NEW DELHI (Reuters) - Indian authorities are investigating claims that Wal-Mart Stores Inc. (WMT.N) violated foreign exchange rules when it invested $100 million in a domestic unit owned by its wholesale joint-venture partner, a law enforcement official said.
An Indian lawmaker first raised the allegations in a letter to the prime minister in early September, and the complaint was subsequently passed from one government department to another without action being taken.
Wal-Mart, the world's largest retailer, has denied any wrongdoing. The allegations relate to the company's complex investment through debentures -- which could later be converted to an equity stake -- at a time when direct ownership by foreign firms was prohibited.
"Yes, the Enforcement Directorate has initiated an investigation into the allegations against Wal-Mart," a senior official, who declined to be named, told Reuters on Friday.
The Enforcement Directorate, an elite agency that falls under the finance ministry, investigates financial crimes.
"The probe is at an early stage and therefore (it is) difficult to say what the outcome will be," the official said.
News of the investigation comes at a bad time for the Congress Party-led minority government, which is preparing to do battle with opponents in parliament next week over its decision to allow foreign companies into India's retail sector. The furor could derail parliamentary proceedings.
Parties opposed to the new retail policy, which include some government allies, may use the investigation to fan suspicion among supporters against foreign retailers including Wal-Mart whose entry is seen threatening the livelihoods of local mom-and-pop store owners.
Arkansas-based Wal-Mart has repeatedly denied the allegations.
"The central government has sought certain information and clarification, which has been provided by us. We are not in a position to offer further comments as the matter is before the courts," a Wal-Mart spokesman said on Friday.
India liberalized its retail sector in mid-September to allow global superstores to buy stakes in Indian companies - one of a number of big-ticket reforms passed in September by Prime Minister Manmohan Singh to revive a sluggish economy.
Previously, foreign retailers were only allowed to invest in wholesale operations.
Wal-Mart was the most vocal advocate for the change and has said it expects to open its first retail store within 18 months.
M.P. Achuthan, a member of the Communist Party of India that opposes foreign direct investment in retail, accused Wal-Mart of investing $100 million as early as early 2010 in a multibrand retail business.
In September, Achuthan raised the issue in parliament, questioning Wal-Mart's role in Easyday stores, which are controlled by Bharti Enterprises, its partner in a wholesale joint venture.
India's commerce minister answered that Wal-Mart, via its Mauritius arm, held debentures that are convertible into a 49 percent equity stake in Cedar Support Services, the company previously known as Bharti Retail Holdings that holds Easyday.
The law enforcement official confirmed that the Enforcement Directorate was looking at Cedar.
"The main part of this investigation will be whether they (Wal-Mart) offered a credit line. They have not made an equity investment directly, but even if they offered a credit line, you cannot do that," said Harminder Sahani, managing director at Wazir Advisors, a retail consultancy.
Wal-Mart's Indian partner, Bharti Enterprises, has also denied the allegation.
"We are in complete compliance of all regulations. All details have been shared with the relevant authorities," a Bharti Enterprises spokesman said.
The news came a day after Wal-Mart reported disappointing quarterly sales and as it announced internal inquiries or investigations into bribery allegations in Brazil, China and India - additions to its original probe in Mexico.
The Indian law enforcement official said the probe was being carried out under the Foreign Exchange Management Act (FEMA), which regulates domestic currency markets, including foreign direct investments and capital transactions.
The official said the agency had asked for documents on Wal-Mart's operations in India from the RBI and the Foreign Investment Promotion Board (FIPB), which clears foreign investment proposals.
"The way company affairs work in India, very little is seen as a criminal offense. So even if there are some violations, companies are usually asked to pay a penalty and they are allowed to carry on with their business," said Sahani of Wazir Advisors.
Additional reporting by Nandita Bose in MUMBAI; Writing by Rajesh Kumar Singh; Editing by Ken Wills and Ross Colvin