Con Inc

Fraud cases threaten to mar corporate India's reputation

When Satyam founder Ramalinga Raju's letter admitting to inflating his company's accounts landed at the Securities and Exchange Board of India (SEBI), people thought it was a spam mail circulated with ulterior motives. While Satyam's will go down as the biggest fraud case in corporate India, it is not the only one. Experts say that corporates are more vulnerable to risk and fraud today than ever before.

A 2012 survey by Ernst & Young on fraud in India Inc. reveals that three out of five respondents (MNCs and domestic firms in India) have been victims of fraud in the last one year. “India faces the challenge of a compromised ethical behaviour, justified by offenders for survival in a highly competitive and fast growing market,” says Arpinder Singh, partner and national director, fraud, investigation and dispute services, Ernst & Young.

The Association of Certified Fraud Examiners report states that 34 cases of fraud have been reported in the corporate world in India in 2011-12.
Reebok India has been among the latest victims. Reebok India has lodged a complaint with the Gurgaon Police alleging that its former managing director Subhinder Singh Prem and former chief operating officer Vishnu Bhagat had stolen products by setting up secret warehouses in Delhi, fudging accounts and making fictitious sales causing a loss of Rs870 crore to the company. The Reebok complaint says that by the end of 2011, products worth Rs147 crore were invoiced, but not delivered. It also alleges that the former executives ran an unauthorised franchise referral programme and collected money for opening stores. This was done despite instructions from the parent company, Adidas, not to expand the store base further. Apparently, no franchise store was opened despite a collection of Rs114 crore from various investors. The case has now been referred to the corporate affairs ministry's Serious Fraud Investigation Office (SFIO).
In the retail sector, companies such as kidswear brand Lilliput and grocery chain Subhiksha have also been accused of accounting fraud. According to Wipro chairman Azim Premji, who invested in Subhiksha, there was an overstatement of accounts, fake inventory, fake bills and fake companies to which money was transferred. Says Neeta Potnis, senior director and national leader, forensic and dispute services, Deloitte India: “In case of retail, the volume of transactions is very large. There are a lot of touch points with business associates. A large inventory has to be maintained and there are multiple processes. So, sometimes, when there is too much focus on growth, focus on internal control goes away.”
In the case of an accounting fraud, the revenues are boosted and liabilities are understated to show higher profits. Experts say frauds also occur in procurement and the chances of receiving kickbacks for orders and manipulation of quotations are high.
According to the Ernst & Young survey, rising consumerism has resulted in executives indulging in frauds to support lifestyle needs 'that is not commensurate with their incomes'. Typically, a fraudster is a very ambitious mid-management employee, with many years to go before retirement, working in the procurement or sales department.
For a growing number of executives, the pressure to meet revenue growth targets is undermining their commitment to compliance with policies and the law. “Expectations of stakeholders such as investors have increased irrespective of business conditions. Remuneration today is far more connected with performance, so there is pressure on the top management to perform,” says Potnis.
The Ernst & Young survey also says that data or information theft and intellectual property infringement ranked first among the top five fraudulent activities in the country. The growing use of technology has led to more instances of online banking or trading frauds, malwares and phishing attacks. Hacking and stealing of passwords, distributing viruses and illegally downloading files also come under technology-led frauds. In quite a few cases, data theft involves employees stealing confidential data like client lists and internal surveys, before taking up jobs in rival organisations.
Sectors that are most vulnerable to fraud are banking and financial services, retail and IT. In a Deloitte survey that was conducted in February, 93 per cent of the respondents said that there was an increase in frauds in the banking industry. The banks are able to recover less than 25 per cent of losses in more than half of the fraud cases. Citigroup wealth management's relationship manager Shivraj Puri had allegedly diverted funds over Rs300 crore from customers and non-customers of Citibank into personal accounts and had been investing in the equities market for over a year, before he was arrested in December 2010. He had offered high returns to investors, including the promoters of the Hero group.
How can this be tackled? “There is no way to eliminate frauds from the system. However, having a robust corporate culture and putting internal controls can stem it to a large extent. If any data is abnormal, be it positive or negative, it should be examined,” says Vidya Rajarao, leader, forensic services at PricewaterhouseCoopers India.
Many companies think twice before revealing they have been affected by fraud, fearing a tarnished image and loss of business. It also affects employee morale. “It is a well laid out plan. The fraudster generally takes advantage of leakages in the system to siphon off funds. Therefore, periodic and independent reviews are very important. Organisations should anticipate risk coming out of circumstances and make a fraud control plan accordingly,” says Bhupendra Bangari, chief operating officer and national head, risk and advisory services, BDO Consulting, India.
For India Inc., its ambitious reputation is at stake.


Fraud in corporate India
© Instances of fraudulent activities steadily increasing
© Data theft, intellectual property infringement pose the biggest risk
© A typical fraudster is in his 30s, mid-management level
© Rising consumerism encourages fraud
© Companies unwilling to reveal fraud, fearing loss of reputation


Tackling the menace
© A robust corporate culture
© Whistle-blowing mechanism
© Internal controls and audit
© A fraud control or risk management plan

(Source: The Week, By Vandana, June 25 2012)

Rajat Gupta found guilty of insider trading, faces 25 years in jail

WASHINGTON: A federal jury on Friday convicted Rajat Gupta, the Indian-American business icon who strode the US corporate world and moved with the country's high and mighty, of insider trading in a case that illustrated greed, guts, and glory in America's most successful immigrant community.

Gupta, 63, a former director of Goldman Sachs and Procter and Gamble among other storied companies, was found guilty on four out of six counts—three for securities fraud and one for conspiracy. He could receive up to 25 years in prison. The maximum sentence for securities fraud is 20 years and the maximum sentence for conspiracy is five years. But Gupta's defence team indicated that ten years was the maximum he would get.

Gupta is free to appeal, but in the US such verdicts are rarely overturned. He will be out on bail till the sentencing is announced on October 18.

Indian-American prosecutes Gupta

Rajat Gupta counted the Clintons, Gates and many other political and business elites among his friends. He grew up as orphan in India before coming to the US to attend Harvard Business School, after which he joined the consulting company McKinsey, where he rose to become the managing director, the highest post. He is generally regarded as the first Indian-born CEO of a global corporation, and is a co-founder of the Indian School of Business in Hyderabad, and the American India Foundation.

