Setback in store for Cash & Carry firms

Key government departments have come to a consensus on the definition of a "group company" in the context of foreign direct investment (FDI) in the wholesale cash & carry trade. Under current policy, while 100 per cent FDI is permitted in wholesale trade, a cash & carry entity can sell only up to 25 per cent of its turnover to group companies.

Wholesale companies have sought a clarification on what constitutes a group company and are lobbying for this restriction to be lifted.

The department of economic affairs (DEA) and the ministry of legal affairs have endorsed a definition of group company as a subsidiary or associate in which the parent company has significant influence.

Significant influence has been defined as having a shareholding of, or voting rights over 20 per cent of the paid-up equity capital.

The definition is based on that of the Accounting Standards as well as of Reserve Bank of India in its group-wise monitoring of the prudential norms of financial institutions.

The consensus was hammered out at a meeting held a few weeks ago under the aegis of the ministry of finance.

The department of industrial policy and promotion (DIPP) had also suggested an alternative, based on Foreign Trade Policy and the Competition Act, 2002, where a group company is defined as one in which the parent company has control of, or voting rights over 26 per cent of the paid-equity capital.

The meeting, which was attended by representatives from DEA, DIPP, department of legal affairs and ministry of corporate affairs, has forwarded its decision, and asked DIPP to take a final view and come out with the necessary clarification.

The definition of group company could prove key to future operations of wholesale firms.

Analysts say companies like Bharti Walmart, the Tata-Tesco tie-up and possible venture between Carrefour and Future group hope to sell a significant portion from their wholesale outfits to the front-end retail stores of Indian partners.

For instance, Bharti Enterprises controls 100 per cent in Bharti Retail. Bharti Enterprises also has a joint venture with Walmart in which each have a 50 per cent stake.

Under the proposed new definition, Bharti Retail and Bharti Walmart are clearly group companies of Bharti Enterprises. Therefore, the wholesale venture would be able to sell only 25 per cent of its turnover to Bharti Retail, the front-end retail chain.

The 25 per cent restriction was imposed by the government to ensure that foreign retailers do not find a back-door entry into multi-brand retailing, where FDI is still banned.

The government is expected to take a call soon on whether to allow foreign direct investment in multi-brand retail.

A committee constituted under the ministry of consumer affairs, which is looking into the issue, is expected to submit its report in a couple of weeks.