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

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 (RoC).

The Cedar investment is now the focus of an investigation by India’s financial crimes watchdog into whether Wal-Mart broke foreign direct investment (FDI) 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 that the transaction appeared to violate at least the spirit of India’s long-standing ban on foreign investment in supermarkets, which it lifted only 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.

A senior partner at ALMT Legal in Mumbai, Hitesh Jain, who advises retailers but is not involved with Wal-Mart, said, “.

This is a complete camouflage. 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.

Senior government officials said 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.

Complex web

Details of Wal-Mart's investment in Cedar, based on perusal of 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.

Documents accessed from the RoC reveal a web of companies set up under the Bharti umbrella, which runs India's largest telecom operator, Bharti 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, 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.

A senior government official,requesting anonymity, said, “The RBI believes there is a need to investigate.” He said both Wal-Mart and Bharti were being investigated because “Wal-Mart allegedly made the investment and Bharti allegedly received it.”

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