Reliance Calls Off Rs 24,713-Cr Deal With Future After Secured Creditors Gives A Thumbs Down

Reliance Calls Off Rs 24,713-Cr Deal With Future After Secured Creditors Gives A Thumbs Down

Reliance Industries Ltd said on Saturday that a Rs 24,713-crore deal with Kishore Biyani’s Future Group to acquire its retail, wholesale, logistics, and storage operations could not go ahead since secured creditors of the latter voted against it almost 21 months after signing the agreement.

Future Group firms, including Future Retail Limited (FRL) and other listed companies involved in the plan, have informed their shareholders and creditors of the results of the scheme of arrangement vote at their respective meetings, according to a regulatory filing.

“… FRL’s secured creditors voted against the scheme. As a result, the subject scheme of arrangement cannot be implemented,” RIL said in an update on the scheme of arrangement for the transfer of Future Group’s retail and wholesale businesses, as well as its logistics and warehousing operations, to its subsidiaries Reliance Retail Ventures Ltd (RRVL) and Reliance Retail and Fashion Lifestyle Ltd. (RRFLL).

This week, the Future Group entities held shareholders, secured and unsecured creditors’ meetings to gain approval for the scheme of amalgamation and asset sale announced with Reliance Retail.

Secured creditors of listed firms – Future Retail, Future Enterprises, Future Lifestyle Fashion Ltd, Future Market Networks, and Future Consumer – were unable to obtain the required 75 per cent clearance.

The shareholders of the listed companies, on the other hand, had backed the Reliance acquisition.

Amazon, which bought a 49 per cent share in Future Coupons Pvt Ltd (FCPL), a promoter firm of FRL, in 2019, was a strong opponent of the meetings.

Future Group said in August 2020 that it would sell 19 retail, wholesale, logistics, and warehousing companies to Reliance Retail Ventures Ltd for Rs 24,713 crore.

RRVL is the holding company for the RIL Group’s retail businesses.

Amazon, the world’s largest e-commerce company, was outspoken in its opposition to the acquisition, claiming that it violated a 2019 agreement. It paid Rs 1,500 crore for a 49 per cent ownership in FCPL, FRL’s promoter firm.

Future Group, Reliance Retail, and e-commerce powerhouse Amazon, all of which are opposed to the deal, have made no immediate comments on the matter.

Reliance Retail took over the operations of at least 350 FRL outlets after the Kishore Biyani-led company failed to make lease payments to landlords. It provided jobs to its staff in February.

Amazon had taken FRL and its promoters to the Singapore International Arbitration Center (SIAC), where the EA (the emergency arbitrator) issued an interim award in favour of Amazon in October 2020. It prohibited FRL from disposing of or encumbering its assets or issuing securities to raise funds from a restricted party.

Following this, many lawsuits were filed in the Delhi High Court, the Supreme Court, and the NCLT.

As a result, RRVL had to extend the Scheme’s long-stop date three times. It was extended for another six months last month through September 30, 2022.

According to the proposed merger between Future Group and Reliance Retail, 19 of the former’s companies would be combined into one entity, Future Enterprises Ltd (FEL), and subsequently handed to RRVL.

However, according to FEL’s voting results, as of Friday, 99.97% of its secured creditors are opposed to the plan.

Even though the purchase was supported by 99.99 per cent of the company’s owners. The scheme was approved by 62.65% of the unsecured creditors, while the remaining 37.34 per cent of the total number of votes cast were against it.

With the exception of Future Supply Chain Solutions Ltd, none of the listed Future group companies, including Future Retail, Future Lifestyle Fashion Ltd, Future Market Networks, and Future Consumer, received the required 75% vote in favour of the scheme.

100% of secured creditors in two companies – Future Consumer and Future Market Networks – voted against the agreement.

In a regulatory statement on Friday, FRL, the flagship firm of the Future group, reported that 69.29% of secured creditors voted against the sale, while 30.71% voted in favour.
Around 85.94 per cent of FRL, shareholders voted in favour of the Reliance merger, while 14.06 per cent voted against it.

The scheme of arrangement sanctioned by the National Company Law Tribunal (NCLT) must be authorised by the “majority of people representing three-fourths in value” in a meeting of creditors or members (shareholders), according to Section 230 (6) of the Companies Act, 2013.