Quite remarkably, Gupta was prosecuted by another Indian-American, New York Southern District US Attorney Preet Bharara, whose war against white-collar crime had snared scores of Wall Street hotshots, including many South Asians.

In the Gupta case, Bharara's prosecution team charged and proved to the satisfaction of the jury that he passed on information about Goldman Sachs and P&G to Sri Lankan-origin businessman Raj Rajaratnam before they were publicly announced, enabling the latter's Galleon Funds to make multi-million dollar profits and avoid losses. Several other corporate managers of Indian-origin were involved in the case and received lighter sentences in exchange for testimony. Before Bharara's crusade against such actions, known as insider trading, white-collar crimes of this kind were rarely punished, particularly when they involved well-connected elites. But Bharara, a Ferozepur, Punjab- born immigrant who was chosen by Obama to be the Manhattan prosecutorial watchdog, has ripped into this cozy Wall Street arrangement, often using controversial methods such as wiretaps and informants.

In the Gupta case, Bharara's team, using phone records and trading sequences, showed that Rajat Gupta placed a call to Raj Rajaratnam within a minute after disconnecting from a conference call in which the Goldman Sachs board (of which Gupta was member) approved billionaire investor Warren Buffett's $5 billion investment in the firm towards the close of market on September 23, 2008. Gupta and Rajaratnam spoke for 30 seconds. With minutes to go before the market closed, Rajaratnam ordered his traders to buy shares of Goldman, making a neat profit for $1.2 million.

That phone call will now send Gupta to prison, where Rajaratnam is already cooling his heels after an 11-year sentence last October.

Allen Stanford jailed for 110 years in fraud case

Source: The Times of India, June 15 2012

NEW DELHI: Disgraced American businessman Allen Stanford, who bankrolled a $20 million Twenty20 match between England and West Indies before being convicted of defrauding investors, has been sentenced to 110 years in prison.

The Texan financier was convicted of 13 charges of fraud. He was found guilty of defrauding investors of more than seven billion dollars.

The 62-year-old created quite a flutter during his association with the England and Wales Cricket Board which later became an embarrassment for the body. He was arrested in 2009 after an investigation by the United States regulators.

But Stanford has always denied any wrongdoing. He told the District Judge David Hittner at his sentencing hearing: "I did not defraud anybody".

"I'm not here to ask for sympathy or forgiveness or to throw myself at your mercy. I did not run a Ponzi scheme. I didn't defraud anybody."

Prosecutors had demanded a 230-year sentence for the businessman, it was reported.

Stanford signed a five-year deal with the ECB worth $100 million but after fraud cases against him came to light, it left the English board red-faced.

He was knighted in 2006 but was later stripped of the title.

Whistling in the wind

Source: Business Today (Edition) of June 24, 2012

Inadequate whistle-blowing policies hindrance to checking corporate fraud

An employee of the Gurgaon-based subsidiary of a multinational company wrote to the parent alleging that some vendors here were companies run by the Indian arm's CEO through his relatives. The parent company hired Hill & Associates, a risk audit firm, to investigate. The allegations turned out to be correct: the vendor companies were run by the CEO's relatives, and he got a share of their profits.
Unethical conduct occurs in companies everywhere, but tolerance of it has declined. Of the companies that responded to Hill & Associates's 2011 fraud survey, 49 per cent had an annual turnover of more than $1 billion, and 69 per cent had at least 1,000 employees.

The survey revealed that 89 per cent of respondents considered employees a major source of information in fraud detection. Only three per cent of known fraud cases were brought to light by shareholders or owners.

A whistle-blower is one who reveals fraud in his or her organisation to the public or to someone in authority. Unfortunately, this is hard to do in India.

"Indian markets are not geared to implement whistle-blower policies," says Monish Chatrath, Executive Director in charge of risk advisory services at Mazars India, an audit and advisory firm in Gurgaon, near Delhi.

 Whistle-blowing in India - especially in public sector enterprises and government agencies - can be costly. The murders of Satyendra Dubey and Shanmughan Manjunath would make most whistle-blowers think twice.

Dubey, an engineer, was murdered in November 2003, after he exposed corruption in the National Highways Authority of India's Golden Quadrilateral project. Two years later, Manjunath, an official of Indian Oil Corporation, was shot for opposing an adulteration racket.

Perhaps one of the biggest deterrents to whistleblowing is the fact that current laws do not guarantee protection of the whistle-blower's identity. In the private sector, too, the corporate governance guidelines of the Securities and Exchange Board of India (SEBI) recommend whistle-blower policies for listed companies, but do not require them.

The Companies Bill, 2011, would make them mandatory, but only for listed companies. The Public Interest Disclosure (Protection of Informers) Bill, 2010, does not apply to the private sector at all.

Awareness about corruption is at a peak thanks to nationwide agitations for a Lokpal and the lid being blown off huge scams.

Tolerance of unethical practices has reduced considerably. In Ernst & Young's (E&Y) 2012 survey on fraud in India, 68 per cent of respondents identified whistle-blowing as a highly effective tool for detecting malpractice in organisations (see "The Battle Against Fraud" , Business Today, March 18, 2012).

The global response was lower at 40 per cent. "However, not even half of the respondent companies had a whistle-blowing mechanism in place in India," says Arpinder Singh, Partner and national leader of fraud investigation and dispute services.

Even so, whistle-blowing works, says Dinesh Anand, Partner and cohead of forensic services at KPMG India. "Out of all fraud detected, nearly 30 per cent surface due to the anonymous whistle-blower mechanism," he says. He says whistle-blowing has uncovered even fraud that had been going on for two or three years.

Chatrath of Mazars cites the case of a company in which a senior employee had been committing fraud for nearly six years, but his subordinates were helpless as there was no whistle-blowing policy. "They had no access beyond the fraudster who was their senior," he says.

The lack of regulatory requirements lets companies in India avoid making strong whistle-blower policies. Most listed companies do have such a policy, but it is rarely backed by a mechanism that makes it an effective fraud detection tool, says Singh of E&Y. Unlisted companies generally do not even have a policy.

Multinational companies usually require their Indian subsidiaries to have mechanisms in place. Indian companies that do business in other countries, too, must have them.

"The Foreign Corrupt Practices Act of the US is too expensive to violate," says Anil Roy, Partner and Head of forensic investigation services at Grant Thornton India.

