COMMENTARY

Vaulting over Indias Retail

FDI Policy Wall
K S Chalapati Rao, Biswajit Dhar

Multi-brand retail was opened

to foreign participation in
September 2012, but even
earlier some Indian and foreign
companies had used a maze of
relationships between themselves
and their subsidiaries to bypass
the restrictions. An analysis of the
Bharti-Walmart venture.

lot has been said over the past

few years both in favour of and
against allowing foreign direct
investment (FDI) in Indias multi-brand
retail trade (MBRT). Not much is, however,
known about the operations of foreign
companies which have been permitted
to trade in this sector. While prohibiting
FDI in MBRT, India allowed 100% FDI participation in wholesale cash and carry
business initially in 1997 under the approval route and subsequently in 2006
under the automatic route. Up to 51% FDI
was allowed in single-brand retail trade
(SBRT) in February 2006. In November
2011, the government made the first major move by announcing 51% FDI in
MBRT and subsequently relaxed the limit
to 100% in SBRT (January 2012).
The implementation in respect of
MBRT was, however, put on hold due to
severe opposition. Instead of waiting to
build a consensus, which the government stated as the reason for keeping
its November 2011 decision in abeyance,
in mid-September 2012 the government
hurriedly announced its policy to open
up MBRT along with civil aviation and
power exchanges to greater FDI. It also
simultaneously increased the limits for
FDI in the broadcasting sector and relaxed
the norms in SBRT.
FDI through the Backdoor

The views expressed here are personal and do

not necessarily reflect the official policy or
position of the institutes with which the
authors are associated.
K S Chalapati Rao (rao@isid.org.in) is with the
Institute for Studies in Industrial Development,
New Delhi and Biswajit Dhar (biswajit@ris.org.
in) is with the Research and Information
System for Developing Countries, New Delhi.

10

Though the government has formally

opened up MBRT only in September 2012,
for sometime, however, there have been
complaints that foreign companies which
were allowed in cash and carry wholesale
trade were catering to the retail segment
through the backdoor.1 A writ petition in
the Delhi High Court, which followed
these accusations, brought Walmart to
the centre stage. While replying to a
question in the Rajya Sabha, regarding
the violation of multi-brand trade norms
november 17, 2012

by Bharti-Walmart, the government did

not go beyond admitting the existence of
a writ petition in the Delhi High Court
and simply stated that the matter was
subjudice.2 Interestingly, the petition
first came up for hearing on 22 August
20123 and the first announcement regarding the new FDI policy was made on
14 September 2012. The relevant notification came on 20 September, just six
days before the third hearing. On 26
September the bench noted that the
counsel for the petitioner seeks time to
withdraw the writ petition in view of
the subsequent developments after the
government had informed the bench
that the petition lost its relevance in the
changed circumstances. Thus, irrespective
of whether the timing of the policy had
anything to do with the petition or not,
the fact remains that the petition was
withdrawn following the change in policy.
The issue, however, continues to haunt
the government as the complaint by a
Member of Parliament to the Prime Ministers Office is reported to be under active consideration of the Department of
Industrial Policy and Promotion, Ministry
of Corporate Affairs and the Reserve
Bank of India (RBI). The allegation is that
along with the Bharti group, Walmart
had invested in Cedar Support Services,
which in turn has invested in its whollyowned subsidiary Bharti Retail Ltd (BRL).
Since BRL is in retail trade, Walmarts
investment in Cedar amounts to FDI in
retail trade which was prohibited under
the extant policy. Irrespective of how
the authorities finally treat the matter, it
provides an important case study of how
corporate provisions can be used to ones
advantage while seemingly conforming
to the law and hence could have much
wider implications.
While under Indias cash and carry
wholesale trade FDI policy Walmart could
have started as a wholly foreign-owned
venture like Metro and Carrefour, or used
the franchise route adopted by Tesco, it
preferred to follow the joint venture route
and enlisted the support of the Bharti
group. Walmart formed a joint venture
(JV), Bharti Walmart (BWM), with the
Bharti group in 2007. The relationship
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was not, however, limited to this JV as it

