ED may impose penalty on Reebok for Fema violation

Company says it complied with practices defined by regulators

The Enforcement Directorate (ED) is proposing a penalty on German sportswear giant Adidas’ subsidiary Reebok India for alleged violations of the Foreign Exchange Management Act (Fema).

After its investigation, ED found the sportswear company had failed to stick to its commitment to the Foreign Investment Promotion Board by importing goods that could have been manufactured locally. The matter has been referred to the finance ministry. A senior ED official said, “The company was carrying out retail sales in India by importing goods, against its earlier commitment of manufacturing these locally. We are looking at imposing a penalty on it for violation of Fema.”

An Adidas spokesperson, however, said, “In 2010, the Enforcement Directorate had requested Reebok India Company for some information, which was duly given, along with required documents. No further enquiry or action was initiated by the directorate thereafter.”

The company said according to an FIPB-approved letter, Reebok India Company was not subject to any export obligation, except export earnings, to balance the outflow of foreign exchange on account of dividend payment for the initial period of seven years. It added reports on Fema violations were incorrect and misleading. “We operate in compliance with the practices defined by regulatory bodies,” said the Adidas spokesperson.

In a report in 2009, Adidas auditors had stated the company had committed it would export $100 million worth of products from India through the first five years of operations. Though the auditors admitted the company had not been able to meet the commitment, they concluded after discussions with FIPB, the company felt not adhering to the estimate would not affect the approval given to it to operate in the country.

Adidas has been involved in a bitter battle in India with its former employees after it announced fictitious sales over several years and alleged misappropriation of funds by former employees Subhinder Singh Prem and Vishnu Bhagat had resulted in a loss of Rs 870 crore to the company.

Adidas also told the Serious Fraud Investigation Office, which was tasked with investigating the allegations, it had lost about Rs 170 crore, owing to “goodwill impairment”, after it had bought Reebok. Goodwill impairment is not mentioned in Indian accounting norms. In its annual accounts, Adidas had stated “goodwill” primarily related to the group’s acquisition of Reebok and some other brands. The group, it stated, determined whether goodwill impairment was necessary to be accounted for, at least on an annual basis. This, it said, required estimation of the value in use of the cash-generating units to which the goodwill was allocated. To estimate the value in use, the group would have to estimate of the expected cash flow from the unit and fix a suitable discount rate to calculate the current value of the cash flow.

Subhash Gulati, Prem and Bhagat’s counsel, had denied the charges of fraud and misappropriation by Reebok India.