TOKYO -- One of the biggest economic achievements by Indian Prime Minister Narendra Modi thus far has been his efforts to push the country up in the World Bank's annual ease-of-doing-business rankings. India has managed to move up almost 80 places, from 142nd in 2014 to 63rd among 190 economies.
But India has completely failed to improve in one of the 10 areas that the World Bank measures: Ease of enforcing contracts. India's rank here edged up from 186th out of 189 economies in 2014 to only 163rd today.
Since August, U.S.-based Amazon has endured firsthand the consequences of this poor rating.
When the online-shopping giant agreed to invest 15 billion rupees ($200 million) last August in a 49% stake in Future Coupons -- an owner-controlled financial company of retail conglomerate Future Group -- Amazon made two contracts to solidify its position in Future Group's retail business Future Retail, a listed company.
One of the agreements was a shareholders contract with Future Group's owners, including the founding Biyani family and Future Coupons. The other was a similar contract between Future Retail and its owners.
In the former, Amazon received a call option to buy all or part of the owners' equity stake in Future Retail, exercisable between 2022 and 2029. The contract also banned the owners from transferring their Future Retail shares to competitors, including Reliance Industries. It also gave Amazon the right of first refusal on any transfer of Future Retail shares held by Group owners.
The second contract gave Future Coupons the right of first refusal on the transfer or licensing of Future Retail's assets and any amendments to Retail's articles of association. With Amazon's strong 49% stake in Future Coupons, the contract was designed to give the American company an indirect veto against unexpected decisions to transfer Future Retail shares or assets by Future Group's owners.
In spite of these clauses, Future Group made an agreement this August with Reliance Retail, a retail and e-commerce division of Mukesh Ambani's Reliance Industries, in which Reliance would acquire Future Group's retail, wholesale, logistics and warehouse businesses for 247 billion rupees. The deal apparently breached the spirit of the clauses, which were obviously intended to prevent Future's retail business from being transferred to a third party without Amazon's consent.
Amazon countered in early October by making a plea to stop the deal at the Singapore International Arbitration Centre, an arbitration entity in the agreement between Amazon and Future's owners. The SIAC granted an interim order in October to postpone the Future-Reliance deal.
Future Group and Reliance denied any contract violation and insisted that the SIAC ruling was not enforceable in India. Then on Nov. 7, Future Group filed a suit in a Delhi high court for relief against Amazon's interference in the Future-Reliance deal.
Why are Future Group and Reliance so confident that they have not breached the contract with Amazon?
The devil is in the details. The Future-Reliance deal first calls for Future Retail to merge with four other companies to create a new entity named Future Enterprises. This new company will then sell its retail, wholesale, logistics and warehouse businesses as a going concern without transferring equity shares.
Such a transaction, where a business as a going concern -- including assets, liabilities and employees -- is transferred without equity transactions, is common in India and called a "slump sale."
The intragroup merger will in essence erase Future Retail, the transfer of whose shares and assets were restricted in the Amazon-Future contracts. The slump sale technically allows Future Group to avoid breaching the contract that restricts the transfer of Future Retail shares, as there will be no equity share transfer.
While this explanation may fall short in covering the finer points of the move, as exact details of the contracts are not disclosed, it is obvious that Future Group and Reliance Group have taken advantage of technicalities to ensure leverage in any legal battles with Amazon.
"In general, Indian business people tend to look at their contracts very creatively," said Taeko Suzuki, a lawyer who represents Japanese companies in disputes on Indian soil. "Contracts must be constructed and written very carefully, taking into account all possibilities that could arise from such creative interpretations."
Foreign investors, including venture capitals and startup shareholders, are paying close attention to the Future-versus-Amazon case, especially whether the court will stick to the spirit of the contracts or follow their exact wording.
If the two Indian companies can technically circumvent contract-set restrictions in the upcoming court battle, India may lose another point in the World Bank scorebook regarding contract enforcement.