SEBI orders forensic audit of the books of Future Retail

The stock market regulator, SEBI, has appointed Chokshi and Chokshi as the forensic auditors for a special forensic audit of the last three fiscal years accounts of Future Retail Ltd (FRL). This pertains to the forensic audit of the books of accounts of Future Group in general and Future Retail in particular for the financial year 2019‐20 to the just concluded financial year 2021‐22. SEBI notices have gone out simultaneously to 4 Future group companies viz. Future Enterprises, Future Consumer, Future Lifestyle and Future Supply Chain Solutions. 

Normally, a forensic audit is ordered by SEBI, if it has reasonable grounds to believe that the company has undertaken business transactions that are not in the interests of the investors of the company at large. In this case, apparently, SEBI has reasonable and substantial premises to believe that the disclosure of financial information and the business transactions were conducted by the company in a manner that has been detrimental to the interests of the investors and the securities markets in general. 

The notices to all the group companies include an elaborate and incisive review of the last 3 fiscal years between FY2020 and FY2022. The audits of these companies would specifically be with reference to the related-party transactions with Future Retail Ltd during the said review period. In April this year, Amazon had requested the RBI to undertake a forensic audit against Future Retail for the last three financial years to investigate alleged fraud by the company. That was one of the triggers for this move.

There is an interesting background to this entire story. In the early part of this year, Bank of India had pulled Future Retail to the insolvency court towards unpaid dues, although the matter is yet to be admitted. In August 2021, Future Retail and Reliance Retail had signed an agreement to sell Future Retail assets to RRVL for Rs24,713 crore. That was the genesis of the entire problem as Amazon objected. As the issue dragged along, RRVL took possession of most of the retail outlets of Future Retail against rental dues outstanding to them.
A little detour to the Amazon story. Back in the year 2019, Amazon had invested a sum of Rs1,400 crore in Future Coupons, part of the Future group. This deal had given Amazon an indirect ownership in Future Retail and this allowed them to object to the sale of the Future business to any competitor in the retail business, including Reliance group. At that point, Amazon dragged the Future Group to the Singapore International Arbitration Centre and the SIAC had then ruled in favour of the Amazon group, jeopardising the deal with RRVL.
Meanwhile, Amazon had tried to move the Indian courts to seek enforcement of the award passed by the SIAC. That case is still on but now may be largely pointless with Reliance walking out of the deal and Future group on the verge of total bankruptcy. While the banks are putting up a brave face and fighting a pitched battle, little is likely to  be recovered from the group. Under these circumstances, the forensic audit may, at best, say things that most people intuitively know all along. The best thing now is to await the forensic report.