Companies that once saw little benefit in fraud prevention measures now consider them a way to improve margins.."

T.V. Mohandas Pai, Chairman of Manipal Global Education Services Pvt Ltd and former Infosys board member, says: "Regulators have forced the issue overseas, so laws are enforced."

He says violators in many countries pay hefty fines. In India, Wipro has had an ombudsman since 2003, who reports to the chairman of the board's audit committee. In 2011/12, the company received about 750 concerns, which Chief Risk Officer and Corporate Ombudsperson Alexis Samuel says is below the industry average.

Wipro recently set up a 24X7 multilingual hotline and a web portal accessible from anywhere in the world. "In addition to resolving concerns raised by individuals, we have implemented quite a few systemic and policy-level corrections at the enterprise level," Samuel said in an e-mail reply to BT.

Many companies outsource whistleblower communication to third parties who operate multilingual hotlines. KPMG India offers such a service, called Ethics Helpline. Seventy per cent of users are Indian companies.

"Lot of private equitybacked companies have been showing interest in such services," says KPMG's Anand. Grant Thornton's Roy says Indian companies that saw little benefit in such preventive measures earlier now consider them a way to improve margins. "An efficient framework can help corporates correct or prevent risks," says Roy.

E&Y's Singh says the rationale for a third-party service is the same as for an external ombudsman: objectivity and complete reporting. "It leads to a more effective whistle-blowing mechanism and better corporate governance," he says.

The E&Y survey noted that less than half of the respondents had a hotline, but nearly 90 per cent of those with hotlines said these were operated internally. Mazars's Chatrath says: "An external hotline lends credibility."
Opinion is divided regarding monetary rewards for whistle blowers. Grant Thornton's Roy points out that government agencies such as the income tax and customs departments do have rewards schemes for whistle-blowers, but potential informants remain silent as their identity does not remain concealed.

Chatrath says: "More than monetary rewards, the framework should provide security and trust." But Shalini Chakravorty, Country Manager, Hill & Associates, says monetary rewards can increase the effectiveness of whistle-blowing policies. She cites the US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which rewards whistle-blowers after successful judicial or administrative action.

"The reward ranges from 10 to 30 per cent of what has been collected of the monetary sanctions imposed in the action or related actions," she says.

"Whistle-blowing is all about trust," says Amit Tandon, Managing Director of Institutional Investor Advisory Services, a firm that provides opinions on corporate governance issues. He adds that it requires whistle-blowers to not only trust the system, but also to be trustworthy themselves.

Effective whistle-blowing policies are difficult to implement, says Roy of Grant Thornton. "Are corporates willing to go the extra mile to make such policies successful," he asks. But more than anything else, perhaps, regulators need to take that hard step of not giving companies a choice.

Additional reporting by Goutam Das and K.R. Balasubramanyam

Wal-Mart bribery probe includes India, China

Source: The Times of India, June 13 2012

WASHINGTON: Lawyers for Wal-Mart Stores Inc have flagged Brazil, China, India and South Africa in addition to Mexico, as countries that represent the highest corruption risk in a global review, according to a letter from lawmakers investigating the company.

The lawyers said they first reviewed Wal-Mart policies in Mexico, Brazil and China, and later recommended the company also evaluate its operations in India and South Africa. The lawyers referred to those five countries as regions where the risk was the greatest, according to the lawmakers.

The company has acknowledged it is investigating bribery allegations involving its Mexican operations, and that it initiated a world-wide review of its anti-corruption compliance program in March 2011, but has not provided details about the review.

According to the letter, from Representatives Elijah Cummings and Henry Waxman, both Democrats, Wal-Mart continued to review its anti-corruption policies in other countries.

The review led Wal-Mart to revise its program to include a new procedure for escalating corruption complaints to senior management and the board's audit committee, the letter said.

Cummings and Waxman, who are the ranking members, respectively, of the House Oversight and House Energy committees, asked the company on Tuesday to provide documents about the review and the recommendations.

The pair wrote to Wal-Mart chief executive Michael Duke and also asked him to allow certain witnesses to cooperate with a congressional investigation into the bribery allegations.

"We are cooperating with the ongoing federal investigations, and as appropriate, will also continue to assist Members of Congress and their staffs in understanding our efforts to address FCPA issues," Wal-Mart spokesman David Tovar said in a statement.

Outside lawyers for Wal-Mart at two law firms, Greenberg Traurig and Akin Gump Strauss Hauer & Feld, briefed the lawmakers on May 21 about the company's program to comply with the Foreign Corrupt Practices Act, a 1970s-era law that bars bribes to officials of foreign governments.

But the lawyers did not answer any questions about the substance of the bribery allegations, which were brought to light in an April 21 New York Times report that said that management at Wal-Mart de Mexico orchestrated bribes of $24 million to help it grow quickly in the last decade and that Wal-Mart's top brass tried to cover it up.

The two lawmakers have previously expressed frustration about the information they have received from Wal-Mart.

While Wal-Mart has tapped the brakes on its growth in Brazil and China, last month Walmart International CEO Doug McMillon said the slowdown was not a result of foreign bribery concerns.

Lawyers for Wal-Mart are scheduled to brief Congressional investigators on Wednesday about the "investigative protocols" the company is using to examine bribery allegations in Mexico, according to the letter.

Britannia investigating supply-chain ‘corruption’

Source: Hindustan Times, June 11, 2012

Cookies-to-cheese major Britannia Industries is conducting an internal investigation at its supply chain and logistics department to probe alleged misuse of company powers in giving orders by unfairly favouring some suppliers at the cost of others. This comes within a few days of an alleged Rs. 870-crore fraud at at the Indian arm of German sportswear giant Adidas AG’s Reebok unit .

The high-profile probe is being directly led by Vinita Bali, managing director, Britannia Industries, said informed sources. The investigation aims to find out the number of employees involved.

“We have come across instances of certain practices and behaviour, which are in violation of our code of business conduct, which clearly spells out the ethical standards of behaviour from all Britannia employees at all times. These are being investigated thoroughly and appropriate action will be taken against those employees who have violated that code of business conduct, which every employee signs,” said the company spokesperson.

While the sources said that Bali took swift action and fired 28 people after the scam surfaced, Britannia played down the entire incident, claiming employees were still under probe.

“Ten people have been asked not to show up at work till the investigation is over,” said the company spokesperson.

