How Reliance Stunned Amazon in its Battle to Take Over the Future Group

At around noon on a pleasant day this February, a harried executive of a mall in Amritsar called his CEO. Much as he tried to hold his emotions together, the situation got the better of him. Standing in front of him was a team from Reliance Projects & Property Management Services, a part of the Mukesh Ambani-controlled Reliance conglomerate, who, by contrast, was composed but also displayed some level of urgency to wrap up some paperwork.

“They were holding the termination letter and also a new agreement letter,” narrates the CEO, who was pulled out of a meeting by his team member. The offer was quite irresistible—all the outstanding rental payments due from Future Retail, a Kishore Biyani-promoted company, would be cleared in a couple of days and just a formal sign-off was needed. The mall owner had a new tenant in the form of Reliance.

“We have never seen anything move so quickly. It was a little strange to see a pre-printed letter with our name,” he says in a voice that was still incredulous. It marked a momentous transformation when Reliance Projects & Property Management Services swiftly took complete charge of several stores that once housed Big Bazaar, the chain that was considered the destination for India’s large middle class.

The development took place right under the nose of Seattle-based e-commerce giant Amazon, which is locked in an intense legal battle to acquire Future Retail. The deal now looked set to slip away. The nimble-footed Reliance had executed a smart strategy, leaving many people in the business stunned in disbelief. It went as far as renaming a substantial part of Big Bazaar outlets to Smart Bazaar (see photograph), and took complete charge of the business. As the way ahead looks challenging for Amazon, the story is really about Reliance’s audacity in doing what it did.

How was it done?

For all the talk now relating to the speed of execution in assuming charge of Future Retail’s 835 stores across formats (Big Bazaar, FBB, Easyday and Heritage), the fact is Reliance made its move at least 12 months ago. How Amazon was not aware of this and chose to react as late as March 15 is inexplicable. It was August 2020 when Reliance Retail agreed to buy out the wholesale, retail and logistics businesses of Future Group in a `24,713-crore deal. It was a shot in the arm for the seller, which was swimming in a pool of high debt. The rub was that Amazon, exactly a year ago, had picked up a 49 per cent stake in Future Coupons, giving it an indirect 4.81 per cent holding in Future Retail Limited (FRL), Biyani’s crown jewel—this transaction is said to have given them any right of first refusal over acquiring Future Retail. Amazon, quite expectedly, cried foul at the Reliance-Future deal and from that point, everything went legal (see The Story So Far) and has remained so.

Emails sent to Reliance, Future Group and Amazon India with a detailed set of questions remained unanswered till this article went to press.

A senior retail industry official, who has worked at Future, is clear that Reliance had decided to move right after the Singapore International Arbitration Centre (SIAC) halted its deal with Future in October 2020. “It was a strategy that was well planned out,” he insists. Unknown to most people, the seeds were sown as early as November 2020, a month after the SIAC ruling, when Reliance took charge of the warehouses Future owned. “It is shocking that Amazon did not see this coming. Anyone familiar with the industry was clued into this,” says the official, adding that the mistake Amazon made was that it spent all its time and might taking on FRL. “The real opponent was Reliance and they had no idea whatsoever. It was just left wide open to make a smart move.”

Reliance did exactly that, and the stores it chose to pick up accounted for a handy 55-60 per cent of FRL’s revenue. Many of the Big Bazaar outlets now bear the Smart Bazaar name with the Reliance logo—the name chosen is in line with Reliance Smart (grocery retail chain) and Smart Point (neighbourhood small format store). Meanwhile, in a communique to the stock exchanges on March 9, FRL confirmed the receipt of termination notices from Reliance. However, there was no news from Amazon till March 15, when it released advertisements in publications saying “these actions have been done in a clandestine manner by playing a fraud on the constitutional courts in India, the Arbitral Tribunal and Indian statutory authorities/agencies”. A petition filed in the Supreme Court by Amazon said the “transaction” was a stratagem wrongfully adopted by FRL “with the connivance and collusion of the MDA (Mukesh Dhirubhai Ambani) Group to transfer the retail assets”.

Leaving nothing to chance

The most important thing for Reliance to get right was the legal bit. The head of a real estate consultancy simplifies the issue. “Reliance is that party that occupies the space today after inking a new deal with the owner. That means it can do anything in terms of redesigning the store. The question is: what is left of Future Retail once the stores are out of its books?” he explains. To him, the game is 80 per cent about real estate or just the attractive locations that Big Bazaar and the other FRL stores sit on, while the other 20 per cent is the brand name. “Reliance has obviously realised that it would have been impossible to create this kind of a network from scratch,” he says. That also means it may not be incumbent on Reliance to settle the loan with the banks. “From Reliance’s point of view, it is a straightforward deal where they only want the real estate. If they wanted the brand, then it would have been necessary to buy the company.”

