Wal-Mart India suspends CFO and legal team in corruption probe

A Wal-Mart employee in Hyderabad. The retailer’s challenges in India include a corruption probe and uncertainty over the future of foreign investment.
A Wal-Mart employee in Hyderabad. The retailer’s challenges in India include a corruption probe and uncertainty over the future of foreign investment.
Image: AP Photo / Mahesh Kumar A
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Wal-Mart’s woes in India just got a whole lot worse.

Both houses of the country’s Parliament were to meet yesterday, the start of the winter session and the first meeting since the government in September announced a plan to allow foreign firms to take majority stakes in retail stores. But parties opposing the reform disrupted the session and forced an adjournment. Prime Minister Manmohan Singh, trying to hang onto India’s once-miraculous growth story (and his own reputation), invited the opposition over for dinner to talk things out—but that, too, ended inconclusively.

Meanwhile, the retail giant, which in India operates under a joint venture known as Bharti Wal-Mart, suspended chief financial officer Pankaj Madan and four members of its legal team following an internal investigation into corrupt business practices. The Economic Times first reported the development but several people with knowledge of the matter confirmed the suspensions to Quartz.

Internal investigations revealed that government agencies were being paid bribes in order to get clearances for licenses and building approvals for its stores, according to these people, who requested anonymity. A company spokeswoman did not respond to email and text messages for comment, nor did Madan and other suspended staff members. Their suspensions are pending investigation.

MarketWatch reported that the company confirmed the suspensions, quoting a Bharti Wal-Mart spokeswoman’s email: “We are committed to conducting a complete and thorough investigation. Walmart and Bharti have suspended a few associates pending the outcome of the investigation.”

This week, Wal-Mart Asia CEO Scott Price addressed employees after the suspensions and reiterated that the company will operate only on the right side of the law, no matter how difficult it is.  He said the company will have zero tolerance to any violations of the Foreign Corrupt Practices Act (FCPA) and the company is making significant investments in ensuring this.

“We will not tolerate non-compliance anywhere or at any level of the company. We are working diligently to strengthen our compliance programmes and dedicating considerable resources to this effort. In fact, the company has spent more than USD35 million on its global FCPA compliance review efforts over the past 18 months,” the company said in a statement last week.

India is ranked 95th out of 175 countries in the corruption perception index, and it is widely held that running a business without bribing government officials is nearly impossible here.

This is the second country in which Wal-Mart has faced allegations of corruption. After a scandal in Mexico that found payments were made to local officials as the retailer aggressively expanded, Wal-Mart initiated internal investigations in Brazil, China and India. Investigations in the Indian arm have been going on for a couple of months, and escalated last week, when the Hong Kong-based Price arrived.

The suspensions are just the latest in a string of problems Bharti Wal-Mart has been facing in India. Investments by foreign companies in multi-brand retail stores in India had been limited to wholesale outlets as a protectionist measure to save small shop owners from big retail. Then in September, the government announced retail would be open to 51% equity investment from foreign companies.

Bharti Wal-Mart is a 50-50 joint venture established in 2007 between Bharti Enterprises and Wal-Mart. Currently, Wal-Mart operates two cash- and-carry outlets, which are essentially wholesale stores, in India. It also provides back-end support in merchandising and logistics to multi-brand retail stores. These retail stores themselves are run by Bharti under the brand name Easy Day.

However, the company is now being investigated for violating the regulation and investing over $100 million in a unit owned by Bharti Enterprises. This was done through a complex mechanism involving debentures which could later be converted to equity.  The allegation is that this money was invested in 2010 when FDI was disallowed in the sector.

The suspension of the CFO and the investigation into bribery, however, is unrelated to that probe.

The government has called for an all-party meeting on Monday to assuage the concerns of the opposition. The uncertainty about foreign retail and therefore Wal-Mart’s investments in India continue. Other large retailers including Tesco, Ikea and Carrefore are also awaiting Parliament support of the bill before committing to invest in India.