BUSINESS ETHICS

AND
CORPORATE GOVERNANCE
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PROJ ECT- SEMESTER- V

BACHELOR OF BUSI NESS STUDI ESS

S UBMI TTED TO
MS . AANCHAL GUPTA
DEPATMENT OF MANAGEMENT S TUDI ES
DEEN DAYAL UPDHYAYA COL L EGE
THE UNI VERS I TY OF DEL HI

Corporate Scam
vis--vis
Companies Act

A DHAWAN (0069) P.KULSHRESTHA(0067)
FOCUS
Section 297 of The Companies Act,1956
Section 297 of the The Companies Act,1956 is based on the principle of trust, loyalty and
disclosure and it precludes the directors from entering into any business dealing or
arrangements on behalf of the company in which he has personal interest or conflict of interest.
He has very important fiduciary duty of acting bona fide in the interests of the company and
any violation of this duty will amount to breach of trust. There are certain statutory obligations
cast on him.
Section 297(1) states that a company cannot enter into contracts with specified persons without
the consent of Board and if company is having a paid up share capital of Rupees One Crore or
more, all contracts of the nature referred below other than the exempted contracts can be
entered into only after they are approved by the Central Government as per the proviso under
section 297(1):-
(a) sale, purchase or supply of any goods or materials or services;
(b) underwriting the subscription of any shares in or debentures of the company.

The consent considered in the section is not a general consent but consent referable to each
specific contract.
Further, if at the time of entering into contract, no approval of Central Government is required
then no subsequent approval is to be obtained though section 297 becomes applicable if the
companys paid up capital is enhanced to Rupees One Crore or more, the contracting persons
afterwards falls in category of persons covered under section 297, the public company is
converted into private company. If any modifications are made in the terms of contract or it is
renewed after the expiry of its original period, previous approval of the central government is
required.
A DHAWAN (0069) P.KULSHRESTHA(0067)
Corporate India dubs rising fraud as
inevitable cost of business

Notwithstanding the number of media reports on fraud, the last two years have seen a
substantial increase in the incidence of fraud.

This increase can be attributed to several aspects.
-The ongoing economic slowdown for one puts pressure on individuals to perform and tempts
them to commit fraud.
-It is also in a downturn that frauds are most likely to be discovered (even though perpetrated
much earlier), as that is when managements increase their scrutiny in a bid to protect margins
and profits.
-Thirdly, greater awareness of fraud and its impact can result in companies becoming more
sensitive to noticing frauds, which otherwise tend to go unnoticed or are deliberately
overlooked.

This is dangerous as it could lead to organizations having a tolerant approach towards fraud
and subsequently not investing enough in the appropriate fraud risk management controls and
framework. It also translates into a culture of merely reacting to fraud and not proactively
taking steps to mitigate it.
In such a scenario the onus would be on regulatory bodies to ensure that firms follow a robust
fraud risk management framework, failing which they would face stringent action. This has
been the case with most regulated industries such as financial services.


A DHAWAN (0069) P.KULSHRESTHA(0067)
REEBOK INDIA SCAM
A DHAWAN (0069) P.KULSHRESTHA(0067)
Profile
This is probably the biggest corporate scam after Satyam, at least of
whatever has come to light. Reebok India, owned by Adidas AG,
alleged a Rs.870 crore fraud by its former managing director (MD)
Subhinder Singh Prem and former Chief Operating Officer (COO)
Vishnu Bhagat, in a criminal complaint filed at the Gurgaon polices
Economic Offence Wing in May, 2012. In March 2013, Adidas, the
parent company, announced a 153 million Euros loss on account of
the Reebok India episode.
The two were accused of criminal conspiracy and
fraudulent practices including stealing products by setting up
secret warehouses. There has been a grave failure of corporate
governance as well since the company has also alleged that the
former officials fudged accounts and indulged in fictitious sales
causing a multi-crore dent to the company. In its FIR, Reebok has
said that it carried out an internal investigation after certain
fraudulent activities were noticed which again points to the
importance of internal checks for malpractices and corruption.

A DHAWAN (0069) P.KULSHRESTHA(0067)
Profile-contd.
Reebok India had alleged Rs. 870 crore fraud by its
former India Managing Director, Mr Subhinder Singh
Prem, and former Chief Operating Officer, Mr Vishnu
Bhagat. This alleged fraud is being billed as the most
high-profile corporate scandal in India since 2009 when
the Satyam Computers' scam came to light.
In a criminal complaint lodged with the Gurgaon police,
Reebok India alleged that the two former officials stored
products, set up secret warehouses, fudged account
books and also engaged in fictitious sales for several
years.


