The Adidas-Reebok saga in India: When the shoe moves to the other foot

Veeresh Malik | July 17, 2012 04:01 PM |

We have an unfortunate tendency to simply believe everything the foreign companies tell us. It was so in the case of the Adidas/Reebok episode also, when ‘scam’ figures of Rs8,700 crore were thrown around and published without demur

The Reebok-Adidas episode in India moved from the shocking to the absurd and now appears to be settling down to a more rational case of corporate tax evasion.

The issue was initially positioned by eager PR tactics as a case of fraud to the tune of Rs870 crore by the senior Indian executives in the company post takeover of Reebok by Adidas globally. This was lapped up eagerly by a business media more tuned to swallowing hand-outs wholesale. The story was next pushed into another level by the ‘mistaken’ addition of an extra zero which converted it into a Rs8,700 crore scam. It has now eventually been scaled down to a few hundred crores as a possible scam.

And of all things, a claim of Rs135 crore worth of damages suffered in a warehouse fire, on the outskirts of Delhi.

A quick re-check with the fire department reveals that there was no major fire of this sort reported in Delhi or around Delhi in the last eight years, and a fire involving so much rubber, plastic, polymer and other fabrics as well as shoes would have left more than a lingering smell over Delhi for weeks.

At a very modest estimate, a 40 ft container would be able to transport about Rs40 lakh worth of shoes. Such a fire would imply 350 such containers. That is nine train loads. Is it the contention of Adidas and Reebok that there was so much of their product, raw material or finished goods, in stock?

So what’s the truth here, and who is playing a fraud on whom? As on date, this is part of the known status:

# The Income Tax Department opines that it may not be a case of corporate fraud, but more likely be a case of tax evasion, to the tune of about Rs140 crore. This is on operations in India of both Reebok and Adidas, pre and post takeover, and as of now does not include the transfer pricing element. Adidas took over Reebok globally, but there is no clarity on what component of the profits from this sale were taxed in India for the India part of the deal.

# The other official entities involved, which include the police, the Serious Fraud Investigation Office (SFIO) and the Registrar of Companies (RoC), are continuing their enquiries and investigations. However, the ROC has come on record stating that Reebok India was not co-operating fully and not furnishing documents. This, reportedly, pertains to trying to establish who the beneficiary owners of Reebok are.

# The auditors, N Narasimhan & Co, as well as KPMG have claimed that they are not auditors to the companies Reebok and Adidas, though the matter is not as simple as that. They have not really provided any further information to back up the claims made by Reebok-Adidas on the fraud. It is interesting to note that the global merger/take-over took place in 2005 but the India merger/take-over was consolidated only in 2011.

# It is also a fact that there appears to be a strange reluctance on the part of Adidas-Reebok to provide more information on this matter after the initial flurry of accusations and announcements which very often bordered on tarring and besmirching the reputation of not just the Indian managers and executives in the company but also cast aspersions on the whole Indian business ethos as a whole.

All this in the face of a simple fact—true turnover of both the companies put together was in the range of a few hundreds of crores every year. Which number is also in doubt now, due to certain excise related issues on discounts and possible violations in numbers, what is known as ‘seconds’. And in large corporate entities like this, there is no way that fraudulent expenses or tax/excise evasions in thousands, leave alone lakhs and crores, can take place without full and tacit knowledge as well as approvals of board-level people as well as accounts and audits.

What actually happens in such cases is like this:

A merger or take-over takes place between two entities situated abroad at mutually agreed terms after lots of due diligences and negotiations. Space is kept open for issues which may crop up, and some margin for error is also kept, but by and large most issues are pre-empted. Space is also kept wide open for “off the record” issues.

The issue that causes problems, however, is taxes on profits derived by any of the parties involved in the merger and take-over. Till the Essar-Vodafone issue opened this, taxes on these profits were avoided by routing the transaction through a wide choice of tax havens. It was assumed that foreign companies, especially western or other developed countries, could do no wrong in this context.

