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

" Adidas Group had acquired Reebok 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 after claimed that it had discovered financial irregulari ties of 125 million euros 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 Bhagat have denied all wrong doing on their part. Adidas Group chief executive officer (CEO) Herbert Hainer The Germany-based firm had sacked Adidas Group managing director (MD) Shubhinder Singh Prem and chief operating officer (COO) Vishnu Bhagat in March. They both left Reebok India in March. Prem was earlier Reebok India's MD and was associate d with the India auditor : narishama & co. Case for financial bungling, MUMBAI: Reebok India now a subsidiary of the German sports goods-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 breach of export comm itments. Accusations and counter-accusations have been flying since Adidas first alerted the market to its discovery of commercial irregularities' at Reebok India last mo nth, 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). The official said the enquiry was ordered on the basis of a complaint from an in vestor. RULES & REGULATIONS: Under the Sec. 234 of the Companies Act, 1956, the RoC (REGISTRAR OF COMPANIES) can call for information or explanation from a company.. Model theory: Reebok India was one of the apparent success stories, run according to a so- cal led minimum guarantee' model, meaning that each 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 fraud, Commercial fraud) case : 1.Irregularities will likely to have a negative impact 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 with stolen merchandise, falsifying bills and siphoning off good s to fake companies and distributors for years Fraud: The Press Trust of India reported that the fraud resulted in a loss n rupees ($232 million), while the Times of India and the 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 could 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. Claus Hecker ott as MD and Frederic Serrant as sales director together with the team on the g round will now accelerate the restructuring of our business activities 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 India 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 in India, and significant changes' to its business practices. Conclusion Hainer also 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 2012 which could add up to 70 million. "These charges for 2012 will be fully compensated by our stellar performance in 2012 and are already included in our i ncreased guidance for the full year," the letter adds. Adidas is one of the main sponsors of the London Olympics. It had said it is inv estigating commercial irregularities in Reebok India. The firm has announced res ults showing a 38 per cent growth 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, 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 irregularitie s' at Puma Hellas, a small operation for the MNC. 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. Questions: 1.Reebok India was trying to save taxes by claiming that it had lost 870 crore a s a result of the alleged fraud. "In this changed 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 fictitious 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 crore 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 account of goodw ill impairment were notional, and not verifiable according to Indian 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 calculation to kee p the total alleged loss under two different break-ups the same. It seems 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 March 31, Adi das AG, the parent company of Reebok, had declared that it had discovered financ ial irregularities of 125 million euros in Reebok India. Keywords: Reebok India scam, Reebok India irregularities, Adidas India