A DHAWAN (0069) P.KULSHRESTHA(0067)
Swindle-caught !
German sports gear maker Adidas AG filed a criminal complaint over the
alleged financial and commercial irregularities at its Reebok India division.
Acting on a compliant, the Gurgaon police set up a special investigation
team (SIT) to probe into the alleged Rs. 870-crore fraud committed by the
former Adidas Managing Director, Mr Subhinder Singh Prem, and Chief
Operating Officer, Mr Vishnu Bhagat.
Mr Maheswar Dayal, DCP (East) Gurgaon, said a first information report
(FIR) was filed against the two former officials by Mr Shahin Padath,
Director-Finance, Reebok India.
In its complaint, the company said that the two officials had allegedly
siphoned off the company's money by creating ghost distributors, setting
up secret warehouses and generating forged bills over the last five years.
The alleged scam came to light in March 2013. Mr Subhinder Singh Prem,
who had been made the Managing Director of Adidas India last year as a
part of an integration of the businesses of both Adidas and Reebok brands,
was subsequently dismissed from the company.
A DHAWAN (0069) P.KULSHRESTHA(0067)
Investigation
The Rs. 870-crore alleged fraud at branded sportswear
manufacturer Reebok India, owned by Germany's Adidas, was
probed by the Serious Fraud Investigation Office (SFIO).
The Corporate Affairs Minister, Mr Veerappa Moily,
confirmed that the Reebok India case had been referred to the
SFIO, which is a multidisciplinary organisation set up to
investigate serious financial frauds.
This follows a non-invasive scrutiny of the books of accounts
of Reebok India by the Registrar of Companies, Delhi.
Prima-facie, we have found something wrong in their
(Reebok) books. The matter has now been referred to the
SFIO for further investigation, Mr Moily told reporters on the
sidelines of an Assocham event.
A DHAWAN (0069) P.KULSHRESTHA(0067)
Primary Dealing
Subhinder Singh and Vishnu Bhagat were booked for
fraud, criminal conspiracy and other charges under IPC
for allegedly siphoning off the sportswear companys
money by creating ghost distributors across the country
and generating forged bills over the last five years.
While the I-T department scrutinized documents related
to accounts and imports of the firm, the SFIO probed the
entire governance affairs of the company under Section
235 of the Companies Act.
According to sources, the probe agencies also do not rule
out the culpability of accounting officials of the firm at
this stage for their deliberate or mistaken oversight in
account books which led to the alleged financial
irregularities.
A DHAWAN (0069) P.KULSHRESTHA(0067)
SFIO-Handover
Corporate fraud probe body SFIO started scrutinising documents
relating to alleged Rs. 870-crore fraud involving Reebok India and
took a call on questioning senior officials of the sportswear maker.
We are still studying various documents relating the fraud after
which we will begin interrogating senior officials of Reebok and also
the two accused, a source told PTI,then.
The documents, sources said, included annual reports and the
findings of the Registrar of Companies.
The new Director of the Serious Fraud Investigation Office (SFIO),
they said, was briefed about the case who then decided on
summoning the officials of the company.
When asked if it was true that the amount quoted by Reebok in its
FIR was not real, an official said, It is difficult to ascertain, at this
juncture, what exactly the fraud size is.
A DHAWAN (0069) P.KULSHRESTHA(0067)
Investigation Resistance Press Reports
The Serious Fraud Investigation Office is finding it difficult to make headway in the
Rs 870-crore alleged scam at sportswear maker Reebok India because an exodus of
employees has slowed down the process of tracing record.
A senior official, who did not wish to be named, told ET that the agency is either
unable to access documents or taking much longer than expected to get the relevant
records from the company. As a result, it is likely to miss the deadline of September-
end set by the corporate affairs ministry, the official said.
"We are still awaiting several documents as part of the verification process from the
company. But, after the scam hit headlines, the firm saw a surge in employee exits
and voluntary retirement schemes being taken up," the official said, adding that this
has made the process slow and cumbersome.
According to another official privy to the details, the documents remaining to be
scrutinized by the SFIO include the Registrar of Companies report, the quarterly
accounts and the annual reports.
A spokesperson of Reebok India, however, replied to an ET query, writing, "Reebok
India is working closely and extending full cooperation to the investigating
authorities. The VRS does not impact the ongoing investigations."


