E-commerce, cash-and-carry chains to be hit by new norms

Indian e-commerce companies and cash-and-carry

or wholesale chains such as Bharti Walmart may have to restructure their operations after the industry department issued a new definition of “group companies”. If a company is able to exercise direct or indirect voting right of at least 26 percent or appoint at least half the board in another company or other companies, then the companies are group companies, says the new definition.

This elaboration from the ministry would appear to be in response to a clarification sought by Bharti Walmart. Bharti Enterprises and Wal-Mart Stores set up a 50:50 joint venture in 2007 engaged in wholesale cash-and-carry trade. In April 2010, at a time when foreign direct investment in retail stores wasn’t yet allowed, the government placed a limit of 25 percent on sales of cash-and-carry companies to retail stores that were part of the same group. Bharti Walmart had sought a clarification on the definition of group companies and was in favour of doing away with such restrictions, especially with the government allowing a maximum of 51 percent foreign investment in retail stores in September 2012.

The latest circular from the ministry may mean that Bharti Enterprises will have to reduce its stake in Bharti Walmart to below 26 percent if it wants to source more than 25 percent of the products for its retail stores, branded Easy Day, from the joint venture. The new definition could also hit several e-commerce companies that have set up back-end companies through which they route foreign investments. These companies, in turn, sell to the front-end companies that sell to customers. India doesn’t allow any foreign investment in e-commerce retailers although it allows up to 100 percent foreign investment in back-end companies.