SEBI orders forensic audit of Future Retail's financials. Here's the entire story

SEBI has ordered a forensic audit of the accounts of debt-ridden Future Retail Ltd (FRL) for the financial years 2019-20, 2020-21 and 2021-22. The stock market regulator has appointed M/s Chokshi and Chokshi LLP as Future Retail's forensic auditor.

Why SEBI ordered the audit: The Securities and Exchange Board of India (SEBI) has its own reasons to believe that the information that Future Retail has disclosed in its financials could be wrong. It seems like the financial disclosures have violated multiple regulations (like the SEBI Act, SCRA, and Companies Act). Since this could have a detrimental impact on the shareholders, SEBI has used its powers to take control of the situation. 

SEBI has appointed Chokshi and Chokshi LLP as the forensic auditor to:

• Look into the consolidated financial statements of Future Retail Group.
• Audit the books of accounts of the company and its three related companies ie Future Enterprises Ltd, Future Consumer Ltd and Future Supply Chain Solutions Ltd.
• The audit seems to also focus specifically on related party transactions between the three companies. 

(Fun fact: Amazon has been persistently requesting RBI to conduct a forensic audit on Future Retail's financials) 

Some back story: 

Part 1: You might have heard about the messy tussle that has been going on between Reliance, Amazon, and the Future Group for a few years now.  

• In 2019, Amazon spent $200 million to get a 49% stake in Future Coupons. This indirectly meant that Amazon got a 7.3% holding in Future Retail. After this acquisition, Future Group went deep into debt and was unable to pay back its loans. Future Group's agreement with Amazon also included a clause that if Future Group ever sold its companies, Amazon would enjoy the first preference of buying the company. 
• But, in 2020, when Future Group decided to sell its retail, wholesale, warehousing, and logistics businesses, it chose to sell this to Mukesh Ambani’s Reliance Industries. As Reliance and Future Group got into a deal of $3.4 billion, Amazon tried to block it since its original agreement was wronged. Then Amazon obtained a freeze order from the Singapore Arbitration Court and this started a number of cases across multiple Indian courts, where multiple courts contradicted their own orders. 

• Meanwhile, in March 2022, Reliance took over Future Group's Big Bazaar stores after the group failed to pay store rentals to Reliance, which Reliance had sublet to Future Group. As Reliance captured Big Bazaar outlets, this led to further confusion. But, in April 2022, Reliance backed out of its $3.4 billion deal to take over Future Retail because some of the company’s secured creditors, including banks, had “voted against the scheme.”
• Soon, Future Retail's loan lenders led by the Bank of India filed insolvency proceedings against Future Retail in April 2022 for non-payment of crores of Rs of dues.

Part 2: The insolvency application

• When a company doesn't repay its debts, the loan lenders can start an insolvency process against the borrower by applying to the National Company Law Tribunal (NCLT). If NCLT approves the application, it appoints an Interim Insolvency Resolution Professional who will conduct certain procedures and try to resolve the matters. If the matters aren't resolved, the IRP and the company's creditors sell off the company's assets, use this money to repay the creditors, and then dissolve the company.
• In April 2022, the Bank of India and multiple other banks (like Union Bank of India, State Bank of India, Bank of Baroda, and IDBI Bank) applied to the Mumbai bench of the NCLT to initiate an insolvency proceeding against Future Retail. The banks said that Future Group was unable to repay its loans of about Rs 5,322 crore and requested the NCLT to dissolve the company. The NCLT approved the Bank's application only in June 2022. In accordance with the process, it has appointed Vijay Kumar Iyer of Deloitte as the Interim Resolution Professional (IRP).

What's next? After the IRP was appointed, the board of directors was dissolved and the lenders formed a committee of creditors. This also meant that the power to manage Future Retail's decisions now moves from the board of directors to the IRP and this committee of creditors.

Creditors will now be able to settle their claims, call for potential bids from prospective applicants who want to buy the company, and assess resolution plans. If all fails, the creditors will opt for liquidation of the company, where assets will be sold off to pay these banks.

Here a question arises: Will Reliance come up with a plan to resolve the issues of Future Group? If it does, how much money will the banks recover?