Furthermore, FRL’s board of directors and management status is uncertain, as the business has filed a petition with the NCLT to begin insolvency proceedings.

Last Monday, the Bank of India filed a petition with the NCLT’s Mumbai bench, requesting bankruptcy proceedings and a moratorium on the assets.

About Reliance

Reliance Industries Limited, headquartered in Mumbai, is an Indian multinational enterprise. Energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles are among its numerous activities. Reliance Industries is one of India’s most lucrative enterprises and the country’s largest publicly traded company by market capitalization and sales. With nearly 236,000 people, it is India’s tenth largest employer. As of March 31, 2022, RIL has a market capitalization of US$243 billion.

As of 2021, the company is placed 155th on Fortune’s Global 500 list of the world’s largest corporations. Reliance continues to be India’s top exporter, accounting for 8% of the country’s overall merchandise exports with access to over 100 nations’ marketplaces. Reliance is responsible for around 5 per cent of the total customs and excise duty revenue collected by the Indian government. It is also the private sector’s top income taxpayer in India. The company’s free cash flow is negative.

Shareholding

RIL has around 644.51 crore shares (6.44 billion) market capitalisation. The promoter family, the Ambani family, holds roughly 49.38 per cent of the total shares, with the remaining 50.62 per cent held by public shareholders, including FIIs and corporate organisations. Life Insurance Corporation of India is the largest non-promoter stakeholder, owning 7.98% of the company’s shares.

In January 2012, the company announced a share repurchase programme, with a maximum of 12 crore shares to be purchased for Rs. 10,400 crore. By the end of January 2013, the company had purchased 4.62 crore shares for a total of 3,366 crore.

Listing

The company’s equity shares are listed on the National Stock Exchange of India Limited (NSE) and the Bombay Stock Exchange Limited (BSE). The Luxembourg Stock Exchange trades the company’s Global Depository Receipts (GDRs). It has issued approximately 5.6 crore (56 million) GDRs, each of which is equal to two company equity shares. The Luxembourg Stock Exchange lists roughly 3.46% of the company’s total shares.

Its debt instruments are traded on the NSE, Wholesale Debt Market (WDM) segment (NSE).

CRISIL and Fitch have given it AAA domestic credit ratings. Moody’s and S&P have given the company Baa2 a positive outlook and BBB+ outlook investment-grade ratings for its foreign debt. On December 28, 2017, RIL stated that it would purchase the wireless assets of Anil Ambani’s Reliance Communications for about 23,000 crores.

About Future Group

Future Group is an Indian conglomerate centred in Mumbai, Maharashtra, and founded by Kishore Biyani. With prominent grocery chains like Big Bazaar and Food Bazaar and lifestyle outlets like Brand Factory and Central, the company is well-known in the Indian retail and fashion sectors.

The company is also well-known in the integrated foods and FMCG production industries. Future Retail Limited and Future Lifestyle Fashions Limited, two Future Group operational firms, are among the top retail corporations listed in terms of assets on the BSE and market capitalization on the National Stock Exchange of India.

Future Group is a business conglomerate that practically completes its operations through several operational entities based on target industries. For example, its retail division, Future Retail Limited, operates retail supermarket/hypermarket chains Big Bazaar, FBB, Food Bazaar, Food Hall, Hometown, and others. At the same time, its fashion and clothing outlets Brand Factory, Central, and Planet Sports are run by another of its subsidiaries, Future Lifestyle Fashions Limited. Furniture is sold in HomeTown stores across the country as well as online.

The group also promotes its fashion and sports brands such as Indigo Nation, Spalding, Lombard, Bare, and FMCGs such as Tasty Treat, Fresh & Pure, Clean Mate, Ektaa, Premium Harvest, Sach, and others through these numerous retail boutiques and supermarkets. It also has operating firms that handle internal financial concerns and consulting for the rest of the group.

Reliance takes control of Future Retail stores, including Big Bazaar

After the Kishore Biyani-led business failed to make lease payments to landlords, billionaire Mukesh Ambani’s Reliance Industries Ltd took over the operations of at least 200 Future Retail stores and offered jobs to its employees.

