India Puts Wal-Mart Deal With Retailer Under Scrutiny

MUMBAI - Indian regulators have begun an informal inquiry into allegations that Wal-Mart Stores violated rules restricting foreign investment in the country's fast-growing retailing industry.

Wal-Mart and Bharti operate 17 wholesale stores, and Wal-Mart provides services to Easyday stores like this one in Gurgaon.

The regulators are investigating an investment of nearly $100 million by Wal-Mart in an Indian company, Bharti Retail, which operates more than 200 supermarkets across India, at a time when India restricted foreign investments in retailing. The investment took the form of debt securities that paid no interest to Wal-Mart but could be converted into a 49 percent ownership stake in Bharti.

India long prohibited foreign equity investments in retail chains that sell more than one brand of products, known here as multibrand retail. It recently changed those rules to allow foreign companies to own up to 51 percent of such stores, but that change has faced stiff resistance from opposition political parties and even allies of the governing coalition.

Wal-Mart has long wanted to expand into India, where small, family-owned stores dominate a retail sales market worth about $500 billion annually. The company has a 50-50 venture with Bharti that operates 17 wholesale stores, and it provides logistics and management services to Bharti's Easyday retail stores.

The investigation into Wal-Mart's relationship with Bharti was prompted by a letter last month to Prime Minister Manmohan Singh from a lawmaker representing the Communist Party of India (Marxist), which opposes foreign investment in retailing and many other sectors.

Wal-Mart and Bharti issued statements denying that they had violated Indian rules or laws.

“We are in complete compliance with India's F.D.I. laws,” the Indian unit of Wal-Mart said, referring to foreign direct investment. “All procedures and processes have been duly followed and details filed with relevant Indian government authorities including the Reserve Bank of India,” the central bank.

An Indian official, who spoke on the condition of anonymity, citing government policy, said Mr. Singh's office had forwarded the letter to the Ministry of Commerce, which sent it to the central bank, which oversees foreign transactions involving Indian companies, to obtain more information. The official said the investigation was not yet a formal inquiry.

Wal-Mart's actions in overseas markets have come under scrutiny in the United States, where officials are investigating allegations of bribery at its Mexican subsidiary.

Officials want to determine if the loan from Wal-Mart to Bharti was intended to skirt the letter or the spirit of the foreign investment rules. Wal-Mart lent 4.56 billion rupees ($101 million at the time) to Cedar Support Services, the parent company of Bharti Retail, on March 29, 2010.

According to Cedar Support's latest annual report, the debentures would automatically convert into a 49 percent equity stake 30 months after they were issued. It is unclear if that conversion took place last month when the 30 months elapsed or if the companies extended that deadline.

The companies' opponents are expected to argue that the terms of the debentures violated the spirit, if not the letter, of the rules because the debt was to be automatically converted into equity. Critics say the plan was a clever legal maneuver to allow Wal-Mart to quickly enter the Indian market when policy makers relaxed the restrictions on foreigners, which happened last month.

“The tragedy is we are not monitoring the end use of F.D.I. in India,” said M. P. Achuthan, the lawmaker who wrote to the prime minister. “The government has to ensure that they monitor the F.D.I. coming to India is used” only in industries where it is allowed.

Bharti is a conglomerate that also controls Airtel, the largest cellphone company in India. In recent years it has expanded aggressively into retailing with help from Wal-Mart, which supplies its stores with produce and other goods, and offers training and management support.

The partners are expected to announce a venture soon to take advantage of the recent change in the investment rules, which grant each of India's 29 states the right to keep foreign retailers out of their regions. In a telephone interview last month, the top executive at Wal-Mart's Indian operation, Raj Jain, said the company would complete its plans in the next 45 days and could open its first stores in 18 months.

India has been seen as one of the last large untapped markets for the global retailing chains. Ikea, the Swedish furniture retailer, is expected to open stores in India soon, and Starbucks will open its first outlet in central Mumbai on Friday.

Heather Timmons contributed reporting from New Delhi.

A version of this article appeared in print on October 19, 2012, on page B1 of the New York edition with the headline: India Puts Wal-Mart Deal With Retailer Under Scrutiny.