After a seven-year partnership, Walmart and Indian retail partner Bharti Enterprises last month issued a terse joint message saying they were ending the 50/50 joint venture launched by the two firms in 2006 and had reached an agreement to independently own their business interests in India.

The move wasn’t entirely unexpected. Days before the statement was released, Walmart Asia CEO Scott Price told the media during an Asia-Pacific Economic Cooperation meeting in Bali that “the existing franchise to Bharti is not tenable as the base” for Walmart in India. Both sides were looking at the best way to move forward, he added.

Under the agreement reached by the two firms, Bharti will acquire Walmart’s indirect stake in the Easyday chain of retail stores through acquisition of compulsory convertible debentures of Cedar Support Services, a Bharti group company. In turn, Walmart will acquire Bharti’s stake in the 50/50 Bharti Walmart joint venture, which is a cash-and-carry business-to-business operation under the Best Price marquee. India has allowed 100% foreign direct investment (FDI) in the cash-and-carry segment since 2006. “Given the circumstances, our decision to operate independently will be beneficial to both parties,” said Price.

Even though the split was no big surprise, it didn’t make much sense to many observers. Walmart has been leading the campaign to get government permission for 51% foreign holding in multi-brand retail. In single-brand retail, 100% FDI has been allowed since September 2012. The FDI policy in retail has been extremely controversial and the Manmohan Singh government had to stake its survival on the issue. “The Walmart withdrawal is a victory for small traders,” says Praveen Khandelwal, secretary general of the Confederation of All India Traders, an anti-FDI organization.

But according to Wharton lecturer Edwin Keh, India may actually have little to do with Walmart rethinking its strategy in the country. “I suspect the current moves in India are part of a larger shift by Walmart to put focus back on its domestic business,” says Keh, who was formerly chief operating officer and senior vice president of global procurement for the retail giant. “In the current environment of a recovering U.S. economy, the opportunities may be back at home.”

Even though the divorce was no big surprise, it didn’t make sense to many. Walmart has been leading the campaign for 51% foreign holding in multi-brand retail.

Keh cites other recent Walmart moves to support this theory. “India, China and Mexico have been the countries where Walmart is ‘rebalancing’ its stores,” he notes. However, he sees Walmart’s total business in China as poised for growth with its investment in online grocery retailer Yihaodian. Walmart has a 51% interest in Yihaodian and plans to integrate its logistics operations with that of the latter.

Yet everything is not black and white. The retail giant has recently run into problems with the U.S. authorities over allegations that Walmart de Mexico had bribed its way to market dominance in that country. Even as this investigation was proceeding, further accusations were made about similar transgressions in India, China and Brazil.

Probe in India

Unlike in the U.S., lobbying is illegal in India, and there was significant outcry when Walmart disclosed to the U.S. Senate and the House of Representatives that it had been indulging in India-specific lobbying. Opposition lawmakers in India forced the government to take action, and a retired judge was appointed to probe the issue. While initial indications are that the findings have been inconclusive, a new controversy has arisen. The prime minister’s office has declined to give sought-for details of meetings of the prime minister and his officials with Walmart lobbyists. While this exemption can be claimed under India’s Right to Information Act, it has strengthened the arguments coming from the anti-Walmart contingent.

The Walmart-Bharti separation was orchestrated with unnecessary controversy on another front. In early July, the head of Walmart’s operations in India, Raj Jain, was let go. The announcement was made by Price at a town-hall meeting and came as a big surprise to the employees, who assembled on short notice after a summons via e-mail. Jain had been a trusted general of the company for seven years, and his departure was read as action against those accused in the bribery allegations. The New York Times had earlier reported that the joint venture “had suspended several senior executives and delayed the opening of some stores in the country as part of an internal bribery investigation.” Now, many were sure that the kingpin had been identified.

After the break-up, however, Jain was given a vote of confidence from Bharti via a post as advisor to the firm’s retail division. When Rajan Mittal, vice chairman of Bharti Enterprises, made the announcement at yet another town-hall meeting, the employees — who had heard Price in stunned silence — broke out in applause. Jain was unavailable for comment.

