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 handouts 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.

(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.)