Most Merger & Acquisition (M&A) deals are announced to the public with the suffix ‘subject to regulatory approval’, and the Reliance Retail Ventures Ltd (RRVL) acquisition of the Future Group, is no exception. One significant regulatory authority that decides on the competition aspect of the deal is the Competition Commission of India (CCI), which would have to give its nod before the transaction is considered complete. The CCI has numerous issues to deal with as the magnitude of the deal is gargantuan and could cause a complete stir in the sector.
The deal was announced on 29th August 2020 as RRVL acquired the wholesale, retail, logistics and warehousing businesses of the Future group through an intricate transaction. It was decided that all listed Future Group Companies would be merged into Future Enterprises Ltd (FEL), transferring its major business to Reliance on a slump-sale basis for Rs. 24,713 crores. Further Reliance would invest in preferential and equity issue of shares of FEL, taking the transaction value to approximately Rs. 27,000 crores.
From CCI’s perspective, the deal maybe scrutinized because it gives RRVL access to over 1,800 new stores in over 420 cities across India making it at least 2 times larger than its competitors. Moreover, brands such as Big Bazaar, FBB and Central become a part of the RRVL project, that will help in giving it control over majority of the market.
The CCI must tread very carefully as until now, the anti-trust watchdog has looked at pure-play retail market deals, but this transaction involves every step in the entire retail industry from the wholesale to the logistics. It is imperative that CCI sets a precedent that is relevant for years to come because in our opinion a deal like this will pave the way for many more. Some of the major issues at play have been discussed below.
Definition of ‘Market’
According to the Competition Act 2002, a deal is said to be anti-competitive if it has an Appreciable Adverse Effect on Competition (AAEC), which is an assessment that is carried out after looking at a variety of factors. Some of these factors are ‘creation of barriers to entry in the market’ or ‘driving existing competitors out of the market’ but to carry out such an assessment first, it is essential to define the relevant market.
Looking at previous investigations, it can be established that the business-to consumer retail sector is categorized as organised and unorganised. The kirana stores and the low-cost retailing run locally falls under the unorganized sector where-as the organized sector consists of hypermarket, supermarkets, departmental stores. It can be assumed that this deal will fall into the organized retail sector but there are further hurdles, mainly about whether the market will include the e-commerce retail sector as well.
The definition of market is also being looked at to understand whether this combination will give RRVL a market-share wherein it could abuse its dominant position. According to HDFC securities, this combination would result in RRVL’s market share increasing from 27% to 44% in the organized grocery retail sector. Moreover, this sector would essentially become a duopoly with the only other major competitor being DMart, categorizing further abuse of dominance. Reliance will dominate the organized apparel retail sector in a similar manner and end up securing a dominant position.
The only way that RRVL will not partake a dominant position is if the e-commerce retail sector is also included in the definition of market, thereby including players like Amazon and Flipkart. This would reduce their market share to a single digit and then the question of abusing their dominant position would not arise. However, in January 2020, CCI had opened an Anti-trust probe against Amazon and Flipkart, over preferential treatment being given to certain sellers. In that investigation, the definition of market included only e-commerce retailers, and completely excluded the offline retail space. The circumstances are certainly different, but if the CCI takes up a similar approach then RRVL is in for trouble.
Kishore Biyani, the face of Future group, began building his empire back in the late 80s with Pantaloon, and over the next 25 years paved the way for retail in India. He founded the Future Group in 2013, but subsequent failures coupled with globalization lead to his downfall. The Coronavirus Pandemic was the last straw and he was the captain who had to decide the fate of his sinking ship. Mukesh Ambani swooped in with a lifejacket so that the Future Group could be saved from Insolvency, but the rescuer knew he would have a great deal of leverage in such a situation.
The deal was done on a slump sale basis, demonstrating how desperate the Future Group was, but perhaps the non-compete clause really illustrated the extent of his troubles. Kishore Biyani and his family agreed to a non-compete clause of 15 years which would means that they consented to not operate in any retail segment except home furnishings for that time-period.
The CCI has accepted non-compete clauses of 3-4 years in the retail sector on various occasions, and has hesitantly agreed to such clauses up to 8-10 years in sectors such as infrastructure but a 15 year release clause could pose as a tricky situation. The legal test for a non-compete is if it is reasonable in scope while considering duration and products. RRVL could argue that in Retail, the entry barrier is low and the relationships that Kishore Biyani built over the years could pose a threat to them if he entered the sector again, but the CCI may not buy that as 15 years seems excessive.
Failing Firm Defence
The CCI believes in a pro-competition approach and till date has not blocked a combination that has come before it. However, it has a very stringent AAEC assessment which helps to identify problems and work with the parties to make the transaction anti-competitive. RRVL may not want to amend anything with respect to the deal, and a more favourable approach may be to take up the ‘Failing firm defence’.
Section 20(4)(k) of the Competition Act stipulates for this Doctrine, and in the present case where the Future Group’s need has already been discussed, this defence may be of immense use. The CCI generally considers this doctrine in addition to the other factors provided under Section 20 of the Act, but considering the circumstances of the case, this defence may be enough.
The defence is generally invoked where the following essential elements exist :-
The failing firm is not or will not be able to meet its financial obligations and is likely to go into insolvency proceedings in the near future.
The failing firm is incapable of a financial reorganisation to make its business viable again.
In case the transaction is blocked, the failing firm would inevitably exit the market as it would have exhausted all other options.
In the present case the Future group suffered irreparable damage due to the Pandemic, as their remaining customers also shifted from brick-and mortar to the more in vogue click-and-mortar stores. Numerous employees were laid off and Kishore Biyani was sitting on a huge pile of debt, inevitably heading for insolvency. The Future group’s exit from the retail market would be disastrous for competition in the market and lenders who have outstanding dues would have to suffer if the deal is not completed. This could RRVL’s strongest argument as failure of the deal is more detrimental to competition than to complete it. The CCI may push its weight around for a little while, but it is improbable that after this argument they would really amend too many terms of the combination.
The Reliance-Future Group deal seems like a win-win situation for all the parties involved. FEL will come out of Future Group’s ashes stronger, with businesses in manufacturing and distribution of FMCG products and integrated fashion sourcing and merchandising. RRVL may come out as the bigger winner as Mukesh Ambani, having already disrupted the Telcom sector, will aim to do so with organized retail sector as well. However, just as there are hefty claims about anti-competitive behaviour in the Telcom sector, those claims will not easily vanish in this case. Regulatory approvals are always critical and just because both parties are gaining from this deal, CCI must not overlook its findings. The Reliance-Future deal may well be the first case in India where the ‘Failing Firm Defence’ doctrine is applied. It is vital that the CCI conducts its investigation with detailed reasoning and structure as it could be a landmark not only in anti-trust regulation but also for the economic development of the Indian market.