In August 2020, Reliance Retail, the retail arm of the oil-to-telecom giant, agreed to buy the Future Group’s retail and logistics operation for Rs 24,713 crore. Still, the deal fell through after Future’s fighting partner Amazon filed a lawsuit alleging contract violations. Future is adamant in his denial of any wrongdoing.

According to sources, several landlords approached Reliance because Future Retail Ltd (FRL), which is mired in losses, was unable to pay rent.

Future has over 1,700 locations, including the famed Big Bazaar stories, and defaults on some of its lease payments. To avoid closure, Reliance moved the leases of several stores to its step-down subsidiary, RRVL, which then rented them to Future to operate, according to the sources.

According to the sources, it has since begun rebranding the stores and has offered to hire all of the people already employed there.

Furthermore, Reliance Jiomart supplied the majority of the product at these outlets because a cash-strapped FRL couldn’t pay its old vendors. These stores’ Big Bazaar signs and branding will most likely be replaced with Reliance’s own.

Amazon claims Future broke the terms of a 2019 agreement in which the two businesses agreed to spend USD 200 million in a Future Group unit. A Singapore arbitrator has backed Amazon’s position.

Future Retail Ltd claimed in a stock exchange statement, “Without confirming or rejecting the takeover of its stores,” “FRL’s shareholders are well aware that the company is experiencing a severe financial crisis. Future Retail has defaulted on its loan servicing, and as previously stated, the bank has categorised the company’s account as NPA.”

FRL said it is having trouble funding its working capital needs and that “a considerable number of stores have received termination notifications due to large arrears, and we would no longer have access to such retail premises.”

“Amazon’s ongoing litigation, which began in October 2020 and has been ongoing for the past one and a half years, has created serious impediments in the implementation of the Scheme (Reliance takeover), resulting in a severe adverse impact on the company’s working,” it said, adding that the company is scaling down its operations to cut losses.

FRL proposes expanding its online and home delivery businesses to broaden its consumer base.

“The corporation has had trouble financing its working capital requirements. Increased retail losses are a serious worry, and it’s a vicious cycle in which greater operations lead to increased losses. “According to the document, “In the last four quarters, the company has lost Rs 4,445 crore.”

FRL expressed its optimism that the Reliance contract will be implemented because it will benefit all parties involved. Amazon refuses to comment on the situation when approached.

In January, FRL had sued its lenders in the Supreme Court, citing its disagreement with Amazon to avoid facing insolvency procedures over missing bank payments.

The Delhi High Court will hear arguments in the Amazon-Future Group dispute on February 28, 2022.

In August 2020, the loss-making retail company proposed selling its retail, wholesale, and logistics operations to Reliance for Rs 24,713 crore, which includes firms such as Fashion at Big Bazaar, Koryo, Foodhall, and Easyday.

On December 31, 2021, FRL missed the deadline to repay $3,494.56 crore to its lenders. The retailer blamed the hold-up on an ongoing legal battle with Amazon. However, it had planned to pay off the debt in the next 30 days, or by January 2022, which it also failed to do.

It then attempted to sell its small-format stores to pay off the first instalment of the loan, but Amazon objected. The latter offered to assist FRL with a 7,000 crore loan through Samara Capital, which FRL’s independent directors turned down.

The Supreme Court recently ordered lenders and FRL to work out a solution, which came as a comfort to Kishore Biyani’s FRL.

The highest court also ordered the Delhi High Court to consider the matter from the perspective of Future Group because any decision would have a significant impact on the firm’s Indian employees, bankers, and lenders.

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

A harassed executive of an Amritsar mall called his CEO about midday on a sunny February day. He attempted to keep his emotions in check, but the situation got the best of him. In front of him was a crew from Reliance Projects & Property Management Services, a subsidiary of Mukesh Ambani’s Reliance group, which were composed but also seemed pressed for time to complete some paperwork.

“They were holding the termination letter and a new agreement document,” says the CEO, who was dragged from a meeting by a member of his team. All outstanding rental payments due from Future Retail, a Kishore Biyani-promoted company, would be settled in a matter of days, and all that was required was a formal sign-off. Reliance, the mall’s new tenant, was a welcome addition.

“Nothing has ever moved so swiftly in our lives.” “Seeing a pre-printed letter with our name was a little unusual,” he recalls, his voice still puzzled. When Reliance Projects & Property Management Services quickly took over multiple stores that had housed Big Bazaar, the business that was considered the destination for India’s sizable middle class, it signified a watershed event.

