PMO orders probe into Wal-Mart investment in Bharti group
A March 2010 investment by Wal-Mart Holdings worth Rs 456 crore in Cedar Support Services Ltd, a company that was originally known as Bharti Retail Holdings, may have been less than legal.
By Siddharth Zarabi
The world's largest retailer Wal-Mart has come under question in India for the nature and manner of its investment in Bharti Retail. After Rajya Sabha member MP Achuthan raised the matter in Parliament during the Monsoon Session and now that Mamata Banerjee has also gone public with a demand that the investment be annulled for allegedly violating Indian norms, the Prime Minister's Office has ordered a probe into the investment.
According to investigations by CNBC-TV18, which first broke the story on 5 September, show that the controversy relates to alterations to the articles of association, the methodology of valuation of the investment and the end-use of funds among others.
Newer facts emerging from a mix of sources allege that a March 2010 investment by Wal-Mart 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 Wal-Mart. 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."
Simply put, the allegation is that Cedar Support Services (earlier Bharti Retail Holdings) was carrying out multi-brand retail business in India through a 100 percent 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 percent FDI in consultancy services and that too under the automatic route. Just four months later, on 29 March 2010, the next step unfolded: Cedar issued nearly 455 million zero percent compulsorily convertible debentures with a face value of Rs 10. These were convertible into nearly 426 million equity shares at a premium of 70 paise per share.
In effect, Wal-Mart Holdings invested Rs 456 crore in a company that was a real estate consultant. Till early last month, the government of India told Parliament that the Reserve Bank of India does not have any record of FDI in Cedar. Specific questions as to whether Bharti or Wal-Mart has at any point ever informed the RBI about this were not answered by the two companies.
So what did Cedar do with these funds -- roughly US$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 percent FDI in multi-brand retail only this September.
Specific questions as to whether Bharti or Wal-Mart has at any point ever informed the RBI about this were not answered by the two companies. Incidentally, Wal-Mart will own 49 percent in Cedar upon conversion of the debentures. The original conversion date was September 2011, which was then extended to September 2012. With over a fortnight having passed from the end of the extended tenure, it is not known if the option has been exercised.
There are other curious aspects that emerge from the joint venture agreement executed between Wal-Mart, 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 25 March 2010 have Bharti Retail as a party?
The allegation is that the Articles of Association of Cedar show that Wal-Mart has the right to sell the debentures or Cedar shares to Bharti Shareholders based on a valuation that is 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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