CCI’s Penalty on Amazon: A Necessary Intervention

[Saikishan B Rathore is a 4th year BSW LLB (Business Corporate and Financial Law Hons.) student at Gujarat National Law University, Gandhinagar]

In a first of its kind, the Competition Commission of India (CCI) on 17 December 2021 found Amazon NV Investment Holdings LLC (Amazon) guilty of contravening sections 43-A, 44 and 45 of the Competition Act, 2002 (Act). By way of its order dated 17 December 2021 (Order), the CCI has suspended the approval given to Amazon for acquiring 49% shareholding in Future Coupons Private Limited (FCPL) (see previous order dated 28 November 2019) and has imposed a collective penalty of INR 202 crores on Amazon.

Background

According to Amazon’s Notice under section 6(2) of the Act (Notice), three transactions were notified before the CCI. This included the issue of Class A voting equity shares of FCPL to Future Coupons Resources Private Limited (FCRPL) (Transaction I); transfer of shares of FRL held by FCRPL representing 2.52% of the issued, subscribed and paid-up equity share capital of Future Retail Limited (FRL), on a fully diluted basis to FCPL (Transaction II) and; acquisition by Amazon of the Subscription Shares representing 49% of the total issued, subscribed and paid-up equity share capital of FCPL (on a Fully Diluted Basis) (Transaction III). In pursuance of these transactions, Amazon also informed the CCI of a share-subscription agreement (FCPL SSA) that sets out the terms and conditions, and a shareholders agreement (FCPL SHA) which set out the rights and obligations of the shareholders.

However, it is pertinent to note that prior to Amazon’s acquisition of shares, FCPL had acquired equity warrants of FRL, convertible into equity shares representing 7.30% of the share capital of FRL (Warrants Transaction) which was approved by the CCI through its order dated 15.04.2019. In furtherance of this Warrants Transaction, a shareholders agreement was entered into by the parties (FRL SHA). Interestingly, the FCPL SHA included the requirement of prior written consent of Amazon for FCPL to decide on or implement any matter under FRL SHA. Moreover, several commercial agreements (BCAs) were executed between Amazon and the Future Group to consolidate Amazon’s presence in the retail market. However, neither the FRL SHA nor the BCAs were notified, as Amazon argued they were not independent of the combination.

Proceedings before the CCI

In its show-cause notice issued under regulation 14 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations), the CCI had found several contradictions in the submissions of Amazon before other fora and the competition regulator regarding the strategic interest of Amazon in FRL. In fact, the CCI had previously raised similar queries in letters dated 9 October 2019 and 24 October 2019. However, Amazon had clarified in its submissions dated 15 November 2019 that it was interested in the ‘corporate gift cards’ business of FCPL and intended to expand its portfolio of investments in the payments landscape of India. It was also submitted that Amazon neither has direct nor indirect shareholding in FRL and that the rights conferred by the FCPL SHA were merely for the protection of its investments. However, these averments are essentially nullified in light of the following details.

Internal Correspondence

In light of the proceedings initiated by FCPL, fresh evidence was brought on record. This included the following:

Firstly, the internal note dated 24 May 2018 showed that the investment would help Amazon (a) expand coverage in top four cities and improve the merchant fee to 13.5%; (b) build a two-hour-delivery service in the next 20 cities; (c) exclusively carry their private label portfolio in grocery and value-fashion and; (d) obtain option value to increase its equity stake when laws change.

Secondly, the situation update dated 10 July 2018 elaborated the background and purpose with which the combination was contemplated between Amazon and Future Group. The situation update showed that Amazon viewed the arrangement as a means to utilize the FRL’s pan-India store infrastructure to boost Amazon’s ultra-fast delivery program, exclusively carry private label portfolio in grocery and value fashion (where Amazon was allegedly lagging behind its competitors), and drive higher fees for Amazon.

Thirdly, an internal e-mail dated 18 July 2019 demonstrated that in light of the FDI restrictions, Amazon would use a twin-entity investment structure to invest in FRL, i.e., Amazon would acquire 49% shareholding in FCPL, which in turn would hold 8 to 10% of the shareholding in FRL. Lastly, it also listed out several benefits provided by FRL to Amazon in pursuance to the BCAs.

False, incorrect and incomplete disclosure of information

Item 5.3 of Form I: The notifying party is required to disclose the economic and strategic purpose of the combination under this head. However, the internal correspondence clearly highlights how the true purpose of the combination was concealed.

