The curious case of Reebok India scam!

by Swaraj Singh Dhanjal on Wednesday 6 June 2012, 11:29 PM | Category: Legal| View: 7957 views

Reebok India controversy has been in the news for almost a month now. Adidas, the German sports goods manufacturer claimed a Rs. 870 crore scam in Reebok India. Now the corporate affairs ministry arm, Serious Fraud Investigation Office (SFIO) has taken up the case. The CEO of Reebok India, Mr. Subhinder Singh Prem and the COO Mr. Vishnu Bhagat, were initially asked to step down and later were alleged to have indulged in fraudulent activities. In a curious turn of events, both the officials seem to have claimed that Adidas had asked them to manipulate company accounts to ensure that the market value of Reebok India fell so that a significantly lower amount would have to be paid to the exiting JV partner. Adidas wanted to buy out Focus Energy's 6.85 percent stake in Reebok India. Let's trace back and try to understand this curious case.

On May 21, Adidas India filed a FIR against the two executives, which put several charges against them, the two most important charges being; running secret warehouses which held stock which was not accounted for on Adidas's books and running a franchisee referral programme even though there was clear instructions to them not to expand the store base further. In fact it is said that Adidas had sensed some problems in India operation in 2010 itself. Back then it appointed KPMG as to audit the business, the audit however, did not highlight any fraudulent practices.

To understand why Adidas asked Subhinder Singh Prem to step down, we have to go back to the start of it all. Reebok India had grown phenomenally, since 1996 when it opened its first store in Delhi. By 2012 it had opened up over 1,000 stores in India. It became the market leader in India; globally it had always ranked a distant fourth to Nike, Adidas and Puma. In India, Reebok pursued this aggressive expansion with local innovations in products, price points and distribution. One of key programmes run by Reebok India was the minimum return guarantee program, wherein the company offered to take care of the franchisees cost and in return capped their profits at a certain percentage. This program worked well for Reebok and it expanded aggressively in the country.

The problems started when Adidas Global CEO, Herbert Hainer in 2010, presented his Route 2015 wherein the focus was put on profitable growth. The repercussions of this were felt in India, as Prem and his team were asked to close down the loss making stores. This was a dampener for team Reebok as it had so far been driven by the mandate to pursue growth. This downsizing turned out to be a major source of friction between Prem and Adidas top brass. The Reebok team felt that their current relationships with franchisees should be protected for at least some more time. Adidas on the other hand wanted to move quickly to a whole seller based distribution model. The cultural difference between the two organizations was also a source of conflict, Reebok with its American culture was more aggressive; while Adidas was more methodical in its approach.

In 2011, Prem was made the managing director of the Adidas-reebok combine. During this time the business was hit on multiple fronts. An excise duty on apparels, hike in value added tax and the rupees wild swings hit the business hard. Reebok ended its year with 650 Cr of revenue, lower than in previous fiscal. It was during this time that Adidas HQ, under its Route 2015 plan, started to tighten its control over the India business. The aggressive growth strategy followed by Reebok had ensured that it had a large amount of receivables on its books. This was also one of the reasons why Adidas wanted to downsize the Reebok business in a hurry. When Prem refused to align with Adidas HQ, they decided that it was time for him to move on.

In the meanwhile the investigating teams have raided quite a few warehouses in Delhi, some reports claimed that goods worth crores was seized from these; while some others claim that the warehouses were empty! The SFIO now in charge of the case has commented that the claim of Rs. 870 crores seems inflated and that the actual amount of fraud might be lower. Subhinder Singh Prem has filed two cases against Adidas in a Delhi court. The rumour mill is running hot and in all likelihood it seems that things will be clear only when SFIO completes its investigation. By that time the media will surely be fixated to this high profile corporate case.

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