Reebok under tax lens, Adidas seizes goods from warehouses

The I-T department has launched a probe into the finances of Reebok India, which has filed a fraud case against its two former employees, even as the Gurgaon Police said the company’s claim of Rs 870 crore deceit is “far from reality” and the amount “would be less”.

The Income Tax Department, which had earlier this month conducted a survey at the Gurgaon office of the sportswear manufacturer, has begun issuing notices to its executives, sources said. Notices to produce documents, personal transactions and I-T returns for the last four years have been sought from the India-based executives of the firm for the income tax probe to check any possible financial wrongdoing in the company and subsequent tax evasion, sources said.The I-T investigations directorate has also alerted its intelligence wing in this regard to supply it with necessary inputs, sources added.

Reebok India had filed a FIR against the two top executives who were forced out of the company last month in a blaze of controversy. German sportswear and equipment maker Adidas, which owns the Reebok brand, filed a case of fraud, cheating and theft.

Earlier in the day, Gurgaon Police, which is probing the alleged Rs 870-crore fraud in Reebok India by former MD Subhinder Singh Prem and COO Vishnu Bhagat, said the company’s claim is “far from reality” and the amount “would be less”.  “The amount involved in the scandal would be less,” Maheshwar Dayal, DCP (East), Gurgaon told PTI.

When asked about the likely magnitude of the scandal, he did not elaborate while saying the company’s claim that it will have to take a total hit of approximately Rs 870 crore and will have to incur a restructuring cost of Rs 487 crore is “far from reality”. When contacted, the company as well as Prem and Bhagat declined to comment.

Giving an update on the investigation so far, Dayal said three, out of “four secret warehouses”, which Prem and Bhagat had allegedly operated to “keep diverted and stolen stocks” have been found to be empty. The possession of fourth “secret warehouse” where some goods were found was taken by the company, he added.

All the four warehouses are in Delhi – two in Bijwasan and Vasant Vihar each.  Meanwhile, an Economic Times report said Adidas India has confiscated goods from three of the four ‘secret’ warehouses where it alleged that its former top executives had stashed products worth Rs 63 crore.

Reebok India, in its FIR filed on May 21, had stated that it has nine official warehouses but alleged that Prem and Bhagat were “operating four secret warehouses to keep the clandestinely diverted and stolen stocks” which were not reported in the books of the company.

Reebok India had alleged that Prem and Bhagat had indulged in “criminal conspiracy” and “fraudulent” practices over a period of time that resulted in a loss to Adidas group.

Reebok and Adidas operated independently in India until 2011. Prem, who had headed Reebok till then, was appointed managing director of the combined entity that year, while Bhagat who used to handle finance, remained with Reebok but as the COO of the firm. Adidas claims that it found out in internal investigations that Prem and Bhagat stole merchandise amounting to Rs 62.99 crore as on December 31, 2011.

“Reebok India’s franchise owners are worried over payment delays after the new management took control recently. Around 35 franchisee owners have sent a joint letter to the new CEO and other top executives at Adidas, requesting pending payments to be cleared, especially of stores that were shut during its restructuring,” said the ET report.

While the FIR had mentioned the loss at “approximately Rs 8,700 crore”, Dayal had clarified yesterday that the company in its original complaint had stated that the hit due to alleged fraudulent practice of its two former top executives was “Rs 870 crore” and the amount mentioned in the FIR was a typographical error.

Reebok India further said it will also incur a restructuring cost of Rs 487 crore to remedy the consequences of the “criminal and fraudulent” acts of its formers top executives.

Dayal further reiterated that now “the onus for proving these (former) two senior officials guilty lies with the company” and that was why the police had sought relevant documents and proof from Shahin Padath, Director, Finance, Reebok India.

So far the police have not received any other documents except the copy of the complaint now from the company, he added.

With inputs from PTI

Europe bank run is under way

It used to be that you knew a bank run was under way when you saw crowds outside a bank trying to get in and get their money. This is another thing that online banking seems to have gotten rid of. Despite the lack of crowds, many analysts believe what had been a "jog" by big European investors (with the exception of Germany) is now a sprint.

On Monday Gavyn Davies, who chairs Fulcrum Asset Management and is an adviser to the British government, wrote in the Financial Times:

A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.

This was followed on Tuesday by a report from Citi analyst Matt King who applied Greece, Ireland, and Portugal's documented withdrawal rates and applied them to Spain and Italy:

In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52 percent, and foreign government bond holdings by an average of 33 percent, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further $272.17 billion and $270.9 billion in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows.

