5 reasons for the split, Why Wal-Mart, Bharti split in India

Wal-Mart Stores Inc and billionaire Sunil Mittal-promoted Bharti Enterprises on Wednesday called off their six-year old joint venture in India. Wal-Mart, the world's biggest retailer, will control the cash and carry business, where 100 per cent FDI is allowed. Bharti will operate easyday retail stores in the country. Wal-Mart will now have to find a new partner to meet the requirement that a local firm owns 49 per cent of the business if it wants to open retail stores.

Here are five likely reasons for the split between Bharti and Wal-Mart:

1. Retail business requires deep pockets: Bharti Airtel, the flagship of Bharti Enterprises and India's biggest mobile operator, has been struggling under a debt of $12 billion. The company reported a 14th consecutive quarter of declining profits in June. Bharti Enterprises reportedly wants to consolidate its balance sheet and sharpen its focus on Bharti Airtel.
   
2. Low margins, high costs: The retail business entails high costs and narrow margins, so most big retailers in India lose money. The Bharti Walmart wholesale joint venture (unlisted) lost Rs. 277 crore in 2011. Bharti-Walmart's rival Reliance Retail turned a cash profit for the first time since its debut in 2006 for the year ended 2013. Though Bharti Retail will continue to operate its easyday retail chain, which has 212 stores, it will now expand on its own pace.
   
3. Policy uncertainty: In September 2012, the government announced that it would allow foreign supermarket chains to take majority ownership of their local operations. With 1.2 billion people and 90 per cent of its $500 billion in retail trade done at mom-and-pop shops, India is potentially lucrative for global retailers. But no global supermarket chain has applied to enter because of regulatory uncertainty. The biggest stumbling block for companies has been the government's requirement that 30 per cent of their products be sourced locally.
   
4. Political uncertainty: The general elections in India are due by May 2014 and there are concerns that a BJP-led government could reverse the controversial retail reform. In an interview to NDTV in September, former finance minister and senior BJP leader Yashwant Sinha said his party will "not allow Walmarts to come" in the country. Mr. Sinha said that while the BJP will support FDI in general, FDI in multi-brand in retail will not be allowed.
   
5. Bribery scandal: Wal-Mart launched a global review of corruption last year after a New York Times report on bribery at the company's Mexico operations. Its lawyers flagged India among the countries with the highest corruption risk. The U.S. Foreign Corrupt Practices Act forbids American firms from paying bribes. In November, Bharti Walmart suspended employees including the chief financial officer as part of an internal investigation into bribery allegations in India. On June 26, Wal-Mart announced that Raj Jain, who led its India push for the past six years, had left the company. Wal-Mart's internal crackdown on bribe-paying has also slowed expansion plans in India. Wal-Mart, which has run wholesale stores in India since 2009, has not opened a new one since October 2012 despite its stated plans to open eight in 2013. It has 20 such stores in India.

Wal-Mart, Bharti announce divorce, to go separate ways in retail biz

Wal-Mart Stores Inc and its Indian partner Bharti Enterprises on Wednesday said they will dissolve their joint venture and will independently own and operate separate businesses in the country.

Wal-Mart, the world's biggest retailer, will acquire Bharti's 50 per cent stake in Bharti Wal-Mart Pvt Ltd, which runs about 20 wholesale stores in India under the Best Price Modern Wholesale brand. Indian rules allow 100 per cent foreign direct investment (FDI) in cash and carry business.

Bharti will acquire compulsory convertible debentures (CCDs) held by Wal-Mart in Cedar Support Services, a company that operates easyday retail stores in the country.

Wal-Mart's growth in India has been hindered by still-evolving rules on foreign investment, an internal bribery probe, and, more recently, the faltering partnership with New Delhi-based Bharti, which Reuters reported in July.

"Given the circumstances, our decision to operate independently will be beneficial to both parties," Scott Price, president and chief executive of Walmart Asia, said in the statement.

Wal-Mart said it will work with the government to create conditions that enable foreign direct investment in India's supermarket sector.

In September 2012, the government permitted foreign retailers to own 51 per cent of their Indian operations, but ambiguity around rules governing the policy has ensured no foreign retailer has so far applied to enter the country. The biggest stumbling block for companies has been the government's requirement that 30 per cent of their products be sourced locally.

Formed in 2007, Bharti had a 50:50 joint venture with Wal-Mart for cash-and-carry or wholesale stores. The US firm had also been managing Bharti's retail chain easyday since 2008, though at the time Indian laws didn't allow foreign investment in multi-brand supermarkets. Bharti runs 212 easyday stores in the country.

Last year, Wal-Mart came under the scanner for corrupt practices in its Indian operation under the US Foreign Corrupt Practices Act (FCPA). In June 2013, its India head Raj Jain quit.

Bharti Enterprises is the holding company of Bharti Retail. Shares in its listed subsidiary Bharti Airtel traded 2.1 per cent lower at Rs 325 on the NSE as of 10.50 a.m.