Walmart gets ED clean chit after split with Bharti
If the Central Bureau of Investigation naming KM Birla, chairman of the R1.9 lakh crore AV Birla Group, in an FIR on illegal coal mines last week wasn’t bad enough, in quintessential Keystone Cops style, the Enforcement Directorate has given US retailer Walmart’s $100 million investment into a Bharti Retail holding company a clean chit after Walmart has formally split with Bharti. While some in Walmart and Bharti may say this is an important moral victory, and it may have some bearing on Walmart’s Foreign Corrupt Practices Act (FCPA) case in the US, the move symbolises just how legitimate business interests are being treated in a country ostensibly hungry for investment.
Briefly, the case revolves around Walmart investing $100 million in a company called Cedar Support Services, a wholly-owned subsidiary of Bharti Enterprises—Cedar, in turn, is the 100% owner of Bharti Retail, the company that runs the Easyday chain of stores. Under the agreement between Bharti and Walmart, this $100 million worth of compulsory convertible debentures was to be converted into 49% equity after a three-year lock-in, by September 30, 2013, though the company had sought a one-year extension. So, according to the complaint made and that the Enforcement Directorate was examining, this was a violation of the law since, at the time the agreement was made, India did not allow FDI in multi-brand retail—but, by virtue of this agreement, Walmart was directly investing into Bharti’s multi-brand retail venture.
While the law now allows 51% FDI in multi-brand retail, the reason why the probe should never have taken place was that the investment was always legal under what is called Press Note 2, a guideline issued for FDI way back in 2008. Till then, Indian authorities used to work on the concept of beneficial ownership. Foreign firm A investing 74% in Indian firm B which, in turn, has invested 74% in Indian firm C means that foreign firm A has a 54.76% beneficial interest in Indian firm C. Since there was considerable confusion and dispute over this, Press Note 2 said that if there was a joint venture in which the foreign partner held up to 49% equity, the joint venture firm was an Indian one. When that JV, in turn, invests in a downstream unit, that investment will be considered to be an Indian investment for purposes of the law. You could argue that this gave foreign firms a backdoor way to hike their investments in Indian firms to almost any limit—using suitable investment structures—while technically being within the ambit of the law, but if this is what the law allowed, then it is perfectly legal to invest in this manner. To get back to Walmart, even if its investment in Cedar was to be converted into a 49% equity share, Cedar would remain an Indian firm. And so, any investment that Cedar made, in Bharti Retail for instance, was by law Indian investment. Perhaps a cell in the government needs to look at such cases of frivolous harassment, to be able to alert whichever authorities who can bring quick closure to the case.