Adidas may open old accounts to probe India irregularities

Reebok's staff to get voluntary retirement option, stores may be reduced by a third

Adidas Group on Monday unveiled a three-pronged strategy in India that would include the possible closure of nearly a third of its 900 Reebok stores, a voluntary retirement scheme (VRS) for the 200-odd Reebok employees and integration of the two brands’ suppliers.

The German sportswear giant also said the financial irregularities discovered for financial year 2011 might have started much earlier and the company would not hesitate to open the accounts of previous years for investigation, if required.

Speaking for the first time after the group announced it had taken a hit of Rs 870 crore as a result of alleged financial irregularities committed in Reebok India in 2011, Claus Heckerott, managing director of Adidas, group-market India, said, “We are changing our model from a minimum guarantee scheme (rent plus model) offered to franchisees, which is not sustainable for a cash-and-carry model. One-third of the franchisees are ready to go with this model.

TRACKING THE CONTROVERSY

May 1-12: Adidas says ‘commercial irregularities’ at Reebok India; seeks criminal probe; turns heat on former MD Subhinder Singh Prem 

May 21: Reebok India files an FIR with Gurgaon police, accusing Prem and former COO Vishnu Bhagat of ‘criminal conspiracy’ and ‘fraudulent’ practices

May 23: Ministry of Corporate Affairs (MCA) orders scrutiny of Reebok India’s books

May 24: Gurgaon police say Reebok fraud amount ‘far from reality’; I-T dept issues notices to executives

May 26: Prem, Bhagat denied anticipatory bail

May 29: MCA refers the case to Serious Fraud Investigation Office (SFIO), blames the company for not cooperating

June 1-6: Prem, Bhagat deny fraud charges; SFIO says fraud figure inflated; I-T dept, Institute of Chartered Accountants (ICAI) start probe

July 2: Adidas values goodwill impairment at Rs 170 cr; auditor N Narasimhan & Co says no accounting wrongdoing in Reebok

July 9: Reebok refuses to give ‘scam' details to ICAI

July 15-18: I-T finds no signs of corporate fraud; summons  auditors

The others are not sure or will not go. However, we’ll be happy with 300 outlets, provided they are profitable. We had started slowing down the opening of new stores from 2010.” The discovery of alleged financial irregularities led the company to sack former Reebok India managing director Subhinder Singh Prem and former chief operating officer Vishnu Bhagat.

Heckerott said a VRS scheme would be offered to all Reebok employees at generous terms. He said the terms would be much more attractive than market standards, without divulging the numbers. Asked why the offer was only to Reebok and not Adidas employees, Heckerott said, “Adidas is still running as a robust business and we are not expecting a big change there. However, in Reebok we had to take corrective action because of the financial irregularity. We want to make a fresh start in Reebok.” The company is planning to integrate suppliers, which would include manufacturers making products of both the brands to bring in economies of scale.

On a query why Adidas was unable to discover the alleged irregularities earlier despite having taken over the company in 2005, Heckerott said, “The irregularities could have gone on over a larger number of years. As those involved had criminal energy and a collusion system in place, the checks and balances were circumvented. The new Adidas CFO joined in September 2011 and only after that we realised there was a parallel set of records in place.”

The Adidas India boss admitted they had received queries from the government whether after the acquisition of Reebok they still fulfilled the rules of being a single-brand retail chain. “We have separate retail outlets for Adidas and Reebok, which only sell those brands and not the other. Also, all these stores are franchised,” he said.