vima a+mexican+warning+on+fdi+in+retail

7/27/2019 Vima a+Mexican+Warning+on+FDI+in+Retail

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03/06/2012

A Mexican warning on retail FDIBY SHEKHAR SWAMY

Wal-Mart has swept aside local retailers in Mexico in just two decades.

Several months have elapsed since the Centre kept in abeyance the decision of the Cabinet topermit foreign direct investment (FDI) in multi-brand retail. Thanks to opposition from its ownallies in the UPA and to avert a crisis on this issue, the Government has postponed it and is

working on building a consensus among political parties.

Even as we keep hearing murmurs in the media that the decision will be revived, a remarkableexpose about Wal-Mart's (the world's largest retailer) fraudulent practices has appeared in The

New York Times. The story broke on April 22 in the print version with the headline, Vast

Mexico Bribery Case Hushed Up by Wal-Mart (http://nyti.ms/JLqDiL) The bribery relates tothe period prior to 2006. The development in Mexico has important lessons for India.

The article reported the web of corruption woven by Wal-Mart de Mexico to dominate themarket. TheNew York Times examination found credible evidence that bribery played a

persistent and significant role in Wal-Mart's rapid growth in Mexico. The information came

out in the open when a Wal-Mart de Mexico employee (Mr Sergio Cicero Zapata, a lawyerwho served the company for 10 years) who was in charge of obtaining permits becamedisgruntled and disclosed the facts to the US headquarters.

Rapid rise in Mexico

Wal-Mart entered Mexico in 1991. In two decades, the company has grown to a position ofdomination with nearly 50 per cent market share of the retail sector. Wal-Mart de Mexico has2,765 stores and restaurants in that country, nearly four times as many stores as its nearestrival, Soriana. The company has opened new outlets at the average rate of nearly 11 a month,every month over the past 21 years. Wal-Mart has emerged as the largest private sectoremployer in Mexico with 209,000 employees.

Two observations are noteworthy. Those who have argued that Indian small retail will coexistwith big foreign retail should note that Wal-Mart de Mexico has displaced and swept aside thelocal retailers with ease in just two decades. For those who argued that FDI in multi-brandretail will increase employment, it is pertinent to note that Wal-Mart has taken over nearly halfof Mexico's retail business with just over 200,000 employees (the country's population is 112million). In contrast, the Indian retail sector provides employment to 40 million people.

Wal-Mart's findings


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Wal-Mart despatched investigators from the US to Mexico who unearthed evidence ofwidespread bribery. They found a paper trail of suspect payments totalling more than $24million (Rs 120 crore). They found documents showing that Wal-Mart de Mexico's topexecutives not only knew about the payments, but had taken steps to conceal them from theheadquarters. In addition, investigators found that an amount of $16 million (Rs 80 crore) wasdirectly paid by the company as contributions and donations to governments in 2003-05.

The bribes were paid through outside lawyers, fixers known as gestores (pronounced hes-tore-ehs). Wal-Mart's investigators found 441 gestor payments just in 2003-05 (around three aweek). The bribes bought zoning approvals and permits, reductions in environmental impact

fees and the allegiance of local leaders. The bribes were paid in order to build hundreds ofnew stores so fast that competitors would not have time to react.

Wal-Mart violated both the US and Mexico laws. In the US, the company violated the ForeignCorrupt Practices Act, a federal law that makes it a crime for American companies and theirsubsidiaries to bribe foreign officials.

The then Mexico CEO, Mr Eduardo Castro-Wright, was identified as the driving force behindyears of bribery. He was promoted to a bigger role in the US and became Vice-Chairman ofWal-Mart in 2008. Matters came to the knowledge of Mr H. Lee Scott Jr, Wal-Mart globalCEO, in 2005.

He transferred the bribery investigation back to Mexico, where the General Counsel (whohimself was implicated) closed it down. None of Wal-Mart de Mexico's leaders weredisciplined.

Irreversible damage

Upon hearing about The New York Times story, Wal-Mart finally reported this matter to the USJustice Department in December, and to the Securities & Exchange Commission. As overseas

bribery is a criminal violation of the US laws, the US authorities will pursue action against

Wal-Mart. This could result in the arrest of senior executives and/or payment of substantialpenalties. The case will then be closed.

What this will never be able to reverse is the damage caused to tens of thousands of smallretailers, farmers and suppliers in Mexico who have been forced to shut down in the wake ofWal-Mart's expansion, and their families.

Given that Wal-Mart now overwhelmingly dominates the Mexican market, it has made theentire country is dependent on itself for supply of essentials, presumably limiting the actionthat the Mexican authorities can take. Wal-Mart has become too big to fail in Mexico, and thecountry has become reliant on a foreign company that is governed from beyond its borders.

Protecting India's interests


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A simple regulatory framework can protect India's interests against such developments. It isaccepted practice that an individual with an unacceptable criminal or litigation record is denieda visa to enter countries such as the US. Similarly, companies that have been convicted offraud or been the subject of investigation for monopolistic and restrictive practices or otherserious wrongdoing (such as damage to the environment) should be denied permission to enterIndia.

When a company makes an application to the Government for opening shop in India, theyshould be required to make a full disclosure of their litigation record, and cases of criminalmisconduct from their operations across the world. Companies with a poor record should be

disqualified automatically.

When new information comes to light, it is perfectly in order to review decisions previouslytaken. The Government should study the Mexican example and formulate its policies suitablyto protect the masses from the onslaught of big foreign retail.

Wal-M art has taken over nearly half of M exico's retail business with just over 200,000

employees. I n contr ast, the I ndian retail sector employs 40 mil li on.

(This article was published in the Business Line print edition dated May 30, 2012)

Regards,

Ajay Modi

President

98203 20444

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