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

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.)




5 years ago

Do not worry ! It will get away as was in case of Vodaphone-Hutchison/Essor etc.
Former F M tried to inroduce a law with tetrospective effect to cover such mergers/take over for taxation purpose, but it was kept inlimbo by the P M and UPA II Govt.

Mohan Siroya


Veeresh Malik

In Reply to MOHAN SIROYA 5 years ago

Dear Mohan Siroya - thank you for writing in, and no, it will not be forgotten.


Maharashtra Assembly clears Housing Bill

The Housing (Regulation and Development) Bill makes it mandatory for a promoter/developer to register his project and display it on the website of the Housing Regulator

Mumbai: Maharashtra Legislative assembly cleared on Monday night the Housing (Regulation and Development) Bill, 2012 which aims to regulate and promote the construction, sale, management and transfer of flats on ownership basis and establish the Housing Regulatory Authority and Housing Appellate Tribunal, reports PTI.


As per the new law, registering the housing project and displaying it on the website of the Housing Regulatory Authority becomes mandatory for the promoter.


The promoter will have to pay fees not exceeding Rs50,000 along with the application for registration.


However, registration and displaying of the project will not be required, if the area of land proposed to be developed into a project does not exceed 250 sq meter and the total number of flats proposed to be developed into a project inclusive of all phases is less than five.


No promoter shall start sale of prescribed percentage of flats, the area of which shall not exceed 10% of the total area of each building in every new project, which will be referred to as 'retained flats', till occupation certificate from the local authority in respect of that building is obtained by the promoter.


The details of such flats shall be displayed on the website of the Authority, before the start of any transaction, including marketing. The promoter shall be entitled to sell retained flats in each of the building only after the receipt of the occupation certificate or building completion certificate from the local authority for that building.


It will be the responsibility of the promoter to enter the record or details on the website of the housing regulatory authority. No order of cancellation of registration of the project shall be issued by the housing regulatory authority unless reasonable opportunity of being heard is given to the promoter.


Replying to a debate on the Bill, Minister of State for Housing Sachin Ahir said, disclosures and proof of plan is mandatory for the promoters.


"They will be given a registration code and after registration process, they can advertise and sell their flats. The amenities to be provided will also be loaded on the website and if any changes are made later, the promoter has to do it by taking the flat owners into confidence," Ahir said.


Promoter will be responsible for repairing the defects and faults in the building constructed till five years of the flats being handed over to the owners. Housing Appellate Tribubal will hear the appeals and give decision in three months, which can be challenged only in the high court.


If a promoter violates the provisions of the new law, he will be liable for fine of Rs10 lakh and jail term of three years, he said.


According to the minister, the new law will empower the flat owners and will be a "game changer" in regulating the housing sector.


According to the provisions, the layout, including recreation ground, park, garden and playground disclosed along with the building plan can be amended, modified and varied by the promoter from time to time, in accordance with the development control regulations including for the utilisation of the full development potential available from time to time.


He said the Maharashtra Flat Owners Act of 1963 will be amended with the passing of the new law.



Urvish Chitalia

5 years ago

Please correct the spelling of "disply" in the sub-heading. Needless to say it should be "display"

HC asks CBI to finish probe in Kurla fake bail bond scam in a month

Last year the High Court transferred the probe into the fake bail bond scam at Kurla railway station involving several RPF personnel to the CBI. However, there has been no progress since then

Mumbai: The Bombay High Court has directed the Central Bureay of Investigation (CBI) to complete its investigation into the fake bail bond scam at suburban Kurla railway station, involving several Railway Protection Force (RPF) personnel, within a month, reports PTI.


A division bench of Justices SA Bobade and Mridula Bhatkar asked the investigating agency to finish its probe and submit a report before it on 17th August.


Last year in August, the High Court had transferred the probe into the fake bail bond scam at Kurla railway station involving several RPF personnel to the CBI. However, there has been no progress since then.


On several occasions, CBI was pulled up by the High Court for its slow probe.


The court was hearing a public interest litigation (PIL) filed by social activist Samir Zaveri alleging that certain RPF personnel were releasing persons, booked for trespassing and crossing railway tracks, on fake cash bail bonds.


In his PIL, Zaveri had alleged that a head constable acted as a magistrate and granted bail to the alleged offenders and the money collected was misappropriated by the RPF personnel themselves.


The bench also asked the Railways to inform the court on the next date of hearing what measures it proposes to take in order to prevent such corruption.


The matter has been posted for hearing on 17th August.


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