Govt to apply for trade policy to define ‘group company’

The government has decided to apply the foreign

trade policy’s definition of ‘Group company’ for sourcing norms in the retail sector that prevent foreign cash-and-carry firms from selling more than a fourth of their goods to affiliated entities. The foreign trade policy defines a ‘group company’ as an entity that directly or indirectly can exercise 26 percent or more of voting rights in the other enterprise or appoint more than 50 percent of board members.

The Department of Industrial Policy & Promotion (DIPP), which frames the foreign direct investment policy, had in 2010 introduced a regulation restricting cash-and-carry companies from selling more than 25 percent goods to ‘group companies’. The stipulation was brought in to preclude indirect entry of foreigners in multi-brand retail, although earlier this year the sector was opened to FDI up to 51 percent.

DIPP, however, did not say in the policy what a ‘group company’ meant for this purpose, leading to ambiguity as the definition varies under different laws. Differences between the finance and commerce ministries over which definition should be adopted for the FDI policy didn’t help matters either, said a government official.

While DIPP wanted a liberal definition covering only wholly owned subsidiaries, the finance ministry favoured a more stringent one given by RBI that included affiliate entities with more than 20 percent interest as ‘group companies’. The government has in the past examined if Bharti Wal-Mart and Bharti Retail were ‘group companies’, but could not decide in the absence of a clear definition.