"Speed money" halts India's retail growth

"Speed money" halts India's retail growth

Hong-Kong entrepreneur Ramesh Tainwala spent 18 months operating branded clothing retail stores in India before deciding it was impossible to succeed without paying bribes.

Tainwala, a 55-year-old expatriate Indian, owns Planet Retail, which held the India franchise rights for US fashion labels Guess and Nautica as well as UK retailers Next and Debenhams. He sold the brands last September to various Indian businesses.

"Right now it's not possible to do business in India without greasing palms, without paying bribes," said Tainwala, who is also luggage maker Samsonite's president for Asia Pacific and West Asia. Tainwala said he himself refused to pay bribes to licensing officials, though that could not be independently confirmed.

India is the next great frontier for global retailers, a $500 billion market growing at 20 per cent a year. For now, small shops dominate the sector. Giants from Wal-Mart Stores Inc to IKEA AB have struggled merely for the right to enter, which they finally won last year.
But a daunting array of permits - more than 40 are required for a typical supermarket selling a range of products - force retailers to pay so-called "speed money" through middlemen or local partners to set up shop.

In interviews with middlemen and several retailers, Reuters found the official cost for key licenses is typically accompanied by significant expenses in the form of bribes. The added cost erodes profitability in an industry where margins tend to be razor-thin. It also creates risk for companies by making them complicit in activity that, while commonplace in India and other emerging markets, is nonetheless illegal.

That creates a handicap for foreign operators such as US-based Wal-Mart, the world's biggest retailer, and Britain's Tesco Plc and Marks and Spencer Plc, which must comply with anti-bribery laws in their home countries even while operating abroad.

A Wal-Mart spokesperson said the company is strengthening its compliance programs, part of a global compliance review that has cost more than $35 million over the last 18 months. IKEA, which is awaiting final approval to enter India, has started assessing the market, a spokeswoman said, adding the group has "zero tolerance" for corruption in any form.

Harassed for money

Retail is especially prone to bribery because stores sell multiple types of merchandise, which in India increases the number of licenses and permits needed - a legacy of the so-called "Licence Raj" that was largely dismantled during the country's early 1990s economic reforms.

The World Bank's Ease of Doing Business survey ranks India 173rd out of 185 countries when it comes to starting a business, behind Malawi, Niger, Sudan and Guatemala. Transparency International in 2012 ranked it 94th out of 174 countries on its corruption table - a fall from 72nd five years earlier.

"Even for a simple thing like putting up signage in front of your store you are harassed for money," said Tainwala. "There are many bodies regulating that and the permits needed to set up one shop are baffling."

Ais Kumar, head of the western region for the Food Safety & Standards Authority of India (FSSA), acknowledged that graft exists across government ranks and departments. Many government departments also have staff shortages that cause delays. "These licenses are required for compliance and safety and not because the government wants to delay or complicate things for anyone. It's the law of the land and it must be followed," he said, adding the government is striving to put licensing systems online to streamline the process and make it more transparent. Checks with three retailers, however, showed the online forms still need to be physically delivered to the respective licensing departments.

Permits needed to open a store range from the mundane, such as a trade license, to the petty: lighted shelves require a separate permit, and even a shop window needs a license.

Want to play music in the store? That requires a license. So does selling cosmetics or providing valet parking.

A convenience store that sells basics such as milk, vegetables, cereal, bread, eggs, meat and baby food will require a minimum of 29 licenses from nearly 20 different authorities, according to a list of licenses compiled by the Retailers Association of India and obtained by Reuters.

Those include a food license; a license for sale, storage and distribution; a food-handler's certificate; a license for milk products and another for frozen non-vegetarian food. All those licenses comes from the state-level FSSA, but require separate applications.

But the FSSA does not give permission for operating freezers and chillers. That requires a separate license from a municipal body. Selling baby food requires a permit from a state Controller of Food and Supply.

All those licenses need to be renewed, sometimes annually.

It's not just the red tape of getting those licenses, it's also the under-the-table money that retailers typically have to pay on top of the official fees. In Bandra, a high-end suburb of Mumbai, a state-issued trade license for a 10,000-square-foot (930 square-meter) store - very large by Indian standards - officially costs Rs 1 lakh. But there is an "additional charge" of Rs 12.5 lakh, according to documents obtained by Reuters from the Employee State Insurance, Provident Fund and Industrial Law Practitioners Association of India, which assist retailers in obtaining permits.

EPILPA said their members, who are consultants, collect the "speed money" from retailers and pass it on to the government officials. They act as middlemen who do not take a cut and hence should not be held responsible for the bribes being paid.

"In India, you don't need to ask retailers if you need to pay bribes," said Punit Agarwal, CEO of Promart, a mid-sized multi-brand clothing retailer. "It's known. Here you have a price tag for everything."

He said his company hires middlemen and pays their fees because he knows bribes have to be paid, but does not want his company to get directly involved.

Middlemen sell speed. They provide access to government officers who can sign off on permits as soon as they are paid. The middleman negotiates the bribes, thus keeping company officials from being directly involved.

Take the case of British footwear retailer Clarks. It entered India through a partnership with Future Group, which runs the country's largest listed retail entity, Future Retail. Clarks has hired consultants and, according to one of them, is negotiating with municipal officials for a 365-day license that would allow it to open three of its five stores in Mumbai every day of the year.

For each of the three stores, the company was asked to pay Rs 60,000 per officer for the eight officers involved in its case - a total of Rs 5 lakh per store, said Oovesh Sarabhai, of Atlas AVA Consultants, who is working with Clarks to secure the licenses. The official fee is about Rs 6,000 per store, he said.

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