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Did Walmart flout FDI norms to invest in Bharti Retail in India?


Siddharth Zarabi,CNBC-TV18
Oct 10, 2012 at 02:14pm IST

New Delhi: In the midst of the FDI in retail push, controversy continues to surround Walmart's investments in Bharti Retail. Trinamool Congress chief and West Bengal Chief Minister Mamata Banerjee has demanded that the deal between the two companies be terminated. The world's largest retailer Walmart has come under question in India for the nature and manner of its investment in Bharti retail. Rajya Sabha member and CPI leader MP Achuthan raised the matter in Parliament during the monsoon session and now Mamata Banerjee has also gone public with a demand that the investment be annulled for alleged violation of Indian norms.

New facts emerging from a mix of sources allege that a March 2010 investment by Walmart 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.

Sources have provided CNBC-TV18 with a detailed account of these allegations. Detailed questionnaires were sent to the Bharti group as well as Walmart. 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. December 2009 saw amendments to the articles of Cedar 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.

Just four months later, March 29, 2010, the next step unfolded when Cedar issued 455,800,000 zero per cent compulsorily convertible debentures with a face value of Rs 10. These were convertible into 425,965,859 equity shares at a premium of 70 paise per share. In effect, Walmart Holdings invested Rs 456 crore in a company that was a real estate consultant.

Till early September, the government of India told Parliament that the Reserve Bank of India does not have any record of FDI in Cedar. So the question is what did Cedar do with these funds - roughly $ 100 million. 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 Walmart has at any point ever informed the RBI about this were not answered by the two companies. Incidentally, Walmart 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.

There are other curious aspects that emerge from the joint venture agreement executed between Walmart, Cedar and Bharti Retail (the Cedar subsidiary that operates multi-brand retail stores under the Easy Day brand name). Given that Cedar was a consultant in the services space, questions are being asked as to why did this agreement of March 25, 2010, have Bharti Retail as a party.

The allegation is that the Articles of Association of Cedar show that Walmart 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.

So 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.

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