A Parabolic Top in Apple Inc.

[An Immediate Alert for Apple Lover , CMP AAPL: $546 , TARGET BASED ON ELLIOT WAVE $80]

Back in the late 1990's and early 2000's, when Steve Jobs, CEO of Apple, was brought back to the company after having been removed some years earlier, nobody believed in the company, and everybody knew why AAPL stock was not the thing to own. Of course in retrospect, it was a great buy. Well, now after Jobs turned the company around, everybody knows why AAPL IS the stock to own. As usual, the fundamentals are going to fool people into doing the wrong thing (buying Apple stock). AAPL has simply gone parabolic, and is in a fifth wave up from its 1997 low. As you can see, each rise (wave) slope has gotten steeper and steeper. This is not sustainable and AAPL is topping out on a long-term basis. Once the bear market in AAPL begins, as per the guidelines of  Elliott Wave Principle that state that support after a 5 wave advance lies at the 4th wave low,  my ultimate downside target for AAPL is AT LEAST the 2008 low at 78.20, and likely lower than that due to deflationary forces about to hit the markets. It is quite possible AAPL will do a "throwover" of the upper trendline of the wedge in a final burst up in a 5th wave of Primary wave 5, before reversing hard and heading back towards the fourth wave low. 

A Tailormade Survey

The Prime Minister’s problem is not lack of good economic advice, but lack of ability to use it; he might as well save money by sacking his advisers

A day before the budget, the government brings out the Economic Survey. This tradition goes back to the 1950s at least. Even now, the survey is big news; newspapers publish entire chapters from it on the day of its publication. But it has lost public interest because of its style and content. The finance ministry, which puts it out, writes only three or four chapters of it. The rest come from various ministries, which trumpet their great achievements, such as meetings held on pretentious issues and crores spent on populist projects. Even the chapters written by the finance ministry are largely descriptive, recounting what went up and what went down. What makes economics interesting is insight — saying what is not obvious to the non-economist, and how the future is going to be different from the past. Of insight there is little evidence in the Economic Survey.

The Prime Minister was an economist in the early years of his career. He understands what enormous effects economic trends can have over fairly short periods of time, and how important economic performance is to a country’s international standing. So, instead of depending on the finance ministry, he has set up his own economic kitchen cabinet — the Economic Advisory Council. It gives him a survey in February, and a forecast in July. Inevitably, both the reports give much space to what happened; but they try also to give the Prime Minister an idea of why it happened, and what to do about it.

The latest survey shows how poorly the government has managed its finances. The fiscal deficit in the first three quarters of the current financial year was 92 per cent of what was budgeted; so the government is going towards a fiscal deficit between 6 and 7 per cent of GDP against the target of 4.6 per cent. Together with the last budget, it had put forward a medium-term fiscal policy statement. It has neglected fiscal responsibility so badly that this statement will have to be consigned to the waste paper basket. The council calls for another fiscal responsibility Act; it does not, of course, say that the government is capable of sending that too to the rubbish bin.

The council points out that the deficit has gone up because the government lost control on subsidies. What it has failed to take on board is that the tax-to-GDP ratio has declined for both the Centre and the states, from 12 and 5.7 per cent in 2007-08 to 10 and 5.4 per cent in 2010-11. This is without any reduction in tax rates; the fall reflects lower efficiency of collection. That would have led one to ask why the government has become less good at collecting taxes. That is too uncomfortable; instead, the council’s thoughts turn to new taxes.

It is particularly keen on the Goods and Services Tax (GST), which would simplify indirect taxation and reduce opportunities for graft, which is why it has failed to win the approval of states till now. They are particularly hostile to the proposed dispute settlement authority, which would impinge on their power to use discretion. Hence, progress on GST is unlikely in the coming budget. But taxpayers can take it that the finance minister will take a hint from the council and replace the current positive list for service tax with a negative list, and thus impose it on almost all services. Its collection will not be very efficient since such a large proportion of services is supplied by small firms such as retailers. But efficiency has never been a prime concern of the finance minister.

