Indian lenders are set to initiate debt recovery proceedings against Future Retail this week to safeguard their interests after rival Reliance unexpectedly took over some of the retailer's stores, two bankers told Reuters.

Future, hit by the pandemic, has been struggling to pay off its debt and is fighting a bitter legal battle with US retail giant Amazon. That battle has successfully blocked a $3.4 billion sale of its retail assets to India's largest retailer Reliance, citing violation of certain contracts.

Future denies any wrongdoing. But Reliance Industries suddenly took control of hundreds of Future stores late last month, citing non-payment of rent, after assuming many of the leases held by cash-strapped Future. State-owned lender Bank of Baroda will be the first to take Future to the Debt Recovery Tribunal (DRT) and is expected to file the paperwork this week, the two bankers said.

"We are taking this step as a measure of last resort because we want to protect ourselves in this legal fiasco," said one of the bankers directly involved in the matter. "Going to DRT will ensure that Reliance can't pull another sudden move."

Lenders likely to file a case

Other lenders are likely to follow suit, the second banker with knowledge of the matter told Reuters. Future Retail and BoB did not immediately respond to requests for comment. Future Group as a whole has more than $4 billion in debt and lenders have already started classifying the loans as non-performing assets (NPA) this quarter.

Lenders are also likely to subsequently file a case in the National Company Law Tribunal (NCLT) that handles corporate insolvency cases, both bankers told Reuters. Future and Amazon are fighting it out at multiple levels, including at India's Supreme Court.

Given the legal complexities in this case, approaching the DRT first is likely to help banks attach, seize and sell Future’s assets promptly, instead of going after the entire company at NCLT, Ketan Mukhija, a partner at Link Legal said. “It is a very strategic, tactical call (by the banks),” he said.

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