Item 8.8 of Form I: The notifying party is to furnish documents and material considered by or presented to the board of directors or key managerial person of the parties to the combination or their relevant group entities, in relation to the proposed combination. Amazon had merely submitted a presentation highlighting the gift voucher business of FCPL, its business operating model, estimated five-year business size, organisation design, sales team and financial summary, without any reference to FRL. In fact, the entire internal correspondence was not disclosed and was actively concealed.

Regulation 9(4) read with Items 5.1.1, 5.1.2, 5.2 of Form I: This provision makes it mandatory for parties to the combination to give a notice covering all inter-connected steps of their proposed combination (being disclosures to be made against item 5.1.2).  Moreover, item 5.2 requires the timelines of each inter-connected step to be disclosed. Amazon had only identified three transactions and the FCPL SHA and FCPL SSA as agreements that formed a part of the combination. The FRL SHA and BCAs were not disclosed against any of the abovementioned items.

Suspension & Penalty

The CCI unequivocally held that Amazon failed to notify FRL SHA and the BCAs as parts of the Combination between the parties, and suppressed the actual purpose and particulars of the combination, in contravention of the obligation contained in subsection (2) of section 6 of the Act read with regulation 9(4) of the Combination Regulations.

Suspension of the Deal: In exercise of the powers conferred under section 45(2) of the Act, the CCI directed Amazon to give notice in Form II within a period of 60 days, and, till disposal of such notice, the approval granted to the combination ‘shall remain in abeyance’.

Penalty: The CCI imposed a penalty of INR 202 crores under section 43-A of the Act. Moreover, in the absence of any mitigating factor, the CCI imposed the maximum penalty of INR 1 crore under sections 44 and 45 of the Act respectively, thereby, collectively amounting to a penalty of INR 202 crores.

Key Takeaways

The Order clarifies that it is mandatory for a notifying party to file a single notice mentioning all inter-connected transactions making up the proposed combination. This is in line with the past decisional practice of the CCI (see here, here, here and here). For instance, in the Piramal/Shriram case, the three acquisitions by Piramal Enterprises Limited of equity shares of companies belonging to the Shriram Group were held as inter-connected steps of one combination in terms of regulation 9(4) of the Combination Regulation and ought to have been notified to the CCI. In fact, the law on this point was made clear by the Supreme Court in CCI v. Thomas Cook where it held that the ‘market purchase’ was an inter-connected step and that when the combination comprises of entire series of transactions or steps, a single notice covering all such transactions ought to be filed. Therefore, if parties are unclear on whether a particular transaction is inter-connected and ought to be a part of the notice under section 6(2) of the Act, it is advisable that they apply for a pre-filing consultation with the CCI to avoid any penalty under section 43-A.

A rather unsettled aspect of the Order, however, is whether the CCI possesses the jurisdiction to suspend its approval. In fact, the proceedings in the present case were under sections 43-A, 44 and 45 of the Act which merely provide for imposition of penalties. However, section 45(2) of the Act allows the CCI to pass any other order as it deems fit without prejudice to the provision for a maximum penalty of INR 1 crore mentioned in section 45(1). Moreover, the Supreme Court in SCM Solifert Ltd. v. CCI has held that ‘the intent of the Act is that the Commission has to permit combination to be formed, and has an opportunity to assess whether the proposed combination would cause an appreciable adverse effect on competition. In case combination is to be notified ex post facto for approval, it would defeat the very intendment of the provisions of the Act.’ In the present case, the CCI did not have the opportunity to assess the adverse effect on competition because material agreements (FRL SHA & BCAs) to the combination as mentioned above were not disclosed in the Notice. Therefore, it is argued that the suspension of the approval is in line with the legislative intent of the Act as parties who wilfully conceal material facts cannot reap the statutory outcome that ensues on filing true and correct information.

Conclusion

The importance of ex-ante regulation of dynamic markets (online or digital) is being widely recognized by major jurisdictions such as the EU, the US and Germany, as they push for legislation that invites strict antitrust scrutiny of transactions entered into by such significant players. It is accepted that the presence and growth of e-commerce market is inevitable and the role of competition authorities to keep a check on their practices subsequently assumes significant importance. Therefore, the final verdict on the Amazon-Future dispute does not only bear ramifications on the multiple ongoing proceedings, but also on the competition in the Indian e-commerce market.

Saikishan B Rathore

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