In my last article, Read: Flipkart being investigated for FDI Violation I covered the way Flipkart could be flouting the FDI norms. This piece of information would be helpful in the wake of Foreign Direct Investment policy in organised retail sector that has been inconsistent as far as online retail is concerned.
FDI Policy in favour of E-tailers
The current FDI Policy, allows e-commerce companies to exploit the loopholes by setting up two closely related companies. This allows them to use foreign funds meant for B2B companies for B2C operations.
For instance, Company A and Company B are launched simultaneously with different set of founders, who are not directly coupled. Foreign investors buy equity stake in Company A, which owns the technology, brand and intellectual property of Company B. Thus, foreign investors are able to invest in Company B through Company A.
“Such loopholes need to be closed so that foreign funds allowed in B2B (where 100% FDI is allowed) are not diverted to the B2C operations (where FDI is not permitted).
The Reserve Bank of India has informed that matters related to Bharti Wal-Mart/Cedar Support Services Ltd and M/s Flipkart Online Services Pvt. Ltd, respectively, have been referred to the Directorate of Enforcement for further investigation,” the government said in a statement.
This Cedar investment is now the focus of an investigation by India’s 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.
History of Cedar Investments
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.
There is 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 Wal-Mart 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 Ltd, which in turn owned a subsidiary called Bharti Retail Ltd which operated supermarkets and hypermarkets.
On 12.12.12 the Banking regulator – Reserve Bank of India, clarified its stand stating that, the form FC-GPR filed for issuance of the Compulsorily Convertible Debentures (CCD) has not been taken on record by the RBI to ensure that the CCD are FDI compliant instruments and for the purpose certain information has been called for from the company.
Department of Industrial Policy & Promotion (DIPP) clarified that there was no time frame set for Enforcement Directorate (ED) probe on Walmart investment in cedar support services.