Britannia has strict and clear code of business conduct and code of conduct for prevention of insider trading by employees. The management was quick to take suitable action once the incident came to light, though it could not be verified since how long the activity was going on, said sources.

The company refused to provide further clarifications. “The probe will be quick and action will be taken,” said the spokesperson.

Serious Fraud Investigation Office to probe KPMG role in Reebok Case

NEW DELHI:

(Source: The Times of India, June 12 2012)

Global audit major KPMG will face questions from the Serious Frauds Investigation Office (SFIO) in connection with the Rs 870-crore alleged fraud at Reebok India, corporate affairs secretary Naved Masood said on Monday. While Delhi-based N Narasimhan & Co was the statutory auditor of Reebok India, a forensics team from KPMG had also been tasked in 2010 by the German company to probe any instance of financial irregularities in its Indian subsidiary by its senior executives. KPMG is also global auditor of Adidas. It is believed that KPMG forensics report had given a clean chit in its findings.

Masood said the SFIO inquiry will look into the overall alleged fraud in the company and the role of KPMG will also be covered as part of this. "The SFIO is expected to look into the entire issue. With regards to KPMG, they will broadly look into three issues — whether it is a fact that KPMG had given a clean chit in its forensic report; if so, whether this should have been given; and lastly, if wrongly given, whether anything happened that led to this," Masood told TOI.

However, he refused to divulge specifics of the investigation. "It has been just been a couple of days since the SFIO got the investigation mandate. We have to give them some time before anything definitive can be spoken on the matter." When contacted, a spokesperson for KPMG in India said the firm cannot comment anything on the issue as a government probe is already on.

The economic offences wing (EOW) of the Gurgaon police department is also understood to have questioned officials of KPMG India over the matter. Auditing regulator Institute of Chartered Accountants of India (ICAI) is also looking into the alleged scam, especially with regard to the conduct of the statutory auditor. However, the ICAI probe is not expected to cover KPMG as forensics is a consulting assignment and not an auditing process.

Corporate affairs minister Veerappa Moily said the SFIO is likely to wrap up its probe over the next four months. The step was taken after a non-invasive scrutiny of the books of accounts of the sportswear maker. The report of the non-invasive scrutiny, carried out by the Registrar of Companies (RoC), Delhi, has already been submitted to the ministry. Reebok India had on May 22 lodged a first information report (FIR) with the Gurgaon police alleging that its former MD Subhinder Singh Prem and COO Vishnu Bhagat had "stolen" products by setting up "secret warehouses", fudged accounts and indulged in fictitious sales to cause a Rs 870 crore dent to the company. Both Prem and Bhagat had denied the allegations.

In its complaint, Adidas — which owns the Reebok brand — had said that commercial irregularities in India had forced it to take a Rs 870- crore hit, in addition to restructuring spend of Rs 470 crore planned in 2012.

Mahindra Satyam claims Rs 275 crore damages from previous management

Source: The Times of India (Mumbai) Edition, June 10 2012

HYDERABAD: Mahindra Satyam has filed a suit against its former Board of Directors, certain employees and audit firm PriceWaterhouse, claiming around Rs 275 crore as damages from the previous management.

In its suit, the IT company said it has lost nearly Rs 3,000 crore revenue and Rs 70 crore profit due to actions of previous management and auditors.

"The plaintiff company suffered a loss on account of several customers cancelling or terminating contracts with the plaintiff company. The company suffered a loss of Rs 2,966.49 crore and consequent loss of profits from the said contracts. The company is entailed to recover Rs 70 crore from the defendants," Mahindra Satyam said in the petition filed in the city civil court.

The new management of the city--based IT firm also sought Rs 51 crore towards the expenses for Forensic Audit conducted after the fraud-hit company was taken over by them.

"The company paid in all a sum of Rs 51.72 crore to the entities and agencies among others, for the purpose of irregularities in the financial statements and operations of the plaintiff company when it was under the control of previous management. The plaintiff company is entitled to recover the amount," the petition said.

Mahindra Satyam named as many as 128 as defendants including B Ramalinga Raju, Rama Raju, V Srinivas, former directors including Ram Mynampati, Krishna Palepu and former auditors Pricewaterhouse and Lovelock and Lewes.

In January 2009, Satyam founder Chairman B Ramalinga Raju had admitted to the accounting fraud at the IT firm. Termed as India's own Enron scam, the alleged Rs 14,000 crore scam cast shadow of doubt on the credibility of the Indian IT sector.

The government soon stepped in and set up a new board, following which Tech Mahindra bought 46 per cent stake in Satyam through a formal public auction process. The company in July 2009 was rechristened as Mahindra Satyam.

The company also wants to recover Rs 20.85 crore the auditing fees paid to PW India and PW USA from the defendants.

Responding to the allegations, a PW India spokesperson said: "PW India is outraged that Satyam is attempting to shift responsibility to the auditors for the consequences of a carefully and deliberately concealed fraud that was undertaken at the direction of its own senior management."

"The fraud perpetrated by Satyam was specifically designed to -- and did -- circumvent Satyam's own internal controls and PW India's audit process, and consequently PW India was a victim of Satyam's fraud, and will defend itself vigorously against Satyam's baseless contentions," Price Waterhouse said.

PW India, meanwhile, also said that it has filed its own civil suit against Satyam and certain members of its former senior management claiming compensation and damages.

Mahindra Satyam in a statement said, "The said suit has not yet been served on the company and therefore it is unable to comment on the same."

A Dysfunctional Nation

By John Mauldin | June 9, 2012

dysfunctional [dɪsˈfʌŋkʃən^əl] adj

1. (Medicine) Med (of an organ or part) not functioning normally

2. (especially of a family) characterized by a breakdown of normal or beneficial relationships between members of the group

European leaders launched the euro project in the last century as an experiment to see whether political hope could become economic reality. What they have done is create one of the most dysfunctional economic systems in history. And the distortions inherent in that system are now playing out in an increasingly dysfunctional social order. Today we look at some rather disturbing recent events and wonder about the actual costs of that experiment. What type of "therapy" will be needed to treat the dysfunctional family that Europe has become? And maybe I'll throw in a "fun" item to finish with, so let's get started.

