Reuters: Regulatory News: Red tape, graft mean India not such a super market for Wal-Mart

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Red tape, graft mean India not such a super market for Wal-Mart Jul 7th 2013, 21:00 By Nandita Bose MUMBAI, July 8 | Sun Jul 7, 2013 5:00pm EDT MUMBAI, July 8 (Reuters) - Wal-Mart's India expansion is stalled. When India announced last September that it would allow foreign supermarket chains to take majority ownership of their Indian operations, it marked a victory for Wal-Mart Stores Inc , which had spearheaded efforts to open the market and said its first retail store would open within two years. Now, two sources within the Bentonville, Arkansas-based company's Indian unit say it is unlikely to apply for its first retail store licence before March 2015. The company has said it needs a further 12 to 18 months after winning government approval to open each store, which means its first retail outlet in the country would open in 2016 at the earliest. Meanwhile, Bharti Enterprises, its local partner in an existing wholesale business, is reconsidering its commitment to their joint venture given the heavy investment requirement and distant prospects for returns, four sources with direct knowledge of the matter said. Bharti denied that it is looking to exit the tie-up and said it remains fully committed to the joint venture, and a Wal-Mart spokeswoman declined to comment on what she called speculation. The latest developments stem from an ongoing internal bribery probe relating to its Indian operations, still-evolving rules governing foreign participation in India's retail sector, and national elections due by May 2014 that could result in the controversial retail reform being reversed - and any newly opened supermarkets being shut - the sources said. The delay and faltering partnership mean Wal-Mart may miss out on the "first-mover" advantage in a country considered the last great frontier for global retailers. If Bharti pulled out, Wal-Mart would be forced to find a new partner from a tiny pool of large Indian retailers to meet the requirement that a local firm owns 49 percent of the business. On June 26, Wal-Mart announced that Raj Jain, who led its India push for the past six years, had left the company. The world's biggest retailer named Ramnik Narsey, who recently joined the company after heading the Indian operations of Australia's Woolworths Ltd, as interim India chief, without explaining the change. Jain did not answer repeated calls to his mobile phone and the company declined to make Narsey available for comment. Narsey headed the consumer electronics wholesale business of Woolworths in India for fifteen months, before it was sold to the Tata Group, offering little insight into what his appointment might mean for Wal-Mart's India rollout. "It will take lot more than a management change to fix things," said Devangshu Dutta, who heads Bangalore-based retail consultancy Third Eyesight. "Wal-Mart is being investigated for breaking entry rules, bribery and these are problems that are much larger than any individual or the changes he can quickly bring about," he said. Wal-Mart has said it is in compliance with India's foreign direct investment guidelines. NO APPLICATIONS The U.S. retailer is currently investigating bribery allegations in its Indian operations. With 1.2 billion people and 90 percent of its $500 billion in retail trade done at mom-and-pop shops, India is potentially lucrative for retailers such as Wal-Mart, Carrefour SA and Tesco Plc. But no global supermarket chain has applied to enter because of regulatory uncertainty. Wal-Mart's local joint venture partner Bharti, one of the few large-scale retailers in India, is getting cold feet because of the additional investment required to run retail operations. Bharti, controlled by billionaire Sunil Mittal, wants to consolidate its balance sheet and sharpen its focus on Bharti Airtel Ltd, India's biggest telecoms operator, which has $12 billion in debt, sources said. "The JV is under review. Bharti is taking a closer look at it because it wants to move out," said a senior official at Bharti Wal-Mart Pvt Ltd, declining to be identified. With high costs and narrow margins, most big retailers in India lose money. The Bharti Walmart wholesale joint venture lost 2.77 billion rupees ($48 million) on sales of 18.8 billion rupees in 2011, according to the most recent regulatory filing. "Bharti will continue to look at divestiture," said another source with direct knowledge of the matter. "The plan is to make it a focused business rather than the hands and legs going in all directions." There is no certainty that Bharti will exit the wholesale joint venture after the review, the sources said. GRAFT CRACKDOWN Wal-Mart's internal crackdown on bribe-paying has also slowed expansion plans in a country where paying bribes is seen as a standard cost of doing business, according to Indian retailers and industry officials. Reuters reported in May that retailers in India often pay so-called "speed money" to smooth the process of obtaining dozens of permits. The U.S. Foreign Corrupt Practices Act forbids American firms from paying bribes. Wal-Mart launched a global review of corruption last year after a New York Times report on bribery at the company's Mexico operations. Its lawyers flagged India among the countries with the highest corruption risk. In November, Bharti Walmart, the company's India joint venture, suspended employees including the chief financial officer as part of an internal investigation into bribery allegations in India. More than 15 attorneys from U.S law firm Greenberg Traurig are now working with the Indian business to help strengthen compliance, a Wal-Mart spokeswoman said. Wal-Mart, which has run wholesale stores in India since 2009, has not opened a new one since October despite its stated plans to open eight in 2013. It has 20 such stores in India. In response to questions from Reuters, Wal-Mart said its India wholesale store rollout had encountered delays but did not say how many it will open in 2013. "We are in the process of implementing additional controls for our new store permit and licensing program to ensure the process is handled appropriately and in full compliance with all laws and regulations," the Wal-Mart India spokeswoman said. "As we develop and implement enhanced procedures for obtaining licenses, there have been some temporary delays in store openings," she said in an e-mailed statement. At its Rajahmundry wholesale store in the southern state of Andhra Pradesh, Wal-Mart has not sold fresh fruits and vegetables since October as it has been unable to acquire a licence from the state Agricultural Produce Marketing Committee, according to a company source. APMC officials declined comment. In the same state, Wal-Mart's wholesale store in Hyderabad is only open six days a week because it has been unable to secure a 365-day operating licence, the person said. In both cases, according to the company source, the licence has been held up because Wal-Mart won't pay a bribe. "If you do not pay a bribe, who will do your work in this country? Have all the government officials in India become honest overnight? Nothing has changed," the company executive told Reuters, on condition of anonymity. The Andhra Pradesh APMC and municipal officials declined comment. Link this Share this Digg this Email Reprints

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