New Delhi: Indian e-commerce companies and so-called cash-and-carry or wholesale chains such as Bharti Walmart Pvt. Ltd may have to restructure their operations after the industry department on Monday issued a new definition of “group companies”.
If a company is able to exercise direct or indirect voting right of at least 26% or appoint at least half the board in another company or other companies, then the companies are group companies, says the new definition.
The elaboration from the ministry would appear to be in response to a clarification sought by Bharti Walmart. Bharti Enterprises Ltd and Wal-Mart Stores Inc. set up a 50:50 joint venture in 2007 that is engaged in wholesale cash-and-carry trade.
In April 2010, at a time when foreign direct investment in retail stores wasn’t yet allowed, the government placed a limit of 25% on sales of cash-and-carry companies to retail stores that were part of the same group. Bharti Walmart had sought a clarification on the definition of group companies and was in favour of doing away with such restrictions, especially with the government allowing a maximum of 51% foreign investment in retail stores in September 2012.
Monday’s circular from the ministry may mean that Bharti Enterprises will have to reduce its stake in Bharti Walmart to below 26% if it wants to source more than 25% of the products for its retail stores, branded Easy Day, from the joint venture.
A Bharti Walmart spokesperson said in an email: “We are studying the government’s clarification on the definition of group companies issued today.”
The Indian partners will need to dilute their stake in the wholesale entity to less than 26%, said an expert at a law firm with knowledge of how wholesale cash-and-carry joint ventures operate.
“This will imply a lot of restructuring for both existing players in wholesale cash-and-carry that have joint ventures with foreign companies as well as e-commerce companies,” said the person, who spoke on condition of anonymity.
The new definition could also hit several e-commerce companies that have set up back-end companies through which they route foreign investments. These companies, in turn, sell to the front-end companies that sell to customers. India doesn’t allow any foreign investment in e-commece retailers although it allows up to 100% foreign investment in back-end companies.
The move will affect most e-commerce companies, said the representative of an industry body. “Though I have not seen the circular, this could make anybody who does inventory- based retail trade with foreign equity investment seem illegal. Retail e-commerce should not be a collateral damage to any policy meant for the offline retail trade,” said Subho Ray, president of the Internet and Mobile Association of India.
Spokespersons for Flipkart.com and Myntra.com couldn’t immediately be reached for comment.
Monday’s clarification goes against the spirit of the 51% cap on foreign investment in supermarkets (or multi-brand retail), but the government may be playing it safe with many states yet to approve this, said an analyst who asked not to be identified.
Indeed, the definition of group companies is “more stringent than similar definitions under other regulations such as the Competition Act, which keeps the threshold limit at 50% for the definition of group companies”, said Akash Gupt, executive director at PricewaterhouseCoopers.
Bharti is already being investigated by a government arm for violating foreign investment rules by indirectly receiving significant downstream investment in its subsidiary company that runs the Easy Day chain. Although such investments were eventually held to be legal by the government, and the investment made by the retailer is in keeping with the rules allowing foreign direct investment in supermarkets, the company may have jumped the gun in going ahead with the investment before either of the changes was notified.
The industry department announced on Monday that Himachal Pradesh has given its consent for foreign investment in supermarkets. The government has left it to the states to decide whether they want multi-brand retail investment. The Congress won the assembly elections in the state in December last year.
Mihir Dalal in Bangalore contributed to this story.