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
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.
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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
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