A Dysfunctional Nation

Michael Lewis has documented quite tellingly in Boomerang the dysfunctional country that is Greece – how citizens avoid taxes, how over 600 categories of workers can retire at the age of 50 with full pensions, and how fraud and corruption are endemic. Other stories have surfaced about how few doctors report more than 10,000 euros of income and how few professionals pay their property taxes.

Recently, when the current Greek government committed to actually collect some taxes in order to get more loans, a bureaucrat decided that a great way to collect property taxes would be to include them in people's electricity bills, a move that caused an uproar. Lawsuits followed, as the national power company tried to cut off electricity for nonpayment. In a country where it can take a decade for a legal matter to get on a court docket, a court rather quickly took up the case and ruled it illegal for the power company to cut off service for non-payment. This ruling led to a massive financial loss by the power company as people simply stopped paying their electric bills.

The government had to step in with a rather large chunk of cash to keep the power on. As of May 1, the power company announced, it would no longer collect property taxes. The natural gas company threatened to cut off supplies to the electric utility for nonpayment, and emergency meetings are being held to"… avert the collapse of the natural gas and electricity system."

The credit system in Greece is in a shambles, and there has been an open bank run this year. Reports that hospitals cannot get necessary life-saving medicines abound, as there is no more credit to be had from most manufacturers. Unemployment is at 22%, and youth unemployment is over 50%. "A collapse in the country's economy has forced many Greeks to turn to black market barter economies and has left millions financially devastated, with no hope of finding an income stream for the foreseeable future." ( infowars.com)

The last election resulted in no possibility of a governing coalition, and new elections are scheduled for next weekend (June 17) – except that the employees who run the elections are threatening to strike if they are not given more pay. The head of the government workers union said Thursday that the union will hold a two-day strike on June 16-17. He also said municipal employees will refuse to do any election-related work until then. We will now see whether the courts will declare such a strike illegal and whether the members will honor a court decision. ( http://www.washingtonpost.com/business/greek-municipal-workers-call-electoral-strike-threatening-to-derail-crucial-june-17-vote/2012/06/07/gJQAlhOjLV_story.html)

Greece was already in enough turmoil, with no clear winner emerging in the last polls that were taken this week. (Note: It is against Greek law to publish the results of a poll less than two weeks before an election.) And then there was the "debate."

I assume that by now you have seen the video of the televised debate among representatives of the seven Greek parties. In a bit of poor planning, the very nationalistic Golden Dawn party head, a rather solid-looking young body builder, was seated next to the Communist Party leader, who is a lady. A few insults were exchanged, some water was thrown in the face of a rather pleasant-looking young lady (a representative of a leftist party) across the table from the Golden Dawn guy, there was a slap on his arm with a folder by the Communist Party leader; and then they were on their feet and Mr. Golden Dawn was repeatedly slapping and then punching Ms. Communist Party.

If for some reason you have not viewed this short but exciting clip, here is a link: http://www.rt.com/news/greek-politician-slaps-rival-278/ . Or you can Google "golden dawn greek slap" and get a link to a report in your language of choice. If you choose the German version from Der Spiegel, you can hear the word neo-Nazi repeated several times by the German reporter.

This exchange provokes a few thoughts. First, incidents of violence and vigilantism in Greece are rising, along with the lawful public demonstrations. Whatever veneer of civility that was left was ripped away by the boorish behavior of the Golden Dawn representative.

Second, this fracas will now dominate the national conversation. Rather than focusing on what they should do about remaining in the eurozone, accepting or rejecting austerity, and putting together some sort of coalition that can govern the country, they will be focused on this event. Nine days before an election in which no party seemed to have a clear lead or a path to a ruling coalition, the results are now even more in question. Golden Dawn had some 6% of the Greek vote. Will it maintain that percentage? If not, where will its votes go? Will this help or hurt the mainstream conservative or left-of-center parties?

Whether it be families or nations, such a level of dysfunctionality almost always ends in tears. The "slap" is just one more telling incident in a country that is on the brink of self-destruction. It is very possible that the winner of the election will be a party that wants to reject austerity but believes that the rest of Europe will give them the money they need to continue to pay their public employees, maintain services, and keep the government functioning. The reasoning seems to be that Europe will do that because they need the Greeks to continue to pretend that they will pay off their national debt to the European governments and ECB.

Why are we still fixated on Greece? Even though Greece is small, it matters; because if Greece leaves the euro then the markets will immediately ask, "Who's next?" And while a year ago everyone thought the answer was Portugal, the market is now looking hard at Spain, which is on the same path to insolvency that Greece was only a few years ago.

Spanish government leaders are now beginning to admit they must have help, as it appears they will soon be frozen out of the bond market, if that has not happened already. As I have written, it will take a massive commitment of European (read German) money to save Spain, and it's not a one-time commitment. It is not just 100 billion euros to re-fund Spain's banks. If Spain gets frozen out of the market, adding another €100 billion in debt will not make things better, when there is a nearly 10% fiscal deficit, unemployment as bad as Greece's, and an economy that is in freefall.

Europe is going to have to buy all Spanish debt for years. And not just new debt but all the old debt that is coming due and must be refinanced. We are talking hundreds of billions of euros. And if there is a bank run on the order of Greece's? The number just keeps getting bigger. To think it will be anything like the €46 billion being talked about by the IMF today is to simply ignore economic reality.

That money will have to come from somewhere. Either the ECB will have to monetize it directly (possible but not likely) or a pan-European entity like the ESM will have to be allowed to become a bank and then apply to the ECB for loans and a capital infusion in order to then bail out Spanish (and other) banks.

It is obvious, at least to your humble analyst, that if the eurozone is to survive several things must happen. First, there must be something created on the order of a European FDIC. Banking guarantees and regulation must become a European responsibility, not a country responsibility. How would it have worked if the rest of the US had decided that New York should bail out its own banks, when they had their crisis in 2008?

Second, if the ESM is allowed to become a bank, then what will those guarantees look like? Because the original agreement of member countries to back a specific and limited amount of debt will now be increased ten-fold. And that will mean something in the neighborhood of €4-5 trillion.

How could they need that much? The answer is, because it will not be just Spain. Can Italy be far behind, given the unfolding European recession? And the French banks? France itself, given the new policy direction of its government and its own massive unfunded liabilities?

Assume it is just €4 trillion, spread over a few years. Germany will be responsible for at least 25% of that amount, or about 40% of their GDP. And that assumes that Spain, Greece, Ireland, et al. will be good for their portions.