The development took place right in front of the eyes of Seattle-based e-commerce behemoth Amazon, which is battling Future Retail in court. The transaction appeared to be on the verge of collapsing. The nimble-footed Reliance had executed a brilliant approach, leaving many in the industry surprised. It also renamed a large portion of Big Bazaar stores Smart Bazaar (as seen in the photo) and gained complete control of the firm.

How was it done?

Despite all of the recent discussion about Reliance’s quickness in gaining control of Future Retail’s 835 stores across formats (Big Bazaar, FBB, Easyday, and Heritage), the fact is that the deal was made at least a year ago. It’s unfathomable that Amazon was unaware of this and waited until March 15 to respond. Reliance Retail agreed to buy Future Group’s wholesale, retail, and logistics divisions for Rs 24,713 crore in August 2020. It was a breath of fresh air for the vendor, who was drowning in a sea of debt.

The problem was that Amazon had bought a 49 per cent investment in Future Coupons precisely a year ago, giving them an indirect 4.81 per cent stake in Biyani’s crown jewel, Future Retail Limited (FRL)—this transaction is alleged to have granted them any right of first refusal over acquiring Future Retail. Amazon, predictably, objected to the Reliance-Future merger, and everything after that became lawful and has stayed so.

Emails sent to Reliance Industries, Future Group, and Amazon India with a thorough list of queries went unanswered until the publication of this story.

Reliance had chosen to move soon after the Singapore International Arbitration Centre (SIAC) stopped its deal with Future in October 2020, according to a senior retail industry official who previously worked at Future. “It was a well-thought-out strategy,” he maintains.

The seeds were laid, unbeknownst to most people, as early as November 2020, a month after the SIAC verdict, when Reliance took over the warehouses Future controlled. “It’s incredible that Amazon didn’t foresee this. “Anyone knowledgeable with the industry was aware of this,” the insider says, adding that Amazon made the error of focusing all of its efforts on FRL. “Reliance was the actual adversary, and they had no idea.” It was just left wide open for someone to make a good decision.”

Reliance accomplished just that, and the stores it decided to acquire accounted for a comfortable 55-60% of FRL’s sales. Many Big Bazaar locations now feature the Smart Bazaar moniker along with the Reliance logo—the name was chosen to align with Reliance Smart (grocery retail chain) and Smart Point (financial services firm) (neighbourhood small-format store). Meanwhile, FRL confirmed receipt of termination notifications from Reliance in a statement to the stock exchanges on March 9.

However, Amazon remained silent until March 15, when it published advertisements in newspapers claiming that “these activities were carried out clandestinely by perpetrating a fraud on the Indian constitutional courts, the Arbitral Tribunal, and Indian statutory authorities/agencies.” According to an Amazon petition filed in the Supreme Court, the “transaction” was a misguided strategy used by FRL “with the connivance and participation of the MDA (Mukesh Dhirubhai Ambani) Group to transfer retail assets.”

Leaving nothing to chance

The legal aspect was the most crucial for Reliance to do right. The situation is simplified by the leader of a real estate consultancy. “After striking a new arrangement with the owner, Reliance is the party that now occupies the space.” That means it has complete creative control over the store’s overhaul. “The question is, what will be left of Future Retail once the stores have closed?” he explains.

According to him, the game is 80% about real estate or the appealing locations that Big Bazaar and the other FRL stores occupy, and 20% about the brand name. “Reliance has certainly realised that building this network from the ground up would have been impossible,” he says. That also implies that Reliance may not be required to settle the loan with the banks. “From Reliance’s perspective, it’s a basic arrangement in which they’re simply interested in the real estate.” It would have been essential to purchase the company if they desired the brand.”

Future Retail’s inability to settle outstanding payments with companies resulted in no new merchandise being delivered. As a result, there isn’t much to brag about regarding inventory. According to the marketing chief of a well-known FMCG company, future Retail would owe more than Rs 1,500 crore. “It’s become worse over time, but thanks to Reliance stepping in a year ago, we acquired some business. If the original promoters had remained in charge, it would have been zero,” he claims. According to rumours on the street, Big Bazaar had only a fraction of its regular inventory by June last year.

