Bharti Wal-Mart and Tata-Tesco to benefit, courtesy new definition of ‘group’.
Retail companies with foreign joint ventures have reasons to cheer. The Department of Industrial Policy & Promotion (DIPP) has decided to relax a key condition imposed on wholesale cash-and-carry companies.
Leading retail companies such as Bharti WalMart and Tata-Tesco, which have a cash-and-carry backend in their joint venture with an Indian partner and also want to sell its products to the front-end retail chain run by its Indian partner only (as multi-brand retailing is not allowed), will benefit from this move. Under the earlier guidelines, cash-and-carry companies could sell only up to 25 per cent of their turnover to group companies.
In a policy circular, expected to be issued by the end of this month, DIPP proposes to change the definition of ‘group’ in line with Accounting Standard 23 (AS-23), which does not prescribe any equity limit for defining a “group company”. Under the AS-23 definition, a group means a parent company and its various subsidiaries.
The control can be exercised either through more than 50 per cent of the voting rights or control of the composition of the board or the control of the governing body, so as to obtain economic benefits from the activities.
DIPP has termed restrictive the guidelines under the Companies Act and Foreign Trade Policy, which specifies a company with more than 26 per cent investment in another company will be considered a group company.
In the new definition, said retail experts, the restriction of 25 per cent will not be applicable. For instance, Bharti Enterprises, which has a 50-50 joint venture with Walmart, controls 100 per cent in Bharti Retail.
Under the existing definition, Bharti Retail and Bharti Walmart are clearly group companies of Bharti Enterprises. Therefore, the wholesale venture would be able to sell only 25 per cent of its turnover to Bharti Retail, the front-end retail chain. Under the new definition of ‘group’, they’d no longer remain as group companies anymore.
