MUMBAI Dec 5 Wal-Mart Stores Inc
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 told Reuters 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.
Reuters 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. 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
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
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 penalised. 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 by Reuters.
"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.
DEBT OR EQUITY?
Prime Minister Manmohan Singh is under intense pressure to
roll back the decision to permit foreign retailers. Parliament
ground to a halt on Nov. 22 over opposition to the reforms until
the government agreed to a vote, set for Wednesday.
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
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 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
"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 &
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.
($1 = 54.6400 Indian rupees)
(Additional reporting by Satarupa Bhattacharjya in New Delhi
and Jessica Wohl in Chicago; Editing by Emily Kaiser and Mark