Reliance has begun sending out offer letters to FRL’s employees to make matters worse. Reliance looks to have obtained everything relevant without crossing the legal line, having taken ownership of the store, its furniture and equipment, workers, and inventory.

Senior Future Group officials, who requested anonymity, maintain that any allegations of cooperation between them and Reliance are false. According to one top executive, future Retail was consistently losing money, but the alternative of shutting down operations was never considered. “If we’d done it, the company’s worth would have plummeted to zero.” He explains that “banks would have naturally pushed for liquidation.” He admits that the company’s financial situation was “dire,” and that if Reliance hadn’t stepped in and provided working capital financing, it would have ceased to exist by mid-2020.

“As a result, our remittances to Reliance continued to rise. We hoped to sell our small-format outlets and use a one-time restructuring to pay off our bank debts ($3,500 crore against total debt of Rs 17,000 crore). However, the Amazon agreement fell through, and we defaulted last December.”

Future Retail became a non-performing asset as banks worried, and the official claims that Reliance “became uneasy.” He claims that creditors are at the bottom of the food chain because bankers and Reliance “agreed to deliver the termination notice thinking their money would never come.” Reliance gave FRL around Rs 4,000 crore to cover its working capital requirements.

Options left

Many questions remain unresolved at this time, such as what Amazon will do next. Amazon can seek a reversal of the lease takeover, according to Sudip Mahapatra, Partner at law firm S&R Associates. “However, because Reliance isn’t a party to the Future Retail-Amazon dispute, it’s uncertain if a judge will award such relief.” It’s vital to remember that Future has maintained that the leases have not been transferred.

Instead, the leases have been taken over due to nonpayment.” He believes it will be difficult for Amazon to seek damages against Future, “given Future’s denial of its involvement in the lease transfers.”

Then the Rs 17,000 crore needs to be returned to the lending banks, which the Bank of India is spearheading. According to Mahapatra, lenders might either assert their security rights over Future Retail’s assets or commence IBC (Insolvency and Bankruptcy Code) procedures. “They could also wait for the outcome of Amazon’s legal battle with Future.”

“They could attempt to recoup their dues from the merged business if the Future-Reliance agreement goes through,” he argues.

Vivek Parti, an insolvency resolution professional, describes the situation as “a legal quagmire.” At least from the lenders’ perspective, the issue should be returned to the IBC. “The concern is how it might be untangled,” he says, “, particularly from the standpoint of the lenders, where the largest exposure is from public sector financial institutions and banks and Future Group’s own public shareholders.” Parti is concerned that Future’s stockholders will be the last to receive compensation under the IBC.

“The case is likely to be admitted based on default.” Reliance has reaffirmed the asset buyout strategy, and Future’s promoters also favour it. But, lenders may prefer the scheme to be approved under IBC, and some write-offs could happen.”

The tiny print in Reliance’s store takeover has a few levels to it. At some point, Reliance took over the store leases as the primary tenant and subsequently sub-leased the stores to Future. Future had the right to terminate the sub-lease agreements if it failed to make rental payments.

According to Avanti T. Chandele, Partner at law firm Mind Court, the takeover of stores in February occurred during a legal dispute between Amazon and Future Group, further complicating the two companies’ relationship. “From Reliance’s perspective, this appears to be a method to get around the legal wranglings surrounding the takeover of Future Group assets, even if the scheme of arrangement is still pending approval in the NCLT.

“It’s only a matter of time until Amazon extends its stay on the contract,” she argues. According to her, Reliance now owns the leases for the businesses in question, and it is up to the owners to decide to who they lease their property to, “with Amazon having no voice or power to complain.”

The real hit will be on the business while the battle rages from one court to the next, both within India and outside. Biyani, who once commanded India’s retail landscape and built some of the country’s most well-known shopping centres, now stares down at a company he will never own again. Its value plummeted to unthinkable levels, but it is also likely to leave a slew of hurt investors and lenders in its wake. It’s a humiliating fall from glory for a guy once dubbed “India’s Sam Walton.” By any measure, this is still one of the country’s most tangled takeovers, and the terrible part is that we aren’t done with it yet.

As the clock ticks down, it is becoming increasingly evident that Future Retail will be largely irrelevant. And that’s a frightening concept.

edited and proofread by nikita sharma