Amazon testing waters with the future deals was the opinion of the cognoscenti when in 2019 Amazon got a 10-year call option from Kishore Biyani’s Future Group for an unspecified price. The only price known was and is Rs 1,500 crore paid for a 49 percent stake in Future Coupons — the promoter company of Future Retail — by Amazon in August 2019. With details in the public domain being sketchy, speculation was and is rife if the price paid for the leisurely call option indeed was the Rs 1,500 crore paid for a 49 percent stake in the promoter company. Be that as it may.

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Amazon was not only testing waters but girding its loins to take on its rival back home in the US, Wal-Mart, which was flush from the takeover of Flipkart, its (Amazon’s) competitor in India. But subsequent events have proved in hindsight that Amazon after all was also girding its loins for a challenge from an Indian firm, Reliance Industries. Be that as it may again.

In August 2020, Future entered into a $3.4 billion deal with Reliance Industries Ltd (RIL) which was challenged by Amazon in the Singapore International Arbitration Center (SIAC) and which stopped the Future-RIL deal in its tracks. The call option together with the non-compete agreement with Future restraining in so many words from hobnobbing with Reliance retail helped Amazon’s cause. As recently as on August 6, 202, the Supreme Court of India has upheld the Singapore arbitration forum’s ruling thus stopping the Future-Reliance Retail merger in its tracks.

The purpose of this article is not to go over the minutiae of the bitter fight all over again but instead to focus on the pitfalls of granting a very long duration call option. Amazon in terms of the call option can acquire Future Retail anytime between the third and the tenth year the upshot of which is meanwhile it can play dog-in-the-manger, as it were. Amazon obviously is waiting for a propitious time to enforce its call option.

Remember an option gives the right to exercise it but does not cast an obligation to exercise such right. In other words, it is a kind of heads-I-win-tails-you-lose agreement. It insulates the option holder from loss beyond the option fee he has paid.

While Amazon seems to think that it has a watertight case against the Future-Reliance deal thanks to the pincer of non-compete agreement and the ten-year call option, it remains to be seen whether they are able to stand the test of scrutiny under section 27 of the Indian Contract Act — agreements in restraint of trade are void to that extent — when the Singapore forum starts looking into the merits of the case beyond the stay order it has passed.

Meanwhile, banks in India are getting the jitters following the Apex Court ruling in favor of Amazon. They were looking to a less dense haircut in the event of the merger of Future Retail with Reliance Retail.

Looks like we haven’t heard the last word on the issue. Should the lenders take Future to NCLT under Insolvency and Bankruptcy Code (IBC), inevitably Amazon may have to take an immediate call despite its smug and leisurely call option. If it finds takeover unattractive it may have to yield ground to Reliance or someone else offering more because once the matter reaches NCLT it would be arguably difficult for Amazon to continue to play dog-in-the-manger.

The moral of the unfolding story is never grant a very long call option to anyone because it could recoil on you sooner than later. It could tie you down helplessly, rendering you powerless to accept a more favorable offer that could come along the way even as the option holder quietly laughs up his sleeve.

Disclosure: Network18, the parent company of CNBCTV18.com, is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

—S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own.

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(Edited by : Ajay Vaishnav)

First Published:Aug 9, 2021 6:12 PM IST