Walmart’s discomfiture with its Indian partners is familiar territory for multinationals, according to Keh. “Some countries may prove to be too difficult for multinationals,” he notes. “Multinationals are often held to higher standards and so are often handicapped when competing with national operators.”

Anand Sharma, India’s commerce minister, says that Walmart has already been given plenty of opportunities in the Indian market. “Walmart got enough space,” he notes. “There will be no further steps to woo the company.” With its cash-and-carry venture, Walmart has retained a toehold in India, and observers feel it will make a comeback in multi-brand retail when the regulations are relaxed further. (The company also has the option, of course, of divesting Best Price and getting out of India altogether.)

Finance Minister P. Chidambaram says more relaxations are unlikely. “We have a policy,” he told business channel CNBC-TV18. “A genuine investor must work within that policy. It may not be the ideal policy from [the company’s] point of view. But this is the policy that we have today. You have to take it as it is.”

Policy Pains

What is it about the FDI rules that Walmart is finding difficult to accept? The trouble in India is that every policy is accompanied by subsequent clarifications, some of which are difficult to digest. Swedish furniture maker IKEA’s $2 billion proposal to set up single-brand stores in India was stalled because it wanted to operate cafes and restaurants in its stores. According to the government, this would make it multi-brand retail, logic officials first used while rejecting a Marks & Spencer application. IKEA ultimately received the approval move forward; the chain is allowed to sell coffee but only for consumption on store premises. The first IKEA store in India is expected to open in 2017-2018.

Walmart is facing a different obstacle. A contentious clause says that multi-brand foreign retailers must source at least 30% of their products from small industries. This may be possible in textiles and handicrafts, but what about electronics?

The second problematic clause relates to investment. The policy states that 50% of investment must be in back-end infrastructure. The clarifications issued by the Department of Industrial Policy and Promotion state that this must be entirely for green-field assets, meaning Walmart’s investments in India thus far do not count toward meeting that mandate.

With its cash-and-carry venture, Walmart has retained a toehold in India, and observers feel it will make a comeback in multi-brand retail when the regulations are relaxed further.

“It is now clear that foreign players will have to create capacities from scratch. This means that they will need to go back to the drawing board, assess their appetite for investment and rethink their strategies,” Ankur Bisen, vice president for retail at New Delhi-based research and consultancy firm Technopak Advisors, told Knowledge at Wharton in an earlier interview.

Bisen noted that the new set of clarifications has “added more rigidity and disincentives and will result in further delay in investment decisions.” And according to a KPMG study: “These clarifications may pose additional road blocks for global retail players.”

Not Just Walmart

The Walmart-Bharti breakup is not the only recent severing of ties between multinationals and local partners. Fast-food giant McDonald’s, which has a 50/50 joint venture called Connaught Plaza Restaurants, has accused Indian partner Vikram Bakshi of looking after his own business interests in preference to those of the joint venture. On August 30, McDonald’s issued a public notice that deposed Bakshi as managing director. The company would henceforth be run by the board, it said. The affair has ended up with the Company Law Board.

Meanwhile, a year-old 30/70 partnership between Australian coffee chain Di Bella Coffee and Indian entrepreneur Sachin Sabharwal is now embroiled in legal suits and defamation charges. The 26-year-old joint venture between the Munjals and Honda of Japan broke up in 2010, albeit with much less acrimony. Other joint ventures said to be on the rocks include Gillette India (with key shareholder and chairman Saroj Poddar) and German stationery maker Faber-Castell (with partner and managing director Anup Bhaskaran Rana).

Traditionally, JVs break up mainly because of incompatibility issues or big egos. But in India, it may be more the external environment than the internal environment that is causing separations. “In the Bharti-Walmart case, I suspect it is more the FDI policy and possibly the U.S. Foreign Corrupt Practices Act (FCPA) investigation which led to their decision,” says Pradeep Mukherjee, India head and CEO of global HR consultancy firm Mercer.