However, in this case also, as the game unravels, it appears that transfer pricing and arms-length provisions have been flouted by all the entities concerned, Adidas, Reebok and the new entity. The long timeline from 2005 till 2011 also saw the introduction of a whole gamut of new rules and regulations globally which impact such take-overs and mergers, especially the taxation on profits aspect.

This appears to be the real issue here. Because, as of now, there appears to be no record or track of taxes paid on profits in India on windfall or otherwise, by virtue of the sale or merger or takeover of Reebok in India by Adidas in India, paid by either of these two entities. The trail, as a simple matter of fact, appears to go cold in the annual report by Adidas for 2011.

The actual details are very complicated, but very briefly bear repeating. No taxes appear to have been paid in India on any part of the merger/take-over. Some insurance frauds appear to be part of the game. And there was a very interesting linkage to the Sports of India which appears to have been removed from the online investors’ report of Adidas too.

The lives and careers of more than a few resident Indian directors and executives who worked at Reebok and Adidas in India have been ruined, the business future of vendors and retailers are in limbo, and there is no sign of any substantial evidence by Adidas-Reebok to prove the allegation of Rs870 crore fraud in India by Indians.

(Source: Money life - Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)

Always Ask a Banker to Put the Lie in Writing: It has been an open secret for years that banks have routinely misstated their growth numbers

By JONATHAN WEIL NEW YORK

If we take Bob Diamond and Paul Tucker at their word, part of the Libor scandal at Barclays can be chalked up to a series of comic misunderstandings, like a children's game of telephone. It's a bit much to swallow, but the spectacle sure has been fun to watch.

Both men agree that on October 29, 2008, while the financial system was on the brink, Tucker, who is the Bank of England's deputy governor, called Diamond on the phone. Diamond, who resigned last week as Barclays's chief executive officer, was head of the company's investment-banking business at the time. In Diamond's version, Tucker told him "he had received calls from a number of senior" UK government officials asking "why Barclays was always toward the top end of the Libor pricing", according to a file note Diamond wrote that day. Tucker said "while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently", according to Diamond's memo. Tucker, testifying before a UK parliamentary panel this week, said that last sentence of Diamond's note "gives the wrong impression". He wasn't nudging Barclays to underreport its Libor submissions, he said.

Rather, Tucker said he was expressing concern that Barclays was paying too much to borrow money — and sending signals to the markets that it was desperate for funding, at a time when Barclays was widely viewed as the next big UK bank to need a government bailout. Tucker said he didn't make any record of the talk, in spite of the Bank of England's policy to make notes of important phone calls. He said he was too busy. Libor is the now-infamous interest rate benchmark used in hundreds of trillions of dollars of transactions globally, from loans to derivative contracts. Each day, in surveys overseen by the British Bankers' Association, major banks estimate their borrowing costs. It has been an open secret for years that banks routinely misstated their numbers. A Barclays Capital strategist, Tim Bond, even said so in a May 2008 interview.

Last month, Barclays agreed to pay $453 million to settle US and UK claims that it manipulated its Libor submissions as far back as 2005 — years before the phone call in question.

Diamond told the same parliamentary panel last week that he didn't interpret Tucker's comments as an instruction to lower Barclays's Libor submissions. Another top executive did perceive them that way, however, after receiving Diamond's memo and passed down orders to that effect to the bank's submitters. That person, Jerry del Missier, resigned as Barclays's chief operating officer July 3. The supposed misunderstandings don't end there. In his October 2008 file note, Diamond wrote that he asked Tucker "if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions".

Tucker told members of Parliament's Treasury Committee that he didn't take that statement to mean there was cheating going on. He said he thought it meant that "when they come to do real transactions, they will find they are paying a higher rate than they are judging they would need to pay."