involved Bharti Retail Holdings and its
subsidiary Bharti Retail. Bharti Retail
Holdings, subsequently rechristened as
Cedar Support Services (Cedar), is at the
centre of the controversy. The relationships between the main actors in the
story as pieced together from different
company records are represented in
Figure 1. 4
While BWM is into wholesale cash and
carry business, BRL, the wholly-owned
subsidiary of Cedar, is in retail operations.
The crucial question, therefore, is the
nature of relationship of Cedar and BRL
with Walmart. It can be seen from
Figure 1, that it is not a mere trading relationship. As has been widely reported,
Cedar issued interest-free compulsorily
convertible debentures (CCDs) in March
2010 against the Rs 455.80 crore it received
from Walmart group. The CCDs were to
be converted into equity shares within
18 months, i e, by September 2011. The
date of conversion was however extended first by 12 months, i e, till September
2012 and on 20 September 2012 by another 12 months. There are enough indications which suggest that Cedar operated as a JV of Bharti and Walmart in
spite of it being wholly owned by the
Bharti entities in terms of the subscribed
equity capital. Indeed, on 25 March 2010
Cedar itself referred to a joint venture
agreement following which Cedars
Articles of Association (AoA) were amended. A few relevant provisions of the AoA
of Cedar are:
Article 5: On the effective date, the company
has issued and allotted to Walmart shareholders 455,800,000 () compulsorily
convertible debentures on an As if Converted
Basis (having such meaning as may be
agreed between the shareholders) which
upon conversion into Equity Shares will entitle Walmart Shareholders to 49% of the
issued and subscribed share capital of the
Company (emphasis added).

This Article further specifies that upon

conversion of the CCDs, the shareholding
of the company shall be: Bharti shareholders: 51% and Walmart shareholders: 49%. It needs to be underlined here
that the conversion involves a small premium in the absence of which the shares
would be 49.31% and 50.69% respectively, in which case Cedar would
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november 17, 2012

Thus there are two

ways in which BRL is tied
Bharti
Walmart
up with Walmart. First,
group
group
(49%*)
directly through supply of
CCDs
products and a franchise
50+%
100% (51%*)
agreement. For instance,
BRL reported purchase of
49+
Cedar Support
Bharti-Walmart
%
Rs 1,067.47 crore worth
Services
Best Price
cash & carry
of traded goods during
100%
2011. As a part of the
Bharti Retail
Sales
related party transacEasyday
Loans
Retail
tions it reported purAn Indian
chase of goods worth
subsidiary
Franchise agreement/
technical support
Rs 1,095.55 crore (includ*: These will be the respective shares of Bharti and Walmart after conversion of
ing taxes) from BWM. For
CCDs at a small premium.
2010 the corresponding
become a majority owned entity of the figures were: Rs 513.04 crore and
Walmart group.
Rs 526.34 crore. The company reported a
total income of Rs 1,021 crore and Rs 470
Article 8.8: The Walmart Shareholders
crore for 2011 and 2010, respectively. It is
shall not be concerned or obliged to enquire
whether the Debentures have been issued in
thus apparent that practically the entire
contravention of any provision of the Artiincome of BRL comes out of the items it
cles or such other document...
purchases from BWM. Interestingly, BRL
Article 13.9 (a): If the Walmart Shareholders
incurred an expenditure of Rs 1.28 crore
are permitted to acquire and hold up to fifty
per cent plus one hundred (50%+100) of
and Rs 0.57 crore in 2011 and 2010 rethe Company Securities on a fully diluted
spectively on behalf of BWM. By its own
basis, the Walmart Shareholders shall have
declaration, Walmart acts as BRLs franthe right, at their option, to subscribe or acchisor and technology provider.5
quire from the Bharti Shareholders, in whole
The second type of association is
or in part, up to such number of Company
Securities that would, in aggregate with the
through the joint venture agreement reCompany Securities already owned by them,
ferred to above. It is likely that Walmarts
amount to fifty per cent plus one hundred
share in Cedars equity was pegged at
(50%+100) of the Company Securities.
49% (post-conversion) in order to retain
Article 16 (c): As long as Bharti Shareholders
have the right to appoint majority of the DiCedars Indian character to take advanrectors to the Board, one such Bharti nomitage of the official criteria for calculating
nee shall be a person who does not have or
indirect FDI.6 Further, Bhartis majority on
in the past have had any material personal,
the board, which is necessary to retain its
business, financial, commercial, fiduciary or
other relationship with the Bharti Related
Indian character, was neutralised through
Entities or their Affiliates.
specifying that one of the nominees of
Article 16 (h): One of the Directors nomiBharti should mandatorily be unaffiliated
nated by the Bharti Shareholders shall serve
to the group. Cedar, besides being the
as chairman of the Board (Chairman).
The Chairman, solely in his or her capacity
parent company of BRL, extended longas Chairman, shall not have a casting or tieterm loans to BRL. At the end of 2011 BRL
breaking vote at any general meeting or at
has equity capital (including share appliany meeting of the Board.
cation money) worth Rs 532.81 crore and
Article 13.11: Unless otherwise agreed in writing
by the Shareholders, Bharti Retail will remain
Rs 349 crore of long-term loans from
a wholly owned subsidiary of the Company.
Cedar. Considering the fact that the total
Further, Walmart Stores Inc, in its funds of Cedar at the end of 2011 were
Rs 901.25 crore (Rs 443.35 crore equity
annual report for 2010 stated:
from the Bharti group and Rs 457.90
the joint venture (Bharti Walmart Private
crore of loans (essentially the CCDs subLimited) supplies merchandise to Bharti Retail,
an affiliate of Bharti enterprises that is develscribed by Walmart)), it is obvious that
oping a chain of retail stores in India. Bharti
Cedars investments in and loans to BRL
Retail has entered into a franchise agreement
would not have been possible without
with an Indian subsidiary of Walmart under
deploying the funds raised through the
which such subsidiary provides technical supCCDs. The RBIs Master Circulars on
port to Bharti Retails retail business (p 44).
Figure 1: Bharti-Walmart Ventures

