Amazon fined Rs.202 crores for not disclosing its true purpose of gaining ‘foot-in-the-door’ in the Indian retail sector

Executive Summary

The Competition Commission of India (CCI) imposed a penalty of Rs. 200 crores on Amazon for failing to notify the details of its ‘combination,’ i.e. acquisition of 49 per cent stake in Future Coupons Private Limited (FCPL), as required under Section 6(2) of the Competition Act, 2002.

It also imposed a separate penalty of Rs. 2 crores for suppressing the actual scope and purpose of the combination, a term used in competition law for acquisition, merger or amalgamation of two or more enterprises.

The CCI also revoked the approval granted for Amazon’s deal with Future Group. The CCI, in its order, stated that Amazon suppressed the actual purpose and particulars of the 2019 deal and sought to establish false representation and suppression of material fact.

Background

In 2019, Amazon had entered into a deal worth Rs. 2,000 crores with Future Group. As part of the deal, Amazon had acquired 49 % stake in Future Coupons – the promoter firm of Future Retail.

Amazon notified the said transaction to the CCI in Combination Registration No. C-2019/09/688 notice. In terms of ‘Part V: Description of the Combination’ of the Notice mentioned above, the Combination notified by Amazon comprised the following 3 transactions:

Transaction I

The issue of Nine Million One Hundred and Eighty-ThreeThousand Seven Hundred and Fifty-Four (9,183,754) Class A voting equity shares of FCPL to Future Coupons Resources Private Limited (FCRPL). Prior to, and immediately post-issuance of such equity shares, FCPL will be a wholly-owned subsidiary of FCRPL; and

Transaction II

The transfer of Thirteen Million Six Hundred and Sixty-Six Thousand Two Hundred and Eighty Seven (13,666,287) shares of FRL held by FCRPL (representing Two decimal Five Two Percent (2.52%) of the issued, subscribed and paid-up equity share capital of Future Retail Limited (FRL), on a Fully Diluted Basis) to FCPL; and

Transaction III

The acquisition of the Subscription Shares representing Forty Nine percent (49%) of the total issued, subscribed and paid-up equity share capital of FCPL (on a Fully Diluted Basis) by Amazon, by way of a preferential allotment.

Notice to CCI

It was stated in the notice that in relation to the combination notified to the CCI, Amazon and the relevant entities and persons, belonging to the Future Group have entered into:

(a) a share subscription agreement dated 22nd August, 2019 (FCPL SSA) to set out the terms and conditions of subscription by Amazon and the issuance by FCPL of its shares to Amazon; and

(b) a shareholders agreement dated 22nd August, 2019 to determine their respective rights and obligations as shareholders of FCPL (FCPL SHA) Amazon stated in the notice that the parties have only executed FCPL SSA and FCPL SHA in relation to the combination.

The notice also mentioned that Amazon would acquire certain rights in terms of FCPL Shareholders Agreement (FCPL SHA) to protect its investment in FCPL. These, inter alia, included the requirement of prior written consent of Amazon, for FCPL to decide on or implement any matter under the shareholders’ agreement dated 12th August, 2019 relating to FRL (FRL SHA), which requires the consent of FCPL.

Amazon had also stated that it does not have any direct or indirect shareholding in FRL. It would not acquire directly any rights in FRL. Amazon has only limited investor protection rights in FCPL with a view to protect the value of its investment in FCPL. These rights can be exercised only through FCPL and not directly by Amazon. The said rights have been derived from the rights granted to FCPL in terms of FRL SHA, which was negotiated by the promoters, FRL and FCPL, independent of the investment by Amazon in FCPL and with a view to unlock value for FCPL.

FCPL filed the Application dated March 25, 2021 stating that Amazon has initiated arbitration proceedings in relation to transfer of assets of FRL, a company in which FCPL holds 9.82% of the shareholding and there are related litigations pending before the constitutional courts. It was alleged in the application that Amazon took completely contradictory stands in the arbitration proceedings and constitutional courts with respect to its investments in FCPL as compared to the representations and submissions made before the Commission. Such contradictions were said to establish false representation and suppression of material facts before the Commission.

CCI Held

CCI held that Amazon ought to have notified the combination among other things, consisting of the interconnected steps:

(a) Transaction I;

(b) Transaction II;

(c) Transaction III;

(d) FRL SHA for the acquisition of strategic rights over FRL through FCPL SHA; and

(e) Commercial agreements between Amazon and Future groups, to establish strategic alignment and partnership between Amazon Group and FRL as well as have a ‘foot-in-the-door’ in the India retail sector.

Amazon failed to notify FRL SHA and the commercial arrangements as parts of the combination between the parties. Suppressed the actual purpose and particulars of the combination, as discussed above, in contravention of the obligation contained in sub-section (2) of Section 6 of the Act read with Regulation 5 and sub-regulations (4) and (5) of Regulation 9 of the Combination Regulations.

Omissions, false statements and misrepresentations have the effect, and misrepresentations influence combination. Irrespective of what would have been the outcome of a notice with accurate, correct and complete disclosures, the misleading submissions, false statements, omission and suppression of material particulars, facts and documents discussed above, have denied and disabled the Commission an opportunity to assess the effects of the actual Combination, with specific focus to the actual intended objectives.

Condonation of such lapses would effectively mean that a notifying party could disclose its legal contracts in a distorted and elongated manner of its convenience and engage in suppressions and misrepresentations of the actual scope and purpose of the Combination. Said CCI

In terms of Section 43A of the Act, if any person or enterprise fails to give notice under sub-section (2) of Section 6 of the Act, the Commission shall impose on such person or enterprise a penalty which may extend to one percent of the total turnover or the assets, whichever is higher, of such a combination. In case of a contravention under Sections 44 and 45 of the Act, each of the said provisions renders the contravening person liable, inter alia, to a penalty, as provided therein. Though the penalty under Sections 43A, 44 and 45 of the Act can be to the extent mentioned therein, the Commission has sufficient discretion to consider the conduct of the parties and the circumstances of the case to arrive at an appropriate amount of penalty.