DIPP comes out with definition of ‘group company’

In a bid to bring in clarity in the foreign direct investment (FDI) policy on wholesale trading in India,the government today came out

Written by ENS Economic Bureau | New Delhi | Published: June 4, 2013 1:34 am

In a bid to bring in clarity in the foreign direct investment (FDI) policy on wholesale trading in India,the government today came out with the definition of ‘group company’.

According to a notification issued by the department of industrial policy and promotion (DIPP),‘group company’ would mean “two or more enterprises,which directly or indirectly,are in a position to exercise 26 per cent or more of voting rights in other enterprises or appoint more than 50 per cent of members of board of directors in the other enterprise”.

The notification will be effective immediately,it stated. The existing policy does not permit a wholesale trading company with foreign investment,to trade goods worth more than 25 per cent of its turnover to ‘group companies’.

In April 2010,restricting the companies,the DIPP had notified that,“wholesale trading of goods would be permitted among companies of the same group. However,such wholesale trading to group companies taken together should not exceed 25 per cent of the total turnover of the wholesale venture”.

The definition may impact existing structures like Bharti-Walmart,which is a 50:50 joint venture between the US-based retailer and India’s Bharti Group. The firm is in the cash-and-carry business and supplies products to the front-end stores of Bharti Retail,under the banner of EasyDay. After the government came out with its notification in 2010,Bharti-Walmart had sought clarifications on the 25 per cent cap imposed on sales. It had also asked the government to define group companies.

An official said that earlier the restriction was introduced to prevent cash-and-carry companies from selling more than 25 per cent goods to group companies indirectly in domestic multi-brand retail outlets as FDI was not permitted in the segment then. However,the government recently allowed the foreign retailers to invest up to 51 per cent in the multi-brand retail sector in India. For foreign retailers,the official said,it will be easier to finalise the model it wants to implement in India,given the clarity in definition.

Further,with today’s clarification,experts said that it would be easier for companies to work out the kind of inter-company arrangements they can enter into.

“This was long awaited. Now that it is defined under the consolidated FDI policy,there is no room for ambiguity as to what definition to follow as there is a definition for group company in various legislation including the Companies Act,and the Competition Act,” Akash Gupt,executive director,PwC,said. All the same,since the clarification is prospective in nature,the companies will now have to re-look at their existing structures to ensure that they conform to the new policy.

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