India Insight: Amazon has plenty to fight for

MUMBAI: Jeff Bezos has the patience and gritty determination it takes do business in India.

The Amazon boss is locked in an ugly fight to stop a troubled big-box retailer from selling itself to his biggest rival, Mukesh Ambani's $166 billion Reliance Industries.

Any victory by the US e-commerce giant could wind up costing thousands of jobs and spark a nasty political backlash, but the standoff also might deliver longer-term rewards.

Ambani will turbocharge his retail business if he successfully acquires Kishore Biyani's sprawling Future empire.

The $3.4 billion deal announced in August includes more than 17 companies. In addition to its huge oil and telecom operations, Reliance is India's top brick-and-mortar retailer, with some 12,000 stores. Swallowing Future Retail, its closest competitor, would bag another 1,500. India's Competition Commission already has cleared the deal.

The takeover would trample over part of Amazon's expansion strategy in online groceries. It has a partnership with Future Retail, including its Big Bazaar hypermarkets.

The $1.6 trillion company snapped up upscale US supermarket chain Whole Foods back in 2017 in its biggest acquisition. In India, however, where Amazon already has invested some $6.5 billion over the past decade, it lacks its own physical shops. Even Walmart's Indian online marketplace, Flipkart, has the benefit of the Best Price cash-and-carry stores operated by its parent company.

In its push to stop the sale to Reliance, Amazon has been accused of acting like the East India Company, a 17th century London start-up whose employees killed, pillaged and bribed as they conquered the subcontinent. Counsel for Biyani's Future group have trotted out the provocative comparison to complain that a foreign company is using a dubious minority investment to decide the fate of a struggling Indian outfit.

COUPON CLIPPING

Amazon's involvement is contentious. Bezos took a circuitous route to sink his claws into Future Retail after debt issues prompted Biyani to consider selling. India does not welcome foreign direct investment into physical retailers that sell multiple brands. Indian politicians consider mom-and-pop store owners as an important constituency. But Prime Minister Narendra Modi is easing investment restrictions across multiple sectors and Bezos reasonably took a punt that rules governing retail might change too.

On that basis, Amazon spent about $200 million in August 2019 to pick up a 49% stake in Future Coupons, a wholesaling part of the group. As part of the deal, Biyani and his related entities agreed to restrictions on transferring shares. According to Amazon, that included to Reliance. At the time, Biyani's group, along with Future Coupons, controlled Future Retail through stock and warrants. Days earlier, Future Coupons inked a separate agreement giving it the right to veto any transfer of assets by Future Retail, effectively locking up the shopping assets.

Almost exactly a year later, as Biyani's debt problems ballooned, Amazon was shoved aside. Reliance swooped in and agreed to its own complex, multistage deal to buy Future's retail, wholesale and supply chain businesses. If that transaction closes, Amazon and other investors in Future companies will end up owning shares in a rump that holds a hodgepodge of assets including an insurance joint venture with Generali.

India's foreign investment rules mean Amazon is precluded from offering an alternative deal to Reliance's to stop Future Retail from going into liquidation, which could save some 29,000 jobs. Amazon had lined up friendly domestic backers to try and help before the Reliance deal was struck. They were interested in the retail operations, but not much of the rest.

Either way, any such investors are unlikely to be interested in going up against India's richest man.

Bezos is not intimidated, however.

He's fighting to uphold Amazon's original agreement, in part to make clear that he won't be pushed around. The company in October won an emergency hold on the transaction through an arbitration in Singapore, and lawyers for both sides are now arguing in a Delhi court about whether that ruling applies in India. The outcome is key to Future group's fate and the dispute could go all the way to the country's top court.

PRECEDENTS SET

Amazon is testing the enforceability of contracts in the world's fifth largest economy, a measure of the ease of doing business. It's also a fresh test to see if local courts uphold foreign arbitration awards; overseas companies with Indian partners typically look to London or Singapore tribunals. Japanese telecom operator NTT Docomo and pharmaceutical company Daiichi Sankyo both won overseas arbitrations against commercial partners and those rulings were upheld in India.

Politicians reeling from the pandemic won't be pleased if Amazon's aggressive move results in job losses. A local media report last week suggested an official investigative agency is probing the company's Future deal for potential violations of foreign investment rules. But India is better off with Amazon than without it. The company operates 60 massive fulfilment centres and is creating jobs, developing logistics and supporting exports by small- and medium-sized Indian businesses.

The entire mess might have been avoided had India set a stronger example for tycoons to follow. Even now it is unclear if the government will honour two recent arbitration rulings it lost over tax disputes with British companies. Cairn Energy has written to New Delhi threatening to seize Indian assets overseas if it fails to pay the $1.4 billion awarded in its favour. Unlike Vodafone, which also won its case, the oil and gas explorer can afford to play hardball because it is no longer invested in the country.

Future's retail assets are a prize, but not necessarily a must-have in a fragmented retail market. The bigger message is Amazon's willingness to fight against powerful rivals. To win in India, that is what it will take.