At present, foreign direct investment in retail trading is not allowed and the government rules do not permit foreign companies to directly undertake retail trade.
According to finance ministry sources, following complaints from various quarters, including industry chambers, the Foreign Investment Promotion Board had asked Metro to stick to its licence terms. The original licence granted to Metro allowed it to undertake wholesale trading on cash and carry basis.
Subsequently, the licence was modified allowing the company to undertake "business-to-business sale which cannot be termed as retail sale".
Sources said, having directed the company to stick to its licence terms, the FIPB simultaneously constituted an inquiry into the issue and sought details of the nature of sales made by the company. The inquiry is now close to completion. The case is also sub judice before the Karnataka high court. The hearing of the case is scheduled within the next four months, after the inquiry by the FIPB has been concluded.
The government would, however, not push for any stern action like revocation of the licence, but would definitely take a firm stance and ask the company to strictly adhere to the terms of its licence, the sources said.
"Metro's investment in India is to the tune of Rs 170 crore (Rs 1.7 billion) and we do not intend discouraging foreign investors. The company should, however, abide by the present regulations governing the sector," the source added.
The company, in its argument before the FIPB, said the terms of the licence allowed it to sell products in any quantity to a member, the main premise being the sales would be made to members only.
The government sources, however, said there was substantial evidence to indicate that the company was selling goods in small numbers directly to customers and passing that off as wholesale.
According to the sources, such a sale was improper since the definition of retail trade states that the sale be made to the end-user or for final consumption. Wholesale sale, on the other hand, is carried out in bulk and can be used for further processing and re-sale.
Industry chambers have also complained that Metro had tied up with various companies to offer products to their employees at cheaper rates, which is a form of direct retailing to customers.
Metro recieved the FIPB's approval in December 2000 for undertaking cash and carry wholesale trading in India. It opened its first store in Bangalore.
The Metro Cash and Carry store offers around 17,500 food and non-food products, electronics, FMCG and white goods at competitive prices to registered traders, caterers, restaurants and other small and medium businesses, in all-cash deals.