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* India's $500 bln retail market growing at 20 pct a year
* "License Raj" requires dozens of permits per store
* Licenses often require bribes, along with official fees
* Many retailers hire middlemen to handle backhanders
By Nandita Bose
MUMBAI, May 5 (Reuters) - Hong-Kong entrepreneur RameshTainwala spent 18 months operating branded clothing retailstores in India before deciding it was impossible to succeedwithout paying bribes.
Tainwala, a 55-year-old expatriate Indian, owns PlanetRetail, which held the India franchise rights for U.S. fashionlabels Guess and Nautica as well as UK retailersNext and Debenhams. He sold the brands lastSeptember to various Indian businesses.
"Right now it's not possible to do business in India withoutgreasing palms, without paying bribes," said Tainwala, who isalso luggage maker Samsonite's president for AsiaPacific and West Asia. Tainwala said he himself refused to paybribes to licensing officials, though that could not beindependently confirmed.
India is the next great frontier for global retailers, a$500 billion market growing at 20 percent a year. For now, smallshops dominate the sector. Giants from Wal-Mart Stores Inc to IKEA AB have struggled merely for the rightto enter, which they finally won last year.
But a daunting array of permits - more than 40 are requiredfor a typical supermarket selling a range of products - forceretailers to pay so-called "speed money" through middlemen orlocal partners to set up shop.
In interviews with middlemen and several retailers, Reutersfound the official cost for key licenses is typicallyaccompanied by significant expenses in the form of bribes. The added cost erodes profitability in an industry where marginstend to be razor-thin. It also creates risk for companies bymaking them complicit in activity that, while commonplace inIndia and other emerging markets, is nonetheless illegal.
That creates a handicap for foreign operators such asU.S.-based Wal-Mart, the world's biggest retailer, and Britain'sTesco Plc and Marks and Spencer Plc, whichmust comply with anti-bribery laws in their home countries evenwhile operating abroad.
A Wal-Mart spokesperson said the company is strengtheningits compliance programs, part of a global compliance review thathas cost more than $35 million over the last 18 months. IKEA,which is awaiting final approval to enter India, has startedassessing the market, a spokeswoman said, adding the group has"zero tolerance" for corruption in any form.
"HARASSED FOR MONEY"
Retail is especially prone to bribery because stores sellmultiple types of merchandise, which in India increases thenumber of licenses and permits needed - a legacy of theso-called "Licence Raj" that was largely dismantled during thecountry's early 1990s economic reforms.
The World Bank's Ease of Doing Business survey ranks India173rd out of 185 countries when it comes to starting a business,behind Malawi, Niger, Sudan and Guatemala. TransparencyInternational in 2012 ranked it 94th out of 174 countries on itscorruption table - a fall from 72nd five years earlier.
"Even for a simple thing like putting up signage in front ofyour store you are harassed for money," said Tainwala. "Thereare many bodies regulating that and the permits needed to set upone shop are baffling."
The License Raj, he said, substantially increases costs in amarket where sluggish consumer demand, high rentals and adepreciating currency for over a year have made it hardfor retailers like him to operate profitably. He plans to returnwhen there is more order in the way business is done.
Ais Kumar, head of the western region for the Food Safety &Standards Authority of India (FSSA), acknowledged that graftexists across government ranks and departments. Many governmentdepartments also have staff shortages that cause delays.
"These licenses are required for compliance and safety andnot because the government wants to delay or complicate thingsfor anyone. It's the law of the land and it must be followed,"he said, adding the government is striving to put licensingsystems online to streamline the process and make it moretransparent. Checks with three retailers, however, showed theonline forms still need to be physically delivered to therespective licensing departments.
UNDER THE TABLE
Permits needed to open a store range from the mundane, suchas a trade license, to the petty: lighted shelves require aseparate permit, and even a shop window needs a license.
Want to play music in the store? That requires a license. Sodoes selling cosmetics or providing valet parking.
A convenience store that sells basics such as milk,vegetables, cereal, bread, eggs, meat and baby food will requirea minimum of 29 licenses from nearly 20 different authorities,according to a list of licenses compiled by the RetailersAssociation of India and obtained by Reuters.
Those include a food license; a license for sale, storageand distribution; a food-handler's certificate; a license formilk products and another for frozen non-vegetarian food. Allthose licenses comes from the state-level FSSA, but requireseparate applications.