A DHAWAN (0069) P.KULSHRESTHA(0067)
Summon-Arrest
Former Reebok Managing Director Subhinder Singh Prem,
ex-COO Vishnu Bhagat and three other persons who were
arrested for their role in the Rs. 870-crore financial
irregularity case at Reebok India, were remanded to police
custody.
The Special Investigation Team had arrested five persons
accused of a role in the Rs. 870-crore Reebok fraud. They
were produced in Court today and have were remanded to
seven day police custody.
Three former general managers Sanjay Mishra, Prashant
Bhatnagar, and Surakshit Bhatt were arrested for fraud and
criminal conspiracy.
The five were accused of siphoning off money along with
generating fake bills and creating ghost distributors across the
country for a period of five years.


A DHAWAN (0069) P.KULSHRESTHA(0067)
Scam Report
A forensic audit of Reebok India Co. found fake transactions with unauthorized
customers, allegedly concocted to exaggerate the companys revenue and possibly
aimed at meeting targets.

Transactions between Reebok India and companies owned by Sanjeev Mishra, who
ran a staffing services company that supplied contract employees to the shoemaker,
among other circuitous and complex transactions.

Leakages in some transactions that seem to have benefited various individuals or
other entities

In its original complaint to the Gurgaon Police, Adidas offered a break-up of the
Rs.870 crore number: Rs.530 crore on account of so-called parallel accounting that
inflated sales, which were not passed on to the company; Rs.147 crore in goods
invoiced but not dispatched; Rs.63 crore in goods returned and pending inspection;
Rs.0.9 crore on account of secret warehouse bills, Rs.14.82 crore in interest lost on a
franchisee referral programme; and Rs.98 crore on account of payments to and
from customers (dealers and distributors).






A DHAWAN (0069) P.KULSHRESTHA(0067)
Scam Report-contd.
Interestingly, as Mint reported, the Gurgaon Police has arrived at a number
of Rs.11.3 crore, and not Rs.870 crore, after its investigations. To be sure,
this could be because the police is essentially looking at the criminal
aspect, according to an official at SFIO, who did not want to be identified.
This person added that his agency is looking at the accounting aspect and
that the lower estimate by the police does not necessarily absolve the
accused.
E&Y was appointed by Adidas to conduct the financial audit.
Spokesperson claimed that the audit firm is being paid Rs.130 crore for its
services.
According to the E&Y report, around Rs.147.25 crore of goods were billed
but not delivered and stored in secret warehouses owned by Shivam
Enterprises and Oriya Sales, both owned by Mishra. Reebok India hired the
warehouses in October 2009, and between then and June 2012, paid a rent
of Rs.1.43 crore. On its books, Reebok showed the goods as having been
sold to its dealers and distributors, according to the forensic reportit even
had invoicesbut it had no intention to deliver them, merely to inflate
sales.



A DHAWAN (0069) P.KULSHRESTHA(0067)
Scam Report-contd.
The company, the report adds, also inflated sales by storing stock returned by
dealers and distributors in other designated (read: on the book) warehouses, but
simply chose not to account for them for a long time.
E&Ys report also shows that Reebok India showed higher sales revenue by effecting
retrospective increases in the price of goods already sold to dealers and distributors.
The firm also seems to have done some circular trading, according to the report,
selling goods to be repaired to Mishras Shivam Enterprises and Oriya Sales for
Rs.35.2 crore, when their value was actually lower by around Rs.14.3 crore.
Interestingly, it received only Rs.3.08 crore for these.
Some of these goods were further sold to dealers for Rs.3 crore by the two
companies, which also sold back the rest to Reebok India through Om Trading,
another Mishra-owned company, for Rs.14.4 crore. And Reebok paid Rs.4.1 crore of
the Rs.14.4 crore
In a similar transaction, Reebok India, the audit shows, also sold defective goods
worth Rs.21.5 crore to a company called KK Enterprises as recently as December
2011, but actually moved them to a secret warehouse from where some part was sold
to some unauthorized buyers. These sales transactions to the unauthorized buyers
were off the books.
The remaining goods were booked as sales returns in May without accounting for
the goods sold to the unidentified buyers
A DHAWAN (0069) P.KULSHRESTHA(0067)
Final Outcome
Prem and Bhagat and the other executives have been in
judicial custody since September13. They have been
booked for falsification of records, diversion of funds,
causing loss to the company and wrongful gain.
Employees were offered the opportunity to participate in
VRS which included career support and severance
packages based on the time frame of their association
with the organization.
Reebok India operations were shut-down with
immediate gradual close-down.
3300 employees were either offered VRS or not , but
turned job-less.
A DHAWAN (0069) P.KULSHRESTHA(0067)