Will Germany want to take on such a massive new debt? The periphery countries already owe the German Bundesbank over €1 trillion. German debt-to-GDP is already at 80%. German credit default swaps are rising in cost.

If Germany takes that first step, it must be prepared to keep marching, because to stop at any point will mean even more pain, since they will still be responsible for their share of any debt created after that first step. As they say at the poker table, "In for a dime, in for a dollar."

Certainly, if they are to take on such a debt, there must be guarantees of fiscal control by the nations who need help.

And that means a tighter fiscal union. When the euro was created, European leaders thought that a common currency would naturally lead to a fiscal union. Monetary unions without fiscal union always become dysfunctional.

Or there will have to be direct monetization of the debt by the ECB, which goes against the policy that Germany thinks it agreed to.

Either way, it is a very large change in position for Germany.

There are three problems that Europe must solve. They have a sovereign debt problem and a resulting banking debt problem. Both of these are evident and there might be some solution, given time and money.

But the third problem is the more difficult one. That is the trade imbalance between Germany and the peripheral countries and the differing levels of productivity of their workers. Trade deficits must be brought into line. The usual way to do this is through currency devaluation by the country with the trade deficit. That is not possible for the countries in the eurozone. So, the only other way is for the workers of an uncompetitive country to accept lower wages. Since no one thinks they are underpaid, that will happen slowly and painfully and mean a protracted recession or depression.

Which leads to voter frustration and frayed nerves that spill over into dysfunctional actions. It also leads to political changes.

New Accounting Norms to Increase Liabilities of Cos

New Accounting Norms to Increase Liabilities of Cos

(Source: The Economic Times, June 09 2012)

As per the new norms long-term loans will now show as a current liability on cos books

Indian companies, grappling with slowing business environment and deferment of projects, will now have to contend with another challenge from a recent change in accounting principles that will increase their current liabilities and ability to borrow.

The changes approved by the ministry of corporate affairs have, however, been cushioned with a qualification from the Institute of Chartered Accountants of India, the nodal body to recommend accounting changes, putting the onus on lenders.

The ministry issued the revised Schedule VI to Companies Act, through notification (No. S.O. 447 (E)) by laying down a new format for presentation of financial statements.

The earlier Schedule VI has been followed for more than 50 years. The new requirement to classify all assets and liabilities into current and non-current categories, says liabilities expected to be realised or settled within 12 months from the balance sheet should be classified as current. This will now show long-term loans — repayable within 12 months from the balance sheet — as a current liability.

Such a move will impact key financial ratios such as working capital, current asset and debt equity ratios, which in turn will have an implication on other terms of the loan, including interest rate or repayment terms.

Indian companies have been unable to service their debts due to the slowdown in economic environment and high interest rates. During the March quarter, for companies in the BSE 500 index, the interest coverage ratio — the ability to pay interest on loans — is at 4.9 times, which is the lowest since the liquidity crisis of 2008.

But this classification of long-term loans as a current liability has been provided relief through a guidance note issued by the ICAI that asks lenders to first recall these loans in the event of a breach. Typically, loan agreements in India include a variety of covenants, which if breached will give the lender the right to recall the loan. ICAI’s guidance note has clarified that the loan becomes current only if the lender recalls the debt.

“Banks in India generally do not recall loans on concerns that they will have to show this as an NPA (non-performing asset) on their books,” said KPMG partner and global head of accounting advisory services Jamil Khatri. “Taking on a default in a covenant is generally added as a matter of abundant caution and banks generally do not demand repayment of loans on minor defaults of debt covenants.” A Crisil report pointed out that with corporate defaults rising sharply, the current fiscal year will see Indian banks restructure about . 1 trillion worth of loans, an increase of 54% over last year. The ICAI guidance note also provides relief by saying that if there is a minor breach such as a default in the filing of quarterly information and the lender has not recalled the loan as on the date of approval of the financial statements, the loan should continue to be shown as non-current.

Ernst & Young partner Dolphy D’Souza said the institute has gone a step further and included even large defaults. “In the guidance note they had clarified that minor breaches on the balance sheet date does not lead to classification of the loan as current unless the bankers have actually called the loan,” he added.

Numbers Game

• The classification of long-term loans as a current liability has been provided relief through a guidance note issued by ICAI that asks lenders to first recall these loans in the event of a breach

• The current fiscal year will see Indian banks restructure about . 1 trillion worth of loans, according to a Crisil report

 

Reebok fraud case: Adidas asked to file I-T returns in India

Source: The Economic Times, June 06 2012

NEW DELHI: Adidas, the German headquartered sports goods maker, has more problems on its hands than tackling the alleged fraud in its Reebok India business.

The international tax division, a wing of the Central Board of Direct Taxes (CBDT), has asked the parent company to file income-tax returns in India as it reckons that Adidas is generating some of its income from the country, but not paying taxes here, according to an official in the income-tax department.

The profits that the tax authorities are seeking to tax are independent of the income that the company earns from its two subsidiaries in India - Adidas India Marketing Pvt Ltd and Reebok India Company.

A notice has been sent calling for returns for the financial year 2010-11 (or assessment year 2011-12) and a letter has been sent seeking information for previous years. The move is the outcome of surveys conducted a few years ago where the department found some evidence of the global parent generating income in India, independent of its subsidiary, said the official in the income-tax department.

However he did not disclose details of the business or activity sought to be taxed or the income which the tax authorities believe Adidas is generating.



Adidas is yet to respond to the income-tax notice. The group's spokesperson said: "We have received a letter from a wing of the Central Board of Direct Taxes and we will be responding to the query."

The notice was sent a few weeks before Adidas revealed that irregularities at its Reebok India business had shaved off Rs 870 crore of its global profits.

The disclosure forced Adidas to replace its top management in India and shut down 300 Reebok stores.

Adidas India files returns in India and is also covered by transfer pricing audit meant to ensure that the company does not shift profits out of India.

The Indian subsidiary recorded revenues of Rs 455 crore and a profit of Rs 9.11 crore for the 12 months ended December 2010.

The move comes at a time when the government is under pressure to collect more revenues, with growth slowing down. The tax department has been particularly proactive in establishing whether multinational companies generate profits from India, but escape paying taxes.

"Some of the global MNCs are already filing income-tax returns in India and they have a permanent establishment (PE) here. Therefore, a portion of their income is attributable to India," said a senior tax official.

