The Government has formally defined group companies in the Foreign Direct Investment (FDI) policy in a move that will end ambiguity in the implementation of rules that prevent cash-and-carry companies from indirectly engaging in front-end retail through associate firms.
While it remains to be seen how the clarification would affect the business between entities like Bharti Walmart and Bharti Retail, the Government has, on its part, tried to remove grey areas in the policy so that prospective dealings happen strictly according to rules.
As per Press Note 2 of 2013 series issued by the Department of Industrial Policy & Promotion (DIPP) on Monday, group companies are two or more enterprises which directly or indirectly are in a position to exercise 26 per cent or more of voting rights in the other enterprise or appoint more than 50 per cent members of board of directors. The new definition would be applicable from April 5, 2013.
The definition adopted by the DIPP is the same as the one mentioned in the Foreign Trade Policy.
The need for the clarification arose because while DIPP, in 2010, had introduced a regulation restricting cash-and-carry companies from selling more than 25 per cent goods to ‘group companies’, in the absence of a proper definition of group companies in the FDI policy it was unclear if FDI ventures were flouting rules.
Last year, the Delhi High Court had admitted a public interest litigation filed by social activist Vandana Shiva that alleged that sales by Bharti-Walmart to Bharti Retail violated the restriction on FDI in multi-brand retail.
The companies, however, maintained that they were in compliance with rules, and there was no clear way to establish the truth.
“While existing structures of enterprises have to be studied to establish if they are related and subject to restrictions incorporated in the FDI policy, a clear definition of group companies will ensure that the same rules will apply for all,” a DIPP official told Business Line .