He may follow the council’s cue in respect of service tax, but in view of his past record, it is doubtful if he will listen to its wish that he would bring down the fiscal deficit. In the last budget he planned an enormous increase. He enjoys spending public money; there is no reason why he should end his spending spree. The council would tell him that his fiscal deficits are inflationary. But government functionaries are protected from inflation; there is no reason for them to worry about the common people. The balance of payments might have imposed discipline for them. But the exchange reserves are so high that the finance minister does not have to worry about the balance of payments either. The council is hopeful that inflation will come down to 6 per cent. But that is on the assumption that the government listens to its policy advice — an assumption that would be unjustified in the present circumstances. The Prime Minister may think he needs good economic analysis and advice. But it is necessary only if he cares about the quality of economic policy. It is difficult for him to see why he should end his spending spree.

LIC & ONGC: An insurer discovers love in dying minutes

Govt claims issue fully subscribed; ONGC top management virtually kept out
 

Uncertainty prevailed over the fate of state-owned energy giant Oil and Natural Gas Commission's offer for sale of 42.77 crore shares on Thursday at a floor price of Rs 290 a share.Till late at night, there was no official confirmation of the actual response to the issue, either from the stock exchanges, ONGC or the Department of Disinvestment, which masterminded the sale.

News channel reports said that the offer for sale received bids for 29.22 crore shares worth about Rs 8,500 crore against the offer of 42.77 crore shares that should have fetched over Rs 12,000 crore for the Government.However, some sources maintain that the issue was fully subscribed.

While government sources claimed that certain “last minute” orders had led to the issue being fully subscribed, data available on the Web sites of both the BSE and the NSE showed only a tepid response to the issue.

The BSE and NSE Web sites showed that bids were received only for 1.43 crore shares, or just over three per cent of the issue size, as of 3-20 p.m., ten minutes before the sale closed.

The Petroleum Minister, Mr S. Jaipal Reddy, when asked about the reversal in trend of the sale, which had a brisk opening, said that his Ministry has no comment to make on the issue as it was handled by the Department of Disinvestment.

“The money that accrues from the sale gets accredited to the public exchequer,” he said indicating that benefits would not come to the Petroleum Ministry, even if it was oversubscribed.

Asked if the reason for this performance of ONGC could be the subsidy issue, Mr Reddy said the matter was between the Ministries of Finance and Petroleum and that the investors in ONGC “are mature enough to understand the problem.”

According to sources in the Capital, ONGC's top management was virtually kept out of the loop on the decision to offload the stake, with neither the ONGC Chairman nor the Company Secretary reportedly present at the meeting that fixed the floor price.

According to some sources, state-owned financial institutions led by LIC and SBI threw a lifeline to the issue at the last minute, which led to the exchanges not being able to release the final bid quantum.

“What happened between 3-20 p.m. and 3-30 p.m. that the exchanges are not able to give subscription figures even after two hours?” asked Mr Arun Kejriwal, Founder, KRIS Research. Stock market sources said that domestic institutions, LIC and State Bank of India subscribed heavily to the issue in the last 10 minutes while FIIs kept away from this offer for sale.

Marketmen said this was a clear case of a failure on the part of the government, as asking domestic institutions to subscribe to the issue amounted to transferring its money from one pocket to another.

The disinvestment ministry’s additional secretary, Siddhartha Pradhan, of course, completely denied that there was any pressure on LIC to invest in ONGC.

As if one cue, the insurance company on Friday said that it “had found value” in the stock and that is why it had made a small purchase worth Rs 3,880 crore.

Nice story.

This amount, by some strange coincidence, was almost equal to the shortfall that the issue faced at the close of trading hours. To top it all, LIC’s buying announcement came late in the night and the delay was conveniently attributed to technical and punching errors.

It is understandable if a small retail broker makes such an error, but the orders were directed through some of the biggest brokers in the country by a fund (LIC) which buys and sells crore worth of shares every month. And if an order worth Rs 3,880 crore was to be punched, the senior-most executive is generally present. In a normal day, given the brokerage given by LIC to its brokers, this would have resulted in a brokerage income of Rs 3.8 crore in one transaction only.

The other quaint fact is LIC’s discovery of value in the ONGC stock a few minutes before the auction closed. The fact is the insurer has been holding nearly 3 percent of ONGC shares and has been regularly trading in and out of the company. LIC needs to re-evaluate its discovery process as the stock did not bleep on its radar when the price was 20 percent lower a month back.

The insurance company has also ‘discovered value’ in a series of banks, which needed equity infusion from the government. Given the series of disinvestments planned over the next few weeks, it would not be surprising if LIC’s discoveries take it the UTI way.

For a company that has made money on the pretext of covering risk, it needs to follow its own advice.