“U.S. companies entering into a JV are required to have a clear understanding of their duties and responsibilities under the FCPA,” adds S. Raghunath, professor of corporate strategy and policy, and dean of administration at the Indian Institute of Management, Bangalore. “We also know that compliance issues affect U.S. company executives and heighten corruption risk. They are, therefore, extremely concerned about the potential impact of corruption on their business.”

This is the reason why when Raj Jain was shown the door, speculation immediately started that the change was evidence of Walmart trying to “clean up its act” in India. In recent times, several CEOs of multinational subsidiaries in India have been let go. Reebok India’s managing director Subhinder Singh Prem was even arrested for fraud.

“The Bharti-Walmart case is completely different,” says Raveendra Chittoor, professor of strategy at the Hyderabad-based Indian School of Business. Pointing out that the partners in the joint venture came together based on certain assumptions on the regulatory front, Chittoor notes: “For Walmart, their proposed business model does not fit in with the new regulations.”

Traditionally, JVs break up mainly because of incompatibility issues or big egos. But in India, it may be more the external environment.

A joint venture is a partnership between two companies, each bringing its own strengths — “local market knowledge from one and international best practices from the other,” says Bundeep Singh Rangar, chairman of Indusview, a London-based advisory specializing in business opportunities in India for multinational firms. “Like all relationships, however, one party might fail to fulfill its share of responsibilities, which leads to a breakup.”

Chittoor observes that the breaking up of alliances is very common, both globally and in India. “According to various studies, almost 60% to 70% of joint ventures fail. Failure can be due to many factors. For instance, the objectives of the partnership may not have been thought through or articulated clearly; lack of planning and lack of articulation leading to misunderstandings; different leadership styles; information asymmetry leading to ideological and cultural differences [or] HR issues.”

He makes a distinction between partnerships that spin out of control and those that are designed from the very beginning to break up. Pepsi started in India with the Tatas (Voltas). The moment the laws were changed, the two abandoned the venture. Procter & Gamble-Godrej and Tata-IBM came to an amicable end because the objectives set out at the beginning of the relationship were achieved.

“There is no clear evidence as to how many of the partnerships that break up are by design or because of actual failure,” Chittoor notes. “So even if there are more partnerships breaking up today in India, it is important to see how many of them are a natural progression because the objectives have been met.”

Rangar adds that it would be “unfair” to cast most of the joint ventures being dissolved as acrimonious breakups. “The reason for having a JV is that the overseas company needs handholding as it understands the nuances of doing business in India, and the Indian company needs to learn the best practices in product development and adopt manufacturing technology from the overseas entity,” Rangar says. “When the purpose of the JV is achieved, the partners don’t feel the need to piggyback on each other.”

Raghunath sees a different set of reasons for incompatibility issues between multinationals and Indian partners. “Foreign investors often have deep pockets, a longer-term view of a joint venture’s financial returns and a willingness to reinvest profits and increase capital, while the Indian partner often has a more short-term view and relatively shallow pockets,” Raghunath notes. “The result can be different priorities for investments and a lack of cooperation, both between the JV partners and within the joint management team.”

The bigger issue today for India, which is currently being crippled by a huge current account deficit, is the impact on FDI inflows. “Walmart will be a speck in India’s retail market,” says Chidambaram. “Its absence won’t make any difference to the country.” Rangar is also optimistic. “As long as the broader investment case for an India entry is compelling and overseas companies are patient enough to commit to India for five-to-seven years to see stability in their Indian operations, FDI will keep flowing in,” he predicts. “What’s more, the Indian companies that have deep domestic execution skills will find themselves being courted by overseas companies, not necessarily for a joint venture but on a project-by-project basis.”

But Chittoor sees Walmart as a key player. Since the FDI rules were amended more than a year ago, India has not received a single application for multi-brand retail. “The impact of the Bharti-Walmart breakup on FDI depends on what Walmart plans to do now,” he says. “If it decides to continue in India on its own, it means that it is confident of the potential of the Indian market. That is very positive for FDI. However, if it decides to pull out of India completely, it could have a negative impact.”