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COMMENTARY

Foreign Investment clearly treat convertible debentures as a form of FDI. Foreign

Exchange Management Act (FEMA)
guidelines specify that the RBI has to be
informed within 30 days from the date of
receipt of the amount of consideration. It,
therefore, needs to be seen under what
exceptional provisions Cedar did not report the issue of CCDs to Walmart.
Prior to issuing CCDs to Walmart, the
memorandum of association of Cedar
was amended in December 2009. The
new clauses, besides providing for the
companys entry into facilities management and real estate consultancy and
advisory services, enable it:
To promote, manage, create, run and invest
in companies, which are into any business
either on its own or by entering into agreements, contracts, partnerships, alliance or
any other arrangement.

That such carte blanche provisions

make the object clauses superfluous is
only a small issue. The fact is that coupled
with the criteria for calculating indirect
FDI, it gives scope for FDI to engage in
practically anything and in any manner
making a mockery of official policy.7
Questions about FDI
The way FDI in retail trade has been approached raises many questions not
merely the ones relating to circumvention
of the extant laws. For instance, over the
years, the objectives in attracting FDI
have become increasingly blurred. One
of the expectations from FDI in MBRT
was that it will create the much-needed
infrastructure. On the other hand, meeting the current account gap is another
important expectation from FDI. But
there is hardly any systematic study to
examine whether this expectation is
being met and to what extent FDI itself is
contributing to the widening of the gap.
Looking solely at BWM, it is evident that
within four years of its formation, the
inflow of Rs 100 crore in the form of equity
participation by Walmart has been more
than balanced by outflows on account of
a variety of transactions, activities and
imports. Against the total equity capital
of Rs 200 crore, BWM depended upon as
much as Rs 1,100 crore loans from banks.
Similarly, Carrefours imports amounted
to Rs 180 crore in 2011 alone, whereas the
12

capital inflow on its account, including

premium, was Rs 230 crore. The directors
categorically stated in the annual report
that the company was concentrating on
the domestic marketsdoes not have
any specific export initiatives...
Examination of the accounts of a
number of other FDI trading companies
including those engaged in SBRT brings
out similar disturbing facts. There are
many ways in which outflows take place
even before the companies start making
profits. In some cases outflows bear no
relationship with the initial investments.
Some others use local financial resources
extensively. In fact, it is a puzzle as to
how some such companies continue to
incur huge losses but yet remain in business! If FDI companies operations result
in a huge foreign exchange drain, instead of generating surpluses, a strategy
based on inviting FDI to meet the current
account gap would obviously fail.
The next $100 million question (which
incidentally is the amount involved in
Cedars CCDs) is how restrictive are the
entry conditions and how far they would
be met in letter and spirit of the policy and
how sincere the authorities would be in
monitoring their compliance. Moreover,
there is no guarantee that in five years,
the time limit set for meeting the entry
conditions, the restrictions on the extent
of FDI participation and the severity of the
conditions would be relaxed or even done
away with. Once the initial opposition had
been steamrolled, it would be easy to relax
or even remove the entry conditions.
Then there is the question of placing
limits on FDI. If the government sees
strong reasons for involving FDI, strong
enough to even annoy its political allies,
in Indias retail trade, why limit the
participation to 51% especially in the wake
of the criteria for indirect FDI being prone
to misuse? With the type of subordinate
roles which the domestic businessmen are
prepared to play, would it really matter
whether the limit is pegged at 51% or 74%
or even 100%? Why give foreign trading
companies access to domestic capital
through the Indian partner, Indian financial institutions and Indian public especially as it diminishes the effectiveness
of the condition that 50% of the FDI has
to be invested in back-end infrastructure?8
november 17, 2012