Tucker also was asked about a 2007 meeting with banking-industry members of a Bank of England liaison group. Minutes show "several group members thought that Libor fixings had been lower than actual traded interbank rates." Tucker, who chaired the meeting, said "it did not set alarm bells ringing".

 "This doesn't look good, Tucker," the committee's chairman, Andrew Tyrie, said. "It doesn't look good that we have in the minutes on November 15, 2007, what appears to any reasonable person to be a clear indication of low-balling, about which nothing was done." Tucker replied: "We thought it was a malfunctioning market, not a dishonest market." Diamond's credibility doesn't look any better. This week, Barclays's departing chairman, Marcus Agius, released an April 10 letter from the chairman of the UK's Financial Services Authority, Adair Turner, expressing doubts that Barclays could be trusted. At last week's hearing, Diamond said the FSA had been happy with the bank's "tone at the top”. He downplayed the FSA's concerns as mere "cultural issues", even when asked about the letter, which hadn't been released publicly yet when he testified. It's hard to know whom to believe less.

There's no mystery why Tucker's 2008 phone call to Diamond is receiving so much attention. The notion that a central banker may have prodded a big bank to lie about its numbers rings true.

In May 2008, for example, the US Office of Thrift Supervision let IndyMac Bancorp backdate a capital contribution so it would appear on its books in the prior quarter. IndyMac failed two months later, costing the Federal Deposit Insurance almost $11 billion. When banks were teetering in 2008 and 2009, regulators and lawmakers in Europe and the US browbeat accounting-standard setters into making emergency rule tweaks so banks could show smaller losses.

After American International Group's 2008 government bailout, officials at the Federal Reserve Bank of New York pressured AIG executives not to disclose details of how the company had paid its counterparties 100 cents on the dollar using taxpayer money. Now it turns out the New York Fed says it received "occasional anecdotal reports from Barclays of problems with Libor in 2007", according to a statement it released July 10. The district bank wasn't a party to Barclays's settlement.

Here's one lesson that hopefully has been learned from all this: If you ever think someone in business is telling you to lie, ask that person to put it in writing.— Bloomberg

No accounting wrong doing in Reebok, says auditor

Reebok's auditor N Narasimhan & Co has informed the ICAI the there was no accounting wrong doing in the company which has filed Rs 870-crore fraud case against two of its former employees.

"Narsimhan & Co has said they are both the tax auditors and statutory auditors of the firm. They have told us that as far as audit is concerned there is no issue. We are waiting for some trigger from the company," ICAI President Jaydeep Shah told PTI on the sidelines of Chartered Accountants Day function here.

The Institute of Chartered Accountants of India (ICAI) had asked from Narsimhan & Co and Reebok's former chief operating officer Vishnu Bhagat, who is also a CA, to give their version and clarification on allegations about their role in the case.

Information was also sought from Rebook India which is still carrying out its internal investigation, Shah said.

"The company (Reebok) has said till investigation is going on they will not be able to share anything," he said, adding, "they have given us the report of the FIR that they have filed with the Gurgaon police."

ICAI has sought information from the auditors and the company in order to carry out its own probe into the role of auditors. Shah said the body would wait for the company to complete its probe and give leads.

Apart from the ICAI, Corporate Affairs Ministry's fraud probe body SFIO is investigating the case. The I-T department too launched a probe into the finances of Reebok India.

In May, Adidas-owned Reebok India had filed an FIR, alleging that its former Managing Director Subhinder Singh Prem and Chief Operating Officer Vishnu Bhagat were involved in Rs 870-crore fraud by indulging in "criminal conspiracy" and "fraudulent" practices over a period of time.

Both the executives, however, had denied the allegations. Following this, the Ministry of Corporate Affairs (MCA) had ordered a scrutiny of the books of accounts of the sportswear maker Reebok's Indian arm by the Registrar of Companies. The case was later handed over to the SFIO.
(Source: Press Trust of India / New Delhi Jul 02, 2012, 18:19 IST)