Customers shop at a Bharti Walmart wholesale store in Zirakpur, in the outskirts of Chandigarh, in Punjab, India, on Friday, September 28, 2012. Photo: Sanjit Das for Bloomberg

Nandita Bose Mumbai

WalMart Stores prepared its entry into India’s supermarket sector in 2010 with a $100 million (R883.7m) 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, 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 Walmart broke foreign direct investment (FDI) rules by putting money into a retailer before the government threw open the sector to global players.

Walmart 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 Walmart had 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 this year.

When Walmart 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 Walmart. “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 Walmart 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 Walmart took a stake in Cedar or provided financing.

Bharti and Walmart both declined to provide additional details on how the transaction was structured.

Senior government officials said that India’s central bank had asked the Enforcement Directorate, which investigates financial crimes, to look into whether Walmart violated the law by investing in a supermarket retailer before foreign investment rules were relaxed.

If Walmart did break the law, it could face a penalty of up to three times its initial $100m investment, they said.

That would not only be a setback for Walmart, 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.

Walmart 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 Walmart and its peers will knock millions of mom-and-pop stores out of business.

Reuters pieced together details of Walmart’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 Walmart 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, which in turn owned a subsidiary called Bharti Retail 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 Walmart 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 Walmart Mauritius Holdings, 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 (R283m) to its retail unit, raising questions over whether Walmart’s money went into the retail business.

MP Achuthan, a communist member of India’s parliament, has accused Walmart of breaking the FDI law and said he wanted the US-based 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.”

Walmart’s Indian partner, Bharti Enterprises, said it had followed the rules but did not address specific questions.

“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 (RBI) and the Enforcement Directorate.

The central bank 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 Walmart and Bharti were being investigated because “Walmart allegedly made the investment and Bharti allegedly received it”.

Separately, Walmart said last month it was looking into bribery allegations in several countries including India, Brazil and China.

The global retailer conducted an earlier probe in Mexico. – Reuters page 8