It is an open secret that Future Retail’s inability to settle outstanding payments with companies led to no fresh stock coming. As a result, there is very little inventory to boast of. The marketing head of a well-known FMCG major says that the money owed by Future Retail will be in excess of Rs 1,500 crore. “It has steadily got worse and thanks to Reliance coming in a year ago, at least we managed to get some business. It would have been zero had the original promoters continued to be in charge,” he says. The buzz on the street is that Big Bazaar, by last June, had just a quarter of its usual inventory level. To add insult to injury, Reliance has been issuing offer letters to FRL’s staff. With the store, its furniture and fittings, staff and inventory in their possession, Reliance appears to have managed to get whatever is relevant without getting close to the legal line.

Senior officials in the Future Group, who wanted to remain anonymous, maintain that any allegation of collusion between them and Reliance is inaccurate. One top executive goes to the extent of saying Future Retail was continuously losing money but the option of ceasing operations never arose. “If we had done that, the entire value of the business would be down to zero. Banks would naturally have pushed for liquidation,” he explains. Admitting that the financial situation was “in dire straits”, he says if Reliance had not stepped in and given working capital credit, the company would not have existed by mid-2020. “In the process, our dues to Reliance kept increasing. We were hoping to sell our small-format stores and settle the dues with the banks through a one-time restructuring (`3,500 crore against a total debt of Rs 17,000 crore). But the Amazon deal came in between and we defaulted last December.”

As banks panicked, Future Retail became a non-performing asset and the official insists that Reliance “got jittery”. Creditors are way down the pecking order after bankers and Reliance, he says, “decided to give the termination notice fearing their money would never come”. Over Rs 4,000 crore was given to FRL by Reliance to fund the working capital requirement.

Options left

As things stand, many questions remain unanswered, such as, what does Amazon now do? According to Sudip Mahapatra, Partner at law firm S&R Associates, there is an option for Amazon to seek a reversal of the takeover of the leases. “However, given that Reliance is not a party in the litigation between Future Retail and Amazon, it is unclear whether a court will grant such relief. In this context, it is important to remember that Future has maintained that it has not transferred the leases. Rather, the leases have been taken over due to missed payments.” On the issue of Amazon seeking damages from Future, he thinks, it will be a challenge, “given Future’s denial of its involvement in the transfer of the leases”.

Then, there is the no small matter of the Rs 17,000 crore that needs to go back to the lending banks, a consortium led by Bank of India. Mahapatra thinks lenders could either enforce their security interests over the assets of Future Retail or initiate IBC (Insolvency and Bankruptcy Code) proceedings. “They could also wait for the outcome of the legal proceedings between Amazon and Future. Assuming the Future-Reliance deal eventually goes through, they could look to recover their dues from the merged business,” he says.

Insolvency Resolution Professional Vivek Parti speaks of the issue being “a legal quagmire”. The hope, at least from the lenders’ point of view, is that the issue goes back to the IBC. “The question is how it might be untangled, especially from the perspective of the lenders, where the greatest exposure is from the public sector financial institutions and banks in addition to Future Group’s own public shareholders,” he explains. To Parti, the worry is Future’s shareholders being the last in the priority of payments under IBC. “It is likely that the case will be admitted on account of default. Reliance has reiterated its commitment to the scheme of asset buyout and Future’s promoters are also in favour of it. However, lenders may prefer the scheme to be approved under IBC and some write-offs could happen.”

The fine print in this takeover of stores by Reliance has a few layers to it. Reliance became the main tenant under the store leases at some point and then sub-leased the stores to Future. Once Future missed rental payments, it was entitled to terminate the sub-leases. The takeover of stores in February, explains Avanti T. Chandele, Partner at law firm Mind Legal, was in the midst of a legal battle between Amazon and Future Group, which only complicated the relationship between the two. “From Reliance’s point of view, this seems like a way to manoeuvre around the legal hassles surrounding the takeover of assets of the Future Group, even as the scheme of arrangement is pending approval in the NCLT. For Amazon, it only gears up for another stay on the said deal,” she says. According to her, the lease for the stores in question are now held by Reliance and the matter of who the owners lease their property to is the prerogative of the owners, “with Amazon having no say or right to object”.

As the battle rages from one court to another, within India and overseas, the real hit will be on the business. Biyani, once the man who ruled the retail landscape in India and created some of its most well-known shopping destinations, stares down at a business that he will never own again. Not only has it gone through a value erosion of unimaginable proportions, but is likely to leave behind a set of bruised investors and lenders. It is a fall from grace for a man who, at one point, was called the Sam Walton of India. By any yardstick, this remains one of the country’s messiest takeover deals and the sad part is we are still not done with it. As the clock continues to tick, it is amply clear that very little of consequence will remain of Future Retail. And that is a worrying thought.

@krishnagopalan