Adidas versus Subhinder

Samar Srivastava
Updated: Oct 1, 2012 01:08:04 AM UTC
SUBHINDERSINGH

For Subhinder Singh Prem it would seem as if the chickens have finally come home to roost.

Four months ago his former employers Adidas AG pinned responsibility for commercial irregularities of Rs 870 crore on Prem. This was followed by a police complaint, which led to Prem’s arrest on September 19. Prem and four others arrested will be kept in police custody till for the next seven days during which time the police will work on building their case against them.

By Adidas’ own admission this was a very complex case for them to unravel. In an interview to Forbes India in August its CEO Claus Heckerott had admitted that it took the company time to understand the nature of the fraud and that investigations had been proceeding slowly but steadily since the company filed a police complaint in May.

A few days before the police complaint was filed Forbes India had spoken to Subhinder Singh Prem. It remains the only on the record interview he gave to the media since news of the financial irregularities broke. During the course of the interview he confidently answered an extensive set of questions and defended himself against allegations of financial irregularities. Read out story here. Forbes India had made repeated attempts to get Adidas’ side of the story but the company had declined to talk.

Now four months after the controversy Forbes India has pieced together both interviews.

What follows are reasons for why the irregularities may have gone undetected for so long.

Please note neither Prem nor his lawyers or Adidas has spoken to us since the arrests.

With these two interviews there is now clarity on what the main disagreement between the two was. First, Adidas believes the minimum guarantee system is ideally suited to retailing. Second, even though the books of accounts were approved by the auditors it is now clear that there was a vast and systematic misappropriation of goods.

1) Minimum guarantee – Prem’s argument is that in a country where quality retail space is in short supply one needs to partner with small shop owners to get them to stock a brand. As a result, a company has to agree to a ‘minimum guarantee’ – essentially a promise to a shopkeeper that if he failed to get a certain amount of business the company would compensate him.

Sounds good on paper. But what this really meant was there were kickbacks paid while deciding what this minimum amount was. It is also alleged that Prem and his coterie made money on courier contracts, store design contracts and so on.

What Adidas plans to do: A complete revamp of the terms of trade for its franchisees. They intend to move to a model where franchisees get a higher margin (in some cases as high as 40-45 percent) but will not be compensated for any inability to make a minimum amount in sales.

2) Financial irregularities – Prem contends that the books were submitted to headquarters and that the accounts had been approved by both the statutory auditors Narasimhan and Co. and global auditors KPMG. He did admit that there were issues with the receivables (goods that franchisees were unable to sell) due to sales slowing down.

What Adidas says: The fraud involved diverting goods to warehouses outside the company network. So while the books of account show a certain amount of stock when one goes to verify them the stocks don’t match. This was done in collusion with Vishnu Bhagat, the CFO who has also been arrested. It took the company a long time to get to the bottom of this.

The Road Ahead Claus Heckerott, who took charge of India operations in March has a long road ahead. He plans to close down a third of Reebok stores. He acknowledges that there are disagreements with franchisees on how much the company owes them. He plans to integrate sourcing for Reebok India with global sourcing. Prem had for long resisted this. People in the industry say that this is because he had worked out sweet deals with Indian suppliers. Heckerott will also lay off an unspecified number of employees next year, “Will be a fresh start for the company.”

While Prem spends time assisting with the Gurgaon police’s investigation he also has a defamation case pending in the Delhi High Court that is listed for hearing on on 22 November. We haven’t heard the last of this case yet.

The thoughts and opinions shared here are of the author.

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