NEWS ANALYSIS "Business life is not a bed of roses.

" Adidas Group had acquired R

eebok globally in 2005 and had started the integratio n process in India in 2011
. In April this year, it terminated the services of Pr em and Bhagat and soon af
ter claimed that it had discovered financial irregulari ties of 125 million euro
s in Reebok's India operations. A month later, it filed an FIR with the Gurgaon
police accusing the two former executives of large scale fraud. Both Prem and Bh
agat have denied all wrong doing on their part. Adidas Group chief executive off
icer (CEO) Herbert Hainer The Germany-based firm had sacked Adidas Group managin
g director (MD) Shubhinder Singh Prem and chief operating officer (COO) Vishnu B
hagat in March. They both left Reebok India in March. Prem was earlier Reebok In
dia's MD and was associate d with the India auditor : narishama & co. Case for f
inancial bungling, MUMBAI: Reebok India now a subsidiary of the German sports goo
ds-maker Adidas ha s been booked by the Enforcement Directorate (ED) for alleged
Foreign Exchange Management Act (FEMA) violations and may face penal action and
money laundering charges for running unauthorized retail outlets as well as bre
ach of export comm itments. Accusations and counter-accusations have been flying
since Adidas first alerted the market to its discovery of commercial irregularit
ies' at Reebok India last mo nth, warning that this could impact its consolidate
d results from previous years to a pre-tax minimum of 125 million euro (Rs.883.7
9 croe), and an additional 70 million euro in one off restructuring costs (Rs.49
4.92 crore). The official said the enquiry was ordered on the basis of a complai
nt from an in vestor. RULES & REGULATIONS: Under the Sec. 234 of the Companies A
ct, 1956, the RoC (REGISTRAR OF COMPANIES) can call for information or explanati
on from a company.. Model theory: Reebok India was one of the apparent success s
tories, run according to a so- cal led minimum guarantee' model, meaning that eac
h outlet was guaranteed a certain l evel of income, no matter what its sales, in
order to boost the franchisee netwo rk. 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 mo del. Impact on reebok fraud(.Accounting fr
aud, Commercial fraud) case : 1.Irregularities will likely to have a negative im
pact on prior years consolidate d financial statements of the group. 2. negative
impact of up to a pre-tax amount of 125 million Allegations: four warehouses wit
h stolen merchandise, falsifying bills and siphoning off good s to fake companie
s and distributors for years Fraud: The Press Trust of India reported that the f
raud resulted in a loss n rupees ($232 million), while the Times of India and th
e Hindustan it at 87 billion rupees ($1.6 billion). Complaints of an alleged Rs.
870-crore fraud. April 30 disclosure that irregularities in the India business c
ould 25 million euros ($158 million), with related restructuring charges million
euros ($88 million). numbers were "pure speculation." of 13 billio Times pegged
cost up to 1 of up to 70

Decision: appointed a new local leadership team in India at the end of March. Cl
aus Hecker ott as MD and Frederic Serrant as sales director together with the te
am on the g round will now accelerate the restructuring of our business activiti
es in India, including significant changes to its commercial business practices.
" Result: It said that the managerial changes, and replacement of Mr. Prem with
Adidas vet eran Mr. Claus Heckerott, were necessary to protect our interests in I
ndia pledgin g 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 i
n India, and significant changes to its business practices. Conclusion Hainer al
so said that as part of the restructuring of the Indian operations, the company
would have to incur additional one-time charges in the remaining quarte rs of 20
12 which could add up to 70 million. "These charges for 2012 will be fully compen
sated by our stellar performance in 2012 and are already included in our i ncrea
sed guidance for the full year," the letter adds. Adidas is one of the main spon
sors of the London Olympics. It had said it is inv estigating commercial irregul
arities in Reebok India. The firm has announced res ults showing a 38 per cent g
rowth in net profit to 289 million ($ 382 million) in t he January. Analysts have
drawn parallels with a past controversy at Puma s Greek operations . In 2010, P
uma was also forced to book significant one-off charges (115 million euro pre-ta
x and 15 million euro for restructuring) as a result of irregularitie s at Puma
Hellas, a small operation for the MNC. India is by no means one of Adidas large
st markets, it is one of those that it is counting on for future growth, as part
of its Route 2015 plan. Questions: 1.Reebok India was trying to save taxes by c
laiming that it had lost 870 crore a s a result of the alleged fraud. "In this c
hanged scenario, there is a view that the global company has set aside this 870
crore amount in a tax saving attempt. But while Reebok has scaled down the ficti
tious sales figure, it has added a new loss of 170 crore on account of goodwill
impairment, thereby keeping the total size of the alleged fraud in the 870-900 c
rore region. The additions and deletions by Reebok has raised doubts in the SFIO
about the ve racity of the allegations, said the official. He said losses on ac
count of goodw ill impairment were notional, and not verifiable according to Ind
ian accounting laws, and added that the fraud office would question the company
on this. "At the outset it looks as if the company has done a backward calculati
on to kee p the total alleged loss under two different break-ups the same. It se
ems as if Reebok has pre-decided a hit of 125 million euros or 870 crore," said
the offici al. On April 30, while announcing its results for the period ended Ma
rch 31, Adi das AG, the parent company of Reebok, had declared that it had disco
vered financ ial irregularities of 125 million euros in Reebok India. Keywords:
Reebok India scam, Reebok India irregularities, Adidas India