Wal-Mart prepared its entry into India's supermarket sector in 2010 with a $100m investment into a consultancy with no employees, no profits and $14,000 in revenue.How Wal-Mart got a foot in the door of India's retail market
Wal-Mart prepared its entry into India's supermarket sector in 2010 with a $100m investment into a consultancy with no employees, no profits and $14,000 in revenue.
Reuters | Dec 5, 2012, 11.40AM IST
MUMBAI: 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.
Complex web
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 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.
MP Achuthan, a communist member of 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 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 November 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 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.
Loopholes
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.
http://timesofindia.indiatimes.com/business/india-business/How-Wal-Mart-got-a-foot-in-the-door-of-Indias-retail-market/pmarticleshow/17488859.cms?prtpage=1
Tue, Oct 09, 2012 at 21:40
Questions arise over Wal-Mart investment in Cedar Support
The world’s largest retailer Wal-Mart has come under question in India for the nature and manner of its investment in Bharti Retail. Rajya Sabha member MP Achuthan raised the matter in Parliament during the Monsoon Session and now Mamata Bannerjee has also gone public with a demand that the investment be annulled for allegedly violating Indian norms.
CNBC TV18 delves deeper into the story, one that revolves around alterations to the Articles of Association, the methodology of valuation of the investment and the end use of funds among others.
Newer facts emerging from a mix of sources allege that a March 2010 investment by Wal-Mart, Wal-Mart Holdings worth Rs 456 crore in Cedar Support Services Ltd, a company that was originally known as Bharti Retail Holdings, was illegal, with the entire structure rigged in a manner that was aimed at getting around the complete bar on foreign investment in the Indian multi-brand retail sector.
Our sources have provided detailed account of these allegations. Detailed questionnaires were sent to the Bharti Group as well as Wal-Mart. While the latter did not respond to any of the queries, a Bharti spokesperson said, “We are in complete compliance of all regulations. All details have been shared with the relevant authorities”
The allegation is that Cedar Support Services (earlier Bharti Retail Holdings) was carrying out multi-brand retail business in India through a 100 per cent subsidiary – Bharti Retail.
There were some amendments to the Articles of Cedar in December 2009 enabling it to provide services as a real estate consultant. In itself, this change was innocuous, especially as India allows 100 per cent FDI in consultancy services and that too under the automatic route.
The next step unfolded on 29 March, 2010: Cedar issued nearly 455 million zero per cent compulsorily convertible debentures with a face value of Rs 10. These were convertible into nearly 426 million equity shares at a premium of 70 paise per share. In effect, Wal-Mart Holdings invested Rs 456 crore in a company that was a real estate consultant. Till early last month, the Government of India told Parliament that the Reserve Bank of India does not have any record of FDI in Cedar. Specific questions as to whether Bharti or Wal-Mart has at any point ever informed the RBI about this were not answered by the two companies.
So what did Cedar do with these funds – roughly 100 million US dollars? The entire funds are alleged to have been invested by Cedar in its wholly owned subsidiary – Bharti Retail, the company that has been engaged in the business of multi-brand retail. India permitted 51 per cent FDI in multi-brand retail only this September.
Specific questions as to whether Bharti or Wal-Mart has at any point ever informed the RBI about this were not answered by the two companies. Incidentally, Wal-Mart will own 49 per cent in Cedar upon conversion of the debentures. The original conversion date was September 2011, which was then extended to September 2012. With over a fortnight having passed from the end of the extended tenure, it is not known if the option has been exercised.
There are other curious aspects that emerge from the joint venture agreement executed between Wal-Mart, Cedar and Bharti Retail (the Cedar subsidiary that operates multi-brand retail stores under the Easy Day brand name).
Cedar was a consultant in the services space, questions are being asked as to why did this agreement of 25th March 2010, have Bharti Retail as a party? The allegation is that the Articles of Association of Cedar show that Wal-Mart has the right to sell the debentures or Cedar shares to Bharti Shareholders based on a valuation that used for the retail industry and comparable trading multiples for Indian retailers. The Articles further impose certain restrictions on transfers and allotment of shares to competitors – with the competition being not a similar company but a retail operation.
The question arises whether this money was ever intended to be used for the services or for investment in operating multi brand retail? The government’s earlier response has been only to point towards the RBI, but given the nature of the allegations, it is clear that a detailed clarification is perhaps needed from all involved.
http://www.moneycontrol.com/news/cnbc-tv18-comments/questions-arise-over-wal-mart-investmentcedar-support_766947.html
RBI has no data of Wal-Mart's Rs 455 crore in Bharti unit
Agencies | Sep 6, 2012, 05.34AM IST
NEW DELHI: US retail giant Wal-Mart Stores Inc has invested Rs 455.8 crore in a subsidiary of Bharti Ventures in 2010 via its Mauritius arm but the RBI has no FDI data of the same, Parliament was informed on Wednesday. In a written reply to Rajya Sabha, commerce and industry minister Anand Sharma said on March 29, 2010, Cedar Support Services Ltd (a subsidiary of Bharti Ventures) issued 45.58 crore compulsorily convertible debentures (CCDs) with face value of Rs 10 each.
These CCDs were convertible into 42.6 crore equity shares of Rs 10 each at a premium of 70 paise per share. CCDs are a type of debenture in which the whole value of the debenture must be converted into equity by a specified time. "The debentures are unsecured and convertible at the option of the subscriber ( Wal-Mart Mauritius Holdings Co Ltd) within 18 months from the date of issue," he said.
"As per the balance sheet for the period January 1, 2011 to December 31, 2011 filed by Cedar Support Services, it is reported that, on March 29, 2010, the company issued 45.6 crore, 0% CCDs with face value of Rs 10 each convertible into 42.6 crore equity shares of Rs 10 each at a premium of Rs 0.7 per share," the minister said.
http://timesofindia.indiatimes.com/business/india-business/RBI-has-no-data-of-Wal-Marts-Rs-455-crore-in-Bharti-unit/articleshow/16274704.cms
