How Wal-Mart got a foot in the door of India's retail market

Mumbai, Dec 13: Wal-Mart Stores Inc (WMT) prepared its entry into India's supermarket sector in 2010 with a $100 million investment into a consultancy with no employees, no profits and a scant $14,000 in revenue.

The company, called Cedar Support Services, might have been a more obvious selection four months earlier: it began its corporate life as Bharti Retail Holdings Ltd, according to documents filed with India's Registrar of Companies.

The Cedar investment is now the focus of an investigation by India's financial crimes watchdog into whether Wal-Mart broke foreign direct investment rules by putting money into a retailer before the government threw open the sector to global players.

Wal-Mart said it was in compliance with India's FDI guidelines, and had followed all procedures. It said India's central government had sought "information and clarification", which Wal-Mart has provided.

However, several lawyers said the transaction appeared to violate at least the spirit of India's long-standing ban on foreign investment in supermarkets, which it only lifted in September 2012. When Wal-Mart made the investment in 2010, it was legal for foreigners to own consultants but not retailers, so the shift in Cedar's business description raised eyebrows.

"This is a complete camouflage," said Hitesh Jain, a senior partner at ALMT Legal in Mumbai who advises retailers but is not involved with Wal-Mart. "It can be looked at as a violation of FDI rules because Cedar also operates supermarkets, which was a restricted sector back then."

The law, however, is murky.

Others stressed that the way Wal-Mart structured the transaction might make it legal. According to the documents filed with India's registrar, the investment was in the form of debt that was convertible into equity. That clouds the issue of whether Wal-Mart took a stake in Cedar or provided financing.

Bharti and Wal-Mart both declined to provide additional details on how the transaction was structured.

Senior government officials that India's central bank had asked the Enforcement Directorate, which investigates financial crimes, to look into whether Wal-Mart violated the law by investing in a supermarket retailer before foreign investment rules were relaxed.

If Wal-Mart did break the law, it could face a penalty of up to three times its initial $100 million investment, they said.

That would not only be a setback for Wal-Mart, it would also weaken consensus-building efforts by India's minority government, led by the Congress party. The party is desperate for more support from across the political spectrum after its decision to let foreign players into India's retail market came under fire from the opposition and even some of its own allies.

Wal-Mart and other retailers lobbied for years to gain access to India's market, lured by the promise of a middle class that will one day rival China's. But local opposition has been fierce because of concern that Wal-Mart and its peers will knock millions of mom-and-pop stores out of business.


Media pieced together details of Wal-Mart's investment in Cedar by examining records from India's Registrar of Companies and through interviews with government officials involved with the matter, as well as several lawyers who work with retailers.

The documents reveal a web of companies set up under the Bharti umbrella, which runs India's largest telecom operator, Bharti Airtel (NSI:BHARTIARTL). The group, which also has retail interests, signed a joint venture with Wal-Mart to run wholesale stores in 2007, shortly after India allowed full foreign ownership of wholesale retail operations.

That same year, the Bharti group formed Bharti Retail Holdings Ltd, which in turn owned a subsidiary called Bharti Retail Ltd which operated supermarkets and hypermarkets.

In December 2009, Bharti Retail Holdings changed its business description to consulting services from retail, the documents filed with India's Registrar show. A month later, the company changed its name to Cedar.

The timing of the change in name and business is significant because when Wal-Mart invested in Cedar in March 2010, foreign companies could legally own 100 percent of an Indian consulting firm but not a supermarket retailer.

Cedar issued "compulsorily convertible debentures" to Wal-Mart Mauritius Holdings Co Ltd, which would be exchanged for 49 percent equity 18 months after the issue date. The conversion date has since been pushed back twice, to September 2013, which would be after India's relaxation of rules on retail investment.

Cedar's cash flow statement for 2010 shows that the funds raised from the debentures were used to finance activities and an attached schedule to the balance sheet shows a transfer of 1.75 billion rupees ($32 million) to its retail unit, raising questions over whether Wal-Mart's money went into the retail business.

M.P. Achuthan, a communist member of India's parliament, has accused Wal-Mart of breaking the foreign direct investment law and said he wanted the company to be penalized. Achuthan also wants India to scrap its foreign retail investment policy.

"I am surprised and shocked that the government didn't see this. This kind of an investment could not have happened without the government's knowledge," Achuthan said. "It is impossible."

Wal-Mart's Indian partner, Bharti Enterprises, said it had followed the rules but did not address specific questions emailed.

"We are in complete compliance of all regulations. All details have been shared with the relevant authorities," a Bharti Enterprises spokesman said.

Two senior government officials said there had been an initial round of communication between the Reserve Bank of India and the Enforcement Directorate. The RBI, India's central bank, asked the law enforcement agency to conduct the investigation.

"RBI believes there is a need to investigate," said a senior government official, who spoke on condition of anonymity because of the sensitivity of the matter. He said both Wal-Mart and Bharti were being investigated because "Wal-Mart allegedly made the investment and Bharti allegedly received it".

Separately, Wal-Mart said last month it was looking into bribery allegations in several countries including India, Brazil and China. It conducted an earlier probe in Mexico.


Prime Minister Manmohan Singh is under intense pressure to roll back the decision to permit foreign retailers. Parliament ground to a halt on November 22 over opposition to the reforms until the government agreed to a vote.

A year ago, political pressure forced the government to make a U-turn after it first approved foreign investment into supermarkets, an abrupt shift that brought into question India's ability to build consensus behind long-awaited reforms.

When Wal-Mart made the investment in Cedar in 2010, Indian law permitted foreigners to own "cash-and-carry" wholesale stores, but they were barred from owning what India calls multi-brand retailers, or stores like Wal-Mart's namesake supermarkets that sell a wide array of products and brands.

Whether the investment in Cedar violated India's law depends on two issues, according to the lawyers: if Cedar was in fact a retailer rather than a consultancy, and how the investment was structured.

Cedar's articles of association filed with the Registrar show it called itself a consultancy, but a few pages later it describes a "competing business" as one involved in retail and operates supermarkets, hypermarkets and discount stores.

Even if investigators determine Cedar was a retailer, lawyers said Wal-Mart's investment may still be legal if the transaction is deemed to be debt. Wal-Mart could then argue that it did not acquire a stake but instead extended a loan.

But according to RBI guidelines set in 2007, compulsorily convertible debentures are considered equity. That would mean Wal-Mart jumped the gun, said Alok Dhir, managing partner Dhir & Dhir Associates.

Dhir said there may be one way around that problem. If Wal-Mart and Bharti included a "put" option on the debentures, it could be considered debt because Wal-Mart would no longer be required to convert the debt to equity.

It is not clear whether this transaction included such a clause, and Wal-Mart and Bharti declined to comment.


Under Indian law, Wal-Mart can be found in violation even if each step it took was within bounds. If the combination of those actions led to a result that circumvented the law, a court can consider the bigger picture, four lawyers said, citing a 1985 Supreme Court of India decision.

However, there are numerous grey areas.

For example, the RBI does not require Indian companies to declare what they do with money they receive from foreign investment.

"Even if the investigation is able to prove that funds were invested into the retail business, the companies can say they are not legally bound to declare it and present an argument," said Ravi Singhania, managing partner at law firm Singhania & Partners.

The fact that Wal-Mart's investment was capped at 49 percent and would not give it majority control of Cedar after the debt is converted could also help the companies build a case that the investment was legal.

The rules allow Indian-owned and controlled companies to use foreign capital to fund businesses which their subsidiaries operate. However, lawyers said there is no clarity on whether it is a breach if the unit of the Indian entity operates in a restricted sector, which supermarkets were until September.

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