Theoretically, such companies can offer

49% to the public instead of involving
any local partner. Why is FDI in SBRT
subjected to local sourcing requirements
only when the foreign share exceeds
51%? Would purchases from an FDI
company with less than $1 million
investment in plant and machinery and
which merely assembles/processes imported materials qualify for meeting the
local procurement requirement? One
can raise many such questions. Is it not
time to pause and take a relook at Indias
policy towards FDI in general and trading
in particular?
Notes
1 See Departmentally Related Parliamentary
Standing Committee on Commerce, Foreign
and Domestic Investment in Retail Sector,
June 2009. The strategy of Bharti and Walmart
was commented upon even earlier. For instance,
the New York Times had said: But Walmart has
seized upon two loopholes: Foreign retailers
can operate through franchisees and invest their
own capital in wholesale shops, as the German
retailer Metro has done. Mr Mittal said that the
US retailer would open franchise stores owned
by Bharti while investing its own money in
wholesale outlets. Walmart, with backing from
Washington, has lobbied aggressively to pry
open a market where just 3% of consumers shop
in large-format, Western-style stores. (Last accessed on 19 October 2012 at http://www.nytimes.com/2006/11/27/business/worldbusiness/
27cnd-walmart.html?_r=1& pagewanted=print)
2 Rajya Sabha Unstarred Question No 1097 answered on 22 August 2012. It is also relevant to
note that there is very little monitoring of the
investments once they flow in. For instance, in
response to Rajya Sabha Unstarred Question
No 1557 answered on 28 March 2012, it was
stated that, City-wise data, with regard to the
number of branches set up/proposed to be set
up by such multinational companies, is not centrally maintained.
Similarly, in reply to Lok Sabha Unstarred
Question No 4083 answered on 30 April 2012,
the Union Minister for Commerce & Industry
stated, FDI in this activity (Wholesale Trading)
does not require Government approval, information regarding proposed investment by such
companies is not available. Details with regard
to areas of investment, by entities in the Wholesale Cash & Carry Sector, in infrastructure,
warehouses and cold storage sectors, are not

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COMMENTARY
centrally maintained by the Department of
Industrial Policy and Promotion.
One would have expected policymakers to
have a good idea of the ground reality before
further relaxing the policy and fixing an arbitrary minimum invest limit of $ 100 mn.
3 http://delhihighcourt.nic.in/dhc_case_status_
oj_list.asp?pno=622690
4 The documents are essentially the ones filed
with the Ministry of Corporate Affairs and have
been accessed by paying the requisite fee.
5 Incidentally, the company reported payment of
royalty and management fees of Rs 9.95 crore and
Rs 1.51 crore for 2011 and 2010, respectively. The
corresponding payments for business support

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november 17, 2012

services were: Rs 46.62 crore and Rs 46.96 crore.

Only a part of these payments could be traced
to Bharti entities in the form of related party
transactions. Were the remaining amounts paid
to the unnamed Walmarts Indian subsidiary?
6 The present position is that foreign investment
through companies which are majority owned
and controlled by resident Indian citizens would
not be treated as indirect foreign investment.
Ownership is seen in terms of more than 50%
of the capital and control is defined in terms of
the power to appoint majority of the directors.
7 Incidentally, Bharti also helped Axa to conform
to the 26% FDI limit in the insurance sector in
spite of the latter investing much larger amounts.

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Going by one of the articles of the companies

involved in the scheme, it is likely that a hike in
FDI limit to 49% will not bring in additional
FDI and will only help in restructuring of the
existing investments.
8 The articles of association of Cedar do indicate
the possibility of Cedar going for a share sale to
the public. This is logical because the Bharti
group might not be willing to match Walmarts
future investments. The sale of shares would
also suit the Bharti group as it can sell a part of
its shareholding at a premium. In that case,
fresh FDI inflow is quite unlikely and the mandated investment in backend infrastructure
would be no more than Rs 250 crore!

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