PE refers to a legal entity set up by a company to manage its operations. An alternative definition of PE is that of an agent who has the authority to conclude contracts.

"The existence of a PE is a fact-based assessment. If the subsidiary is a PE, arm's length profit should subsume attribution. However, if a PE exists on a stand-alone basis, one needs to attribute additional profits to tax," said Shefali Goradia, Partner BMR Advisors.

The Adidas Group posted an 11% rise in revenue to 13.4 billion euros (Rs 92,764.3 crore) and 18% increase in profit of 670 million euros ( Rs 4,638.67 crore) for the year ended 2011. However, Adidas India's financial performance during 2011 was not available on the website of the registrar of companies.

Adidas asked us to manipulate Reeboks's accounts: Subhinder Singh Prem & Vishnu Bhagat

NEW DELHI: The two former executives of Reebok India, at the centre of an alleged 870-crore alleged fraud, have accused German sports goods maker Adidas of attempting to hammer down the valuation of the Indian unit, as part of its strategy to reduce its payout to the minority shareholder in the company.

Former Reebok India chief executive Subhinder Singh Prem and former COO Vishnu Bhagat have in separate suits filed last month in the Delhi High Court said they were asked to 'carry out certain illegal and unethical actions' by the Adidas Group, such as manipulating accounts, booking irrelevant expenses and cancelling large distributorships, to ensure that the market value of Reebok India fell significantly 'so that a significantly lower amount becomes payable to the exiting Indian joint venture partner'. Reebok India is a subsidiary of Adidas.

While the petitions do not mention the names of the joint venture partner, Focus Energy Ltd, a group company of Ajay Kalsi's Phoenix International owns 6.85% in Reebok India.

According to the shareholder's agreement, Adidas has a 'call option' or the right to purchase the shares of the Indian partner but the two have been locked in a legal dispute over the price at which Focus Energy will sell its shares. The matter is currently pending before the Delhi High Court.

A person familiar with the development said while Adidas does not want to pay more than 25 crore for Focus Energy's 6.85% stake while the Indian partner was demanding as much as 550 crore. Both Adidas and Focus Energy declined to comment on these figures.

According to an internal e-mail of July 2010, reviewed by ET, Adidas and Reebok India executives have discussed several strategies to keep their payout to a minimum. One of the options considered then was to "to wind down the operation of Reebok India and remove the distribution rights to reduce market valuation."

Adidas AG had also explored the option to transfer its stake in Reebok India to Adidas India based on Controller of Capital Issues (CCI) valuation that values a company based on past performance. The valuation based on this method is usually conservative.

In April 2010, the RBI changed this guideline and said the transfer value of the shares should be decided only through discounted cash flow (DCF) method, which takes into account the projected cash flow in the next five years and not on past performance. Under the present guideline, the valuation of Reebok India would be much more than what it would have been under the Controller of Capital Issues method.




 Adidas had sacked Prem and Bhagat in March this year, and has accused them of commercial irregularities and financial embezzlement, adding up to 870 crore. In an FIR lodged with the Gurgaon police on May 21, it has charged them with misappropriation of funds, inventory diversion, and fictitious inflation of sales revenue.

A person close to Prem and Bhagat said Adidas had invented these charges against them to show exceptional losses of a much larger magnitude, thus bringing down the valuation of Reebok India.

But the suits filed by the two former executives claiming unpaid dues from Reebok India, before the FIR was lodged, do not contain this specific allegation.

The suits say that the refusal of the executives to carry out 'unethical and illegitimate requests' aimed at bringing down the valuation of the company led to further bitterness between Adidas and the executives.

An Adidas spokesperson declined to comment on these allegations.

"We are cooperating with the authorities in their investigation. Please understand that we cannot provide any further detail since the matter now rests with the Indian law enforcement authorities," he said in a reply to a detailed questionnaire.

P K Minocha, director and authorized representative of Focus Energy, too, declined to comment. "The matter is sub-judice. Hence, we would not like to comment," he said. Adidas, through its wholly owned Reebok (Mauritius) Company Ltd, owns 93.15% stake in Reebok India Company.

Focus Energy Ltd, a group firm of Phoenix International of Ajay Kalsi, owns the balance 6.85% or 1,56,750 equity shares of 100 each.

Meanwhile, a large franchisee of Reebok India said on Monday that the company is not dispatching fresh supplies of shoes and merchandise that will have serious bearing on sales of the company. "We have not received goods for the past month and facing shortage of products in our showrooms,'' he said, requesting anonymity.

Source: The Economic Times, June 05 2012
 

Reebok case probe widens, KPMG may come under scanner

Source: Mint, Vidhi Choudhary & Aman Malik, Jyne 1, 2012

The Gurgaon police will also question Reebok India’s executives and internal auditors

Gurgaon/New Delhi: Law enforcement agencies looking into the alleged financial irregularities at the Indian arm of Adidas AG’s Reebok unit are set to widen their probe to include audit firm KPMG India.
Maheshwar Dayal, deputy commissioner of police, Gurgaon (east), and a corporate affairs ministry official with direct knowledge of the matter, independently confirmed the development. The second official declined to be identified.

The ministry official said the forensics arm of KPMG, Adidas’ global auditor, was hired by the company in March 2010 to secretly investigate suspected irregularities at Reebok India. Around that time, Reebok India was getting integrated with local unit of Adidas.

Adidas bought Reebok International Ltd in August 2005 for $3.8 billion but the merger of their Indian operations was completed only in 2011. KPMG had submitted its final report in June 2011.

Gurgaon police will also question Reebok India’s internal auditors and executives of the sportswear company in its accounting, sales and inventory teams, Dayal said. “We will begin taking statements of company executives within this week.”

The special investigation team looking into the case includes an official of the economic offences wing of the Haryana state police.

On Monday, the corporate affairs ministry asked the Serious Fraud Investigation Office (SFIO) as well to investigate the matter. The two investigations—by Gurgaon police and SFIO—will progress parallelly, officials said. The ministry official cited earlier said SFIO will primarily look into the legal aspects of the case and close its investigation in four months.

The move followed a scrutiny of Reebok India’s accounts by the Registrar of Companies (RoC). In its report, RoC stated that Reebok India was not fully cooperating with it and not furnishing the required documents, the official said.

