The Corporate Affairs Ministry, on Wednesday, ordered a scrutiny of the books of accounts of sportswear maker Reebok's Indian arm over complaints of an alleged Rs.870-crore fraud.
“We have ordered an enquiry under Sec. 234 of the Companies Act, which is a non-invasive scrutiny. The Registrar of Companies (RoC) has been asked to submit its report in three days. Based on the report, we will order further scrutiny,” a senior MCA official said.
The official said the enquiry was ordered on the basis of a complaint from an investor.
Under the Sec. 234 of the Companies Act, 1956, the RoC can call for information or explanation from a company. When contacted, the Adidas Group said: “We are given to understand that our criminal complaint has been registered for investigation by the Indian law enforcement authorities...We shall continue to cooperate with the authorities in their investigation of the matter.” — PTI
Vidya Ram adds from London:
Less than a month after warning that irregularities had been uncovered, Reebok India has filed a criminal complaint against two of its former top executives in the country. A First Information Report was filed with the Gurgaon Police against Subhinder Singh Prem, the former Managing Director of Adidas India, and Vishnu Bhagat, its former Chief Operating Officer, by Shahin Padath, the Finance Director of Reebok India on Tuesday.
“We had received a formal complaint from the company a few days ago against its former MD Mr. Subhinder Singh Prem and COO Mr. Vishnu Bhagat for financial bungling,” Gurgaon Police Commissioner K. K. Sindhu said on Wednesday.
“A preliminary investigation was conducted and a case registered today [Tuesday] at Sector 40 Police Station. The probe has been handed over to the Economic Offences Wing.”
Accusations and counter-accusations have been flying since Adidas first alerted the market to its discovery of ‘commercial irregularities' at Reebok India last month, warning that this could impact its consolidated results from previous years to a pre-tax minimum of 125 million euro (Rs.883.79 croe), and an additional 70 million euro in one off restructuring costs (Rs.494.92 crore).
It said that the managerial changes, and replacement of Mr. Prem with Adidas veteran Mr. Claus Heckerott, were necessary to “protect our interests in India” pledging to embark on an aggressive restructuring drive that would involve the closure of at least a third of Reebok India's 1,000 or so franchise stores in India, and ‘significant changes' to its business practices.
Adidas' version and handling of the situation has been strongly contested by the former executives, who have sought to point the finger back at the German sportswear company. Mr. Prem is claiming Rs.150 crore in damages, suggesting that he had been made a scapegoat for exposing fraud at the company. He was unreachable for comment at the time of publication.
While Adidas has pledged to begin 2013 with a ‘clean sheet' in India, the latest developments have raised questions for the German sportswear giant, and its success at integrating and turning around the global assets of Reebok, which it acquired in a 3.1 billion euro deal in 2005. At the time, the deal provoked much criticism, with observers questioning the logic of a deal, largely done on the strength of Reebok's U.S. assets.
“As it turns out the brand was in a downwards spiral and they had to re-launch the brand, which took a number of years and is still work in progress,” said one analyst, speaking on condition of anonymity.
Reebok India was one of the apparent success stories, run according to a so- called ‘minimum guarantee' model, meaning that each outlet was guaranteed a certain level of income, no matter what its sales, in order to boost the franchisee network. However being out of step with the way the rest of the group was run, Adidas had been attempting to bring Reebok India in line with its wholesaler- based model.
Analysts have drawn parallels with a past controversy at Puma's Greek operations. In 2010, Puma was also forced to book significant one-off charges (115 million euro pre-tax and 15 million euro for restructuring) as a result of ‘irregularities' at Puma Hellas, a small operation for the MNC.
Adidas does not publish figures for its India operations, though analysts estimate the figure to be less than 300 million euro (Rs.2,111 crore). “Given the size of the Indian Reebok operations the charges look quite big,” wrote the Deutsche Bank analysts, pointing to the Puma case in a note earlier this month. While India is by no means one of Adidas' largest markets, it is one of those that it is counting on for future growth, as part of its Route 2015 plan.