Walmart, the world's largest retailer by sales, is being investigated in India over accusations that it secretly invested in supermarkets, flouting a ban on foreign direct investment in the sector.
The probe comes amid intense scrutiny over Walmart's international operations. In August the retailer was embroiled in money laundering and tax evasion allegations in Mexico and is facing hurdles expanding in other emerging markets such as China and Brazil.
The commerce ministry last week asked the Reserve Bank of India to investigate allegations that the US retailer "clandestinely and illegally invested" $100 million in an Indian chain of convenience stores and hypermarkets, according to documents obtained by the Financial Times.
The Easyday stores are owned by Bharti Enterprises, Walmart's partner, though the US group in effect manages them with some executives seconded to Bharti.
The official probe comes as New Delhi has decided it will allow foreign direct investment in the retail sector, but the allegations could complicate the US group's longstanding plans to expand aggressively in India.
"The government should undo this illegal investment immediately," M.P. Achuthan, a Kerala member of the upper house of parliament for the Communist Party of India, wrote to Manmohan Singh, prime minister, last month. The letter also appealed for the government to "ban Walmart permanently from India".
Walmart on Thursday denied any wrongdoing. "We are in complete compliance with India's FDI [foreign direct investment] laws. All procedures and processes have been duly followed and details filed with relevant Indian government authorities, including the Reserve Bank of India."
Walmart may not be the only foreign retailer facing headaches in India, as critics of liberalization take a closer look at how overseas groups have been operating in India for the past few years.
Tesco has a franchise agreement with Tata group's Star Bazaar hypermarkets, providing IT systems, technical support and management advice to the chain of 14 stores. Tesco also runs a wholesale business in India exclusively for Star Bazaar, providing about 80 percent of the chain's goods.
Indian authorities are investigating whether Walmart directly invested in Bharti's retail operations through a holding company known as Cedar Support Services.
According to Mr. Achuthan and company documents, Cedar owns Bharti Retail and thus the Easyday chain. In his letter to the prime minister, the parliamentarian said Walmart used complex arrangements to invest in retail in contravention of the rules.
Cedar was originally set up in 2007 as Bharti Retail (Holding) Private Ltd, but its name was changed in 2009. Its articles of association were amended to make it a real estate and design consultancy service company, in which foreign direct investment was allowed.
According to the commerce ministry, Walmart Mauritius (4) Holdings invested Rs4.56 billion, then equivalent to about $100m, in compulsorily convertible debentures, which would give Walmart a 49 per cent stake in the company on conversion.
Walmart and Bharti Enterprises have been working together since 2007 to navigate the complex Indian policy environment for retailing. The two companies set up a 50-50 joint venture, Bharti Walmart, for a wholesaling business, an activity in which India has permitted up to 100 per cent foreign ownership since 2006.
The Bharti Walmart joint venture now runs 17 Best Price Modern Wholesale stores, but also provides back-end logistical support and most of the products for the Easyday stores owned by Bharti Retail. Walmart also provides extensive technical and management support for the day-to-day running of the Easyday retail business.
Additional reporting by Victor Mallet in New Delhi and Anjli Raval in New York