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India Opens Inquiry Into Wal-Mart India Puts Wal-Mart Deal With Retailer Under Scrutiny
(about 4 hours later)
MUMBAI — Indian regulators are investigating allegations that Wal-Mart Stores violated rules restricting foreign investment in the country’s fast-growing retailing industry. MUMBAI — Indian regulators have begun an informal inquiry into allegations that Wal-Mart Stores violated rules restricting foreign investment in the country’s fast-growing retailing industry.
The regulators are looking into a nearly $100 million investment Wal-Mart Stores made in an Indian company, Bharti Retail, which operates more than 200 supermarkets across India, at a time when India restricted investments in the retailing industry. The investment was made in the form of debentures that could be converted into equity. The regulators are investigating an investment of nearly $100 million by Wal-Mart in an Indian company, Bharti Retail, which operates more than 200 supermarkets across India, at a time when India restricted foreign investments in retailing. The investment took the form of debt securities that paid no interest to Wal-Mart but could be converted into a 49 percent ownership stake in Bharti.
India had long prohibited foreign equity investments in retailing chains that sell more than one brand of products, known here as multibrand retail, but it recently changed those rules to allow foreign companies to own up to 51 percent of such stores. That policy change has faced stiff resistance from opposition political parties and even allies of the governing coalition. India had long prohibited foreign equity investments in retail chains that sell more than one brand of products, known here as multibrand retail. It recently changed those rules to allow foreign companies to own up to 51 percent of such stores, but that change has faced stiff resistance from opposition political parties and even allies of the governing coalition.
Wal-Mart, which is in the midst of an investigation involving bribery allegations at its Mexican subsidiary, has long wanted to expand into India, where small, family owned stores dominate a retail sales market worth about $500 billion. The company has a 50-50 joint venture with Bharti that operates 17 wholesale stores selling to other businesses, and it also provides logistics and management services to Bharti’s Easyday retail stores. Wal-Mart has long wanted to expand into India, where small, family-owned stores dominate a retail sales market worth about $500 billion annually. The company has a 50-50 venture with Bharti that operates 17 wholesale stores, and it provides logistics and management services to Bharti’s Easyday retail stores.
The investigation into Wal-Mart’s relationship with Bharti was prompted by a letter last month to the prime minister of India, Manmohan Singh, from a lawmaker representing the Communist Party of India (Marxist), which opposes foreign investment in retailing and many other industries. The investigation into Wal-Mart’s relationship with Bharti was prompted by a letter last month to Prime Minister Manmohan Singh from a lawmaker representing the Communist Party of India (Marxist), which opposes foreign investment in retailing and many other sectors.
Both Wal-Mart and Bharti issued statements denying that they had violated Indian rules or laws. Wal-Mart and Bharti issued statements denying that they had violated Indian rules or laws.
“We are in complete compliance with India’s F.D.I. laws,” the Indian unit of Wal-Mart said, referring to foreign direct investment. “All procedures and processes have been duly followed and details filed with relevant Indian government authorities including the Reserve Bank of India.” “We are in complete compliance with India’s F.D.I. laws,” the Indian unit of Wal-Mart said, referring to foreign direct investment. “All procedures and processes have been duly followed and details filed with relevant Indian government authorities including the Reserve Bank of India,” the central bank.
An Indian government official, who asked not to be identified because the government had not authorized anyone to speak to the media, said Mr. Singh’s office had forwarded the letter to the Ministry of Commerce, which then sent it to the central bank, which oversees foreign transactions involving Indian companies. The official said the investigation was not a formal inquiry. An Indian official, who spoke on the condition of anonymity citing government policy, said Mr. Singh’s office had forwarded the letter to the Ministry of Commerce, which sent it to the central bank, which oversees foreign transactions involving Indian companies, to obtain more information. The official said the investigation was not yet a formal inquiry.
Officials want to determine if the loan from Wal-Mart to Bharti was designed to skirt the letter or the spirit of the foreign investment rules. The companies’ opponents are expected to argue that it violated the spirit of the rules because the debt could be converted into equity if policy makers relaxed the restrictions on foreigners, which they did last month. Wal-Mart’s actions in overseas markets have come under scrutiny in the United States, where officials are investigating allegations of bribery at its Mexican subsidiary.
“The tragedy is we are not monitoring the end use of F.D.I. in India,” said M.P. Achuthan, the lawmaker who wrote to the prime minister. “The government has to ensure that they monitor the F.D.I. coming to India is used” in industries where it is allowed. Officials want to determine if the loan from Wal-Mart to Bharti was intended to skirt the letter or the spirit of the foreign investment rules. Wal-Mart lent 4.56 billion rupees ($101 million at the time) to Cedar Support Services, the parent company of Bharti Retail, on March 29, 2010.
Bharti is an business conglomerate that also controls Airtel, the largest cellphone company in India. In recent years it has expanded aggressively into retailing with the help of Wal-Mart, which supplies its stores with produce and other goods as well as offering training and management support. According to Cedar Support’s latest annual report, the debentures would automatically convert into a 49 percent equity stake 30 months after they were issued. It is unclear if that conversion took place last month when the 30 months elapsed or if the companies extended that deadline.
The partners are expected to announce a venture soon to take advantage of the recent change in the foreign investment rules. In an interview last month, the head of Wal-Mart’s Indian operation, Raj Jain, said the company would complete its plans in the next 45 days and could open its first stores in about 18 months. The companies’ opponents are expected to argue that the terms of the debentures violated the spirit, if not the letter, of the rules because the debt was to be automatically converted into equity. Critics say the plan was a clever legal maneuver to allow Wal-Mart to quickly enter the Indian market when policy makers relaxed the restrictions on foreigners, which happened last month.
India has been seen as one of the last large untapped markets in the world for the global retailing chains. Ikea, the Swedish furniture retailer, is expected to open stores in India soon and Starbucks, the coffee store chain, will open its first outlet in central Mumbai on Friday. “The tragedy is we are not monitoring the end use of F.D.I. in India,” said M. P. Achuthan, the lawmaker who wrote to the prime minister. “The government has to ensure that they monitor the F.D.I. coming to India is used” only in industries where it is allowed.
Heather Timmons contributed reporting from New Delhi. Bharti is a conglomerate that also controls Airtel, the largest cellphone company in India. In recent years it has expanded aggressively into retailing with help from Wal-Mart, which supplies its stores with produce and other goods, and offers training and management support.
The partners are expected to announce a venture soon to take advantage of the recent change in the investment rules, which grant each of India’s 29 states the right to keep foreign retailers out of their regions. In a telephone interview last month, the top executive at Wal-Mart’s Indian operation, Raj Jain, said the company would complete its plans in the next 45 days and could open its first stores in 18 months.
India has been seen as one of the last large untapped markets for the global retailing chains. Ikea, the Swedish furniture retailer, is expected to open stores in India soon, and Starbucks will open its first outlet in central Mumbai on Friday.

Heather Timmons contributed reporting from New Delhi.