Government defines ‘group company’ to remove FDI ambiguities

NEW DELHI: The government on Monday issued guidelines defining clearly the concept of ‘group company’ in the foreign direct investment (FDI) policy, which is expected to address concerns over backdoor entry of foreign retailers into India through the wholesale route. The foreign direct investment policy allows 100% FDI in cash & carry wholesale trade but puts a limit on sale by such a foreign investment funded venture to its ‘group company’. The policy, however, did not define group company.

“Group company means when two or more enterprises, which directly or indirectly are in a position to either exercise 26% or more voting rights in the other enterprise or appoint more than 50% of members of board of directors in other enterprise,” the department of industrial policy and promotion (DIPP) said in a press note issued on Monday. Experts welcomed the new definition, which is in line with the one in the foreign trade policy, but were not sure how it would impact world’s biggest retailer Walmart that has a wholesale cash&carry venture in India with the Bharti group, Bharti-Walmart.

Walmart owned slightly more than 50% stake in Bharti-Walmart, which has about 20 cash & carry stores in India. Majority of Bharti-Walmart sales are to Bharti Retail, a Bharti Group company that runs around 200 retail stores under the Easy Day brand. According to the rules, a FDI wholesale venture cannot have more than 25% of its sales to a group company. There were charges that Bharti-Walmart’s sale to Bharti Retail breached this group sale rule. If Bharti Walmart and Bharti Retail are considered group company, according to the new definition, then the two companies will have to reduce the volume of goods sold by one to another. FDI in multi-brand retail was banned till September last year when government allowed 51% foreign stakes.

The clarity in rules will allow for better assessment of the Bharti-Walmart’s relationship with Bharti Retail, but experts ET spoke to declined to comment on the issue. Bharti Group spokesperson also declined to comment .

“Now there is at least certainty where anyone can take a position depending on the given definition, but it does not make things easier for foreign investors,” said Akash Gupt, executive director, Pricewaterhouse Coopers.

HIMACHAL ALLOWS MULTI-BRAND RETAIL

The DIPP in a separate press note issued a new list of states that have agreed to allow FDI funded multi-brand retail. Himachal Pradesh is new entry in the list, taking the total number of such states and Union Territories to 11 from ten earlier. The addition has become possible after Congress came to power in the state recently. The BJP had opposed FDI in multi-brand retail. There are concerns that the policy could be reversed if a party opposed to opening of the sector came to power after the general elections next year. “The concerns of the foreign retailers remain. Opposition party coming to power after 5 years could also lead to reversal of policy. Government needs to clarify it all in one go”, said retail expert Arvind Singhal, managing director, Technopak Advisors.