Wal-Mart Stores prepared its entry into Indias supermarket sector in 2010 with a $100-million 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 Indias Registrar of Companies.
The Cedar investment is now the focus of an investigation by Indias financial crimes watchdog into whether Wal-Mart broke foreign direct investment rules by putting money into a retailer before the government threw open the sector to global players. Wal-Mart said it was in compliance with Indias FDI guidelines, and had followed all procedures. It said the central government had sought information and clarification, which Wal-Mart has provided.
However, several lawyers said the transaction appeared to violate at least the spirit of Indias long-standing ban on foreign investment in supermarkets, which it only lifted in September 2012. When Wal-Mart made the investment in 2010, it was legal for foreigners to own consultants but not retailers, so the shift in Cedars 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 Wal-Mart. 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 Wal-Mart structured the transaction might make it legal. According to the documents filed with Indias registrar, the investment was in the form of debt that was convertible into equity. That clouds the issue of whether Wal-Mart took a stake in Cedar or provided financing.
Bharti and Wal-Mart both declined to provide additional details on how the transaction was structured.
Senior government officials said that the Reserve Bank of India (RBI) had asked the Enforcement Directorate, which investigates financial crimes, to look into whether Wal-Mart violated the law by investing in a supermarket retailer before foreign investment rules were relaxed. If Wal-Mart did break the law, it could face a penalty of up to three times its initial $100 million investment, they said.
That would not only be a setback for Wal-Mart, it would also weaken consensus-building efforts by Indias minority government, led by the Congress party. The party is desperate for more support from across the political spectrum after its decision to let