SFIO and RoC come under the corporate affairs ministry.

The case unravelled as German sportswear maker Adidas, which has bought Reebok, accused two of its former top executives in India of a Rs. 870 crore fraud. The company filed a first information report (FIR) with Gurgaon police on 21 May accusing its former India managing director Subhinder Singh Prem and ex-chief operating officer Vishnu Bhagat of indulging in “criminal conspiracy” and “fraudulent” practices over a period of time.

The ministry official cited above said the KPMG probe had cleared the two former company officials. Financial website moneycontrol.com had first reported this on 29 May.

A spokesperson for the audit firm said in an emailed response that “KPMG India are not the statutory auditors of Adidas/Reebok in India,” and declined to comment further.

Reebok India’s books are audited by N. Narasimhan and Co. The auditor could not be immediately reached for a comment.

Prem, speaking over the phone, said the KPMG report is a part of a legal suit he has filed against Adidas. Prem claimed that all the cases against him were part of a “conspiracy” by Adidas. The “secret” warehouses mentioned in Adidas’ FIR were “on the company books” and were “temporary” in nature, he said.

The FIR had said Prem and Bhagat were operating four “secret” warehouses “to keep clandestinely diverted and stolen stocks” of the company.

An executive of the Institute of Chartered Accountants of India said the apex body will investigate N. Narasimhan and Co. “to the extent that they used information provided by the company.”

On Saturday, a Gurgaon court rejected anticipatory bail pleas filed by Prem and Bhagat.

Phone calls and text messages sent to Bhagat on Thursday remained unanswered.

An Adidas spokesman said the company “is cooperating with law enforcement agencies.” He declined to comment any further on the matter.

A 2G scam that predates Raja: Did telcos steal spectrum?

Source: First Post, By Aditi Roy Ghatak and Paranjoy Guha Thakurta

The spectrum scam neither started with A Raja, nor, for that matter, when the BJP-led NDA government was in power, as is often alleged by the Congress. Spectrum has been misallocated and undervalued ever since the government gave up its monopoly over the country's airwaves in 1994 when Sukh Ram was Communications Minister.

The untold story of the history of India's spectrum scandal is being revealed here for the first time after four months of investigation into old records and dozens of off-the-record interviews with experts who disclosed how phrases like 'cumulative maximum' were deliberately used to interpret complex rules, thereby depriving the exchequer of its dues.
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Technology has a curious way of rendering even popular and often wise English expressions redundant. Whoever said that money could not be made 'out of thin air' was mistaken. India has just shown that not only can humongous sums be made out of thin air. Indian ingenuity has accomplished what is arguably the world's largest ever reported financial scam 'out of thin air', in this instance, a close to $40 billion scam relating to misallocation and undervaluation of second-generation or 2G electromagnetic spectrum used mainly for mobile telecommunications.

Whereas the 2G scam has hogged the headlines, there is a strongly suspected but uninvestigated case of 'stolen' spectrum, for want of a better word, which started in 1994 when the government of India gave up its monopoly over the telecom sector. So effectively have the tracks been covered that not even seasoned telecom experts with no vested interests sense the possibility of a scam while others dismiss it as ridiculous.

Thus, contrary to questioning the need for placing licences of 1994 vintage under judicial scrutiny on grounds that they have no relevance to the Supreme Court's February 2012 judgment cancelling 122 licences.

The investigation conducted by the two journalists who have written this series of articles suggests that it would be an excellent idea to have the entire licence-spectrum regime of the last 18 years examined thoroughly so that those who have secured spectrum beyond their contractual obligations and possibly through malfeasance be brought to book. One school of thought suggests that the companies that received extra spectrum only be asked to pay the appropriate price for a finite (and, therefore, scarce) natural resource that has turned them into multi-billionaires in a decade or so. Another view is that the letter and the spirit of the law demands that purloined resources be returned and letting those who misappropriated these resources get away by paying for what was not theirs to begin with, would be tantamount to standing the law on its head. Spectrum, as every Indian knows, is an invaluable asset in today's age of communications-driven growth. After the hullabaloo over the 2 February 2012 judgment of Supreme Court Justices GS Singhvi and AK Ganguly (now retired) settles down, the question that should exercise the mind of the interested Indian is how all this began in the first place and how come no one is talking about the roots of the phenomenon called 'stolen' spectrum. Not that everyone is entirely ignorant; the government knows; members of the Joint Parliamentary Committee, set up to examine matters relating to 'Allocation and Pricing of Telecom Licences and Spectrum' during 1998, actually had a presentation made to them by the Department of Telecommunications (DoT) clearly suggesting the anomalies in the spectrum allocation, even though the presentation did not underscore this point of stolen spectrum and none of the MPs present asked pointed questions to the officials of the DoT. To set the stage for this series, it may be worthwhile to revisit recent developments in the telecom space. The Indian telecommunications network currently has in excess of 900million wireless connections and India has the world's second largest telecom subscriber base - which is also the fastest growing market with between five million and 10 million additions to the SIM (or 'subscriber identity module') card base every month over the last year. The private sector is at the commanding heights of this market with an 85 percent control, thanks to policies that have provided easy market access for telecom equipment and a regulatory framework that the government promised would be fair for the service providers and affordable for a wide cross-section of Indians.Yet, the government's actions have been far from fair, irrespective of the party in power. The only Union Minister for Communications to have got seriously implicated in recent times is Andimuthu Raja, who has spent 15 months behind bars. The important development in recent times is the sudden scramble to seek clarity on pricing of spectrum and allocation, especially after the Telecom Regulatory Authority of India (Trai) released a consultation paper on "Auction of Spectrum" on 7 March 2012. A quick look at the questionnaire leaves an impression that Trai is inclined to accommodate the incumbent dominant operators at any cost by seemingly trying to develop some consensus on contentious issues through comments from industry associations and other stakeholders, overlooking well established-principles of "no loss to the exchequer" and raising eyebrows yet again on its ability to be an impartial regulator. The Trai paper principally deals with the quantum of spectrum to be auctioned, liberalisation of spectrum (ie use of spectrum for any kind of service), refarming (or reallocation) of spectrum in the 800 Mhz (megahertz) and 900 Mhz bands, the structure of the auction, the spectrum block size, the eligibility criteria for participating in the auction, the reserve price, roll-out obligations, spectrum usage charges and spectrum trading.