But the FSSA does not give permission for operating freezersand chillers. That requires a separate license from a municipalbody. Selling baby food requires a permit from a stateController of Food and Supply. The state Agriculture ProduceMarketing Committee must give permission to sell vegetables; thecentral Directorate of Marketing and Inspection gives permissionto grade and sort those vegetables; the Controller of Rationinggrants licenses for selling essential commodities like rice.
All those licenses need to be renewed, sometimes annually.
The Directorate of Marketing and Inspection declinedcomment, while the other departments were not available.
Most of the licenses required can either be done away withcompletely or combined into one, said Lalit Agarwal, chairman ofV-Mart Retail. "Every day, you have new licenses addedto the list, but nothing ever gets deleted."
It's not just the red tape of getting those licenses, it'salso the under-the-table money that retailers typically have topay on top of the official fees.
In Bandra, a high-end suburb of Mumbai, a state-issued tradelicense for a 10,000-square-foot (930 square-meter) store - verylarge by Indian standards - officially costs 100,000 rupees($1,825). But there is an "additional charge" of 1.25 millionrupees ($22,800), according to documents obtained by Reutersfrom the Employee State Insurance, Provident Fund and IndustrialLaw Practitioners Association of India (EPILPA), which assistretailers in obtaining permits.
EPILPA said their members, who are consultants, collect the"speed money" from retailers and pass it on to the governmentofficials. They act as middlemen who do not take a cut and henceshould not be held responsible for the bribes being paid.
"In India, you don't need to ask retailers if you need to paybribes," said Punit Agarwal, CEO of Promart, a mid-sizedmulti-brand clothing retailer. "It's known. Here you have aprice tag for everything."
He said his company hires middlemen and pays their feesbecause he knows bribes have to be paid, but does not want hiscompany to get directly involved.
SPEED MERCHANTS
Middlemen sell speed. They provide access to governmentofficers who can sign off on permits as soon as they are paid.The middleman negotiates the bribes, thus keeping companyofficials from being directly involved.
Take the case of British footwear retailer Clarks. Itentered India through a partnership with Future Group, whichruns the country's largest listed retail entity, Future Retail. Clarks has hired consultants and, according to one ofthem, is negotiating with municipal officials for a 365-daylicense that would allow it to open three of its five stores inMumbai every day of the year.
For each of the three stores, the company was asked to pay60,000 rupees ($1,100) per officer for the eight officersinvolved in its case - a total of 500,000 rupees ($9,100) perstore, said Oovesh Sarabhai, of Atlas AVA Consultants, who isworking with Clarks to secure the licenses. The official fee isabout 6,000 rupees ($110) per store, he said.
The government officials involved in issuing the licensedeclined to comment when contacted by Reuters. Future and Clarksdeclined to comment.
A senior Clarks official, who declined to be identified,confirmed the company had applied for a 365-day license for thethree Mumbai stores in January 2012 and received notificationsfrom the government related to this, but has so far failed toreceive the licenses. "It's stuck because of the bureaucracy,"the official said.
No high-level official dealing with licenses ever accepts abribe directly, said Raichand Jiwani, owner of Emkay ConsultancyServices, who is a member of EPILPA and helps several top Indianretailers to procure licenses. Officials use subordinates tocollect the money and only from trusted people. The payment isthen shared by junior and senior officers and up thebureaucratic chain.
"The nexus runs far deeper than just a few corrupt officialsat the local level," said Jiwani, noting that if a retailerapproaches an official directly he will not be told about thebribe, but his papers will take months to be approved.
IS INDIA WORTH IT?
While India holds vast promise for retailers, with itsgrowing spending power and rising middle class, most localsupermarket chains lose money due to low prices, poor supplychains and high rents. Wal-Mart has said it aims to turn aprofit in 10 years, something it hasn't managed in China after12 years.
Tainwala thinks India offers miniscule retail returns forthe massive investment of time and energy that is needed. Fastexpansion requires paying speed money, he said.
Tainwala recalls he was asked to pay either a 22,000 rupee($400) monthly fee to have signage outside his store in Mumbai'splush Atria mall, or a 2,000 rupee ($36) bribe every month tocircumvent it. He said he chose to pack up rather than bribe themunicipal officials needed to get his signs approved.
"My people said we have to close the stores, and we decidedto do that," he said. "You get excited about the Indian middleclass but then you wonder - is it really worth it?"
