raising India focused funds and fund managers may have to assume greater risk, a trend that started in 2012 post the implementation of retrospective taxation. It is often misunderstood that foreign investors expect favourable policies and dispensations. The demand rather remains quite simple – stability and predictability. A written contract is supposed to delineate the understanding between the parties and provide predictability of outcome. In case of disagreement, the arbitrator/ judicial intervention is supposed to resolve the disagreement. Wilful disregard of process will seriously dent India’s position as an attractive investment destination.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.