The fabled knights of the round table from the twelfth century who were exemplars of valour in the court of King Arthur seem to be inspiring the suited gentry in the board room of a fast-sinking twenty-first century corporation!
When has corporate India gyrated to the gladiatorial gimmicks of mistaken gumption of a set of board members who have taken up the cudgels for a corporate entity, they believe has been duped by a deviously designed investment purportedly falling foul of the law of the land?
The facts are tortuous and in debate before competent forums like the courts of the country and an arbitration panel overseas.
This article will be falling woefully short should it attempt to enter the serried spate of sensational claims and counter-claims between the parties involved in the dispute. Much is in the public domain and allegedly there is more waiting to be surfaced.
The intriguing side-show is what has triggered this brief discussion.
The independent directors of Future Retail Ltd (FRL) are the heroes under the spotlight and their presumptuous petitioning to the regulators of the land on an alleged fraud or suppression of material details by Amazon, the investor, in a connected company in the Future group, is the script!
It is inescapable to narrate a slip of the background for a fuller appreciation of the matter.
What Just Happened
Amazon, seeking to get a toehold in the burgeoning arena of multi-brand retail, made an investment in Future Coupons Ltd (FCL), picking up 49% of the stakes therein. The terms of the investment and the conditionalities attached thereto do not seem to be available in the public domain.
Future Coupons Ltd funnelled the money into Future Retail Ltd, listed in the stock exchanges, which is into the restricted domain of multi-brand retail—where foreign investment has many conditions to satisfy.
Both the investments by Amazon in FCL and the follow on by FCL in FRL have been subjected to scrutiny by the Competition Commission of India (CCI).
Well within a year of this materialising, Future Group agreed to sell out its business to another large group engaged in retail and Amazon sought to thwart it, which is currently keeping many lawyers and courts busy!
As matters stood such, an unusual initiative by the independent directors of FRL to raise cain with a petition to the CCI for revocation of the approval granted alleging that Amazon had violated the restrictions on foreign investment in retail, suddenly lit up the skies which had gone dull after the Diwali celebrations!
The said complaint has reportedly drawn reference to an internal correspondence within Amazon betraying its real intent.
Independent directors by construct have little to do with day-to-day management and essentially oversee if the governance in the organisation is accommodative of all stakeholders’ interests and especially the non-promoter group of investors.
The passivity of independent directors in regular corporate actions and functioning is almost given and the occasions when their presence has been adversely noticed is when major frauds erupted in the companies.
Fingers are seldom pointed at independent directors for any failure in corporate action where no mala fides are involved but, nevertheless may fall short of the required diligence by the operating management.
A poor investment decision or a faulty choice of an option to do business is rarely laid at the doors of the independent directors. But that is not to imply that independent directors should be indifferent in major corporate initiatives. Their presence should be felt in an impactful manner and a questioning attitude is very essential.
The audit committee that predominantly consists of independent directors has to exercise extra vigilance when legal compliances are rife. They have the liberty to independently consult experts like lawyers when complicated business issues come for consideration.
Hence, the question arises about how the same set of independent directors who have currently raised the issue with the regulator appraised the investment proposal, which was effected between 23 April 2019 and 19 May 2020, culminating in Amazon going to bed with Future group.
The scope of the narration in the two orders of the CCI issued to FCL and Amazon gives an inkling that the impact of the investment by Amazon which finally extended to all facets of the Future group’s operations did not miss any one’s attention, least of all the regulator.
But given the caveat in the beginning that this article shall not spy into the basic dispute between the parties, the point is raised only to drive home the fact that the case was a high-profile one involving multiple regulatory interfaces and the independent directors and the board of FRL should have been on guard in the first instance on appraising the case from all aspects.
It is necessary to mention that the annual reports of 2018-2019 and 2019-2020 which are relevant to the issue on hand has no whisper about Amazon’s investment in the Future group. Though as stated in the background, Amazon invested into FCL which in turn, put the money in FRL, and no direct investment came into FRL from Amazon.
The investment made by FCL into FRL through the route of warrants has been staidly explained in the language of accountants with little insights into the origin of the investment.
It is facile to put forth the façade of FCL being an independent entity in the promoter group and FRL being unconcerned with its source of money to make the investment and thereby justifying the non-disclosure of the Amazon transaction.
The sequence of the events and the explicit mention in the CCI orders sanctioning that the investment has a good capture of the implications of a giant like Amazon entering the fray through this process.
It defies logic that the company and the board would have remained ignorant of the bigger picture and would not have sought sufficient legal advice on the entire matter.
No aspect of the regulatory rigour and the political aversion to let foreign play in retail is new. It is only fair to ask of the independent directors whether the level of angst now displayed in raising the issue was in evidence in challenging and debating the issue when the initial proposal surfaced in the board!
Here is a set of questions for independent directors of FCL and FRL
The independent directors need to explain many aspects in the interest of addressing the curiosity triggered by their unprecedented action.
First, how much were they informed by the promoters on the handshake with Amazon?
Second, assuming that they were duly informed, what enquiry and discussions were held on the matter in the board meetings and the nature of clarifications/advice sought from lawyers and consultants.
Third, why did they maintain complete silence in reporting to the shareholders the larger transaction taking place in the group and the consequent investment by FCL in the company?
Fourth, with FRL being the flagship entity in the group, could the promoters have concluded a major tie-up with a critical global player completely on their own with no involvement of the board of FRL? Did the directors seek details on why Amazon and not another retail player was taken as a partner? Whether alternative ideas were explored?
Fifth, one of the independent directors has resigned with effect from 1 June 2021. The annual report has little information on this. Given the proceedings, there is an inevitability in seeing some link to the events, though the opaqueness in the resignation process usually makes it difficult to get to the underlying facts in such cases.
Sixth, the most important one, about how they felt compelled to write to the regulator bypassing the management team, and the promoter himself serves as the chairman.
Seventh, whether their action to write was approved by the board, or the company or they have acted unilaterally on their own.
Finally, and most importantly, the independent directors should explain why the market-cap of the company has fallen by a whopping 90.63% over a three-year period when their key competitors, who operate in identical market conditions have delivered a market cap growth of 247.35%, 269.36%, 76.96% at the higher end and – 26.71 at the low end. The one-year record is equally dismal and not worth troubling the readers with!
Should not the independent directors who feel so concerned about an issue already in contention before many courts and regulators, not demonstrate a modicum of like earnestness in taking up on behalf of the common investor about the consistent value destruction!
If, as complained, Amazon had suppressed information in its application to CCI on entering the joint venture with FCL, it is FCL’s board that should be concerned and seek revocation of the CCI order issued for Amazon’s investment into its company. The live link is missing for FRL to question when it has apparently not recognised at any stage the Amazon transaction.
The action of the independent directors raises questions on the propriety of their conduct in many aspects of the governance than meriting an appreciation for something unknown hitherto!
Cowboys in the corporate board room don’t make for an elegant sight!
Are they being directed by some higher force or voice?
(The author is a CA and CS and retired as a partner at EY, Chennai heading tax and regulatory advice.)