The Serious Fraud Investigation Office (SFIO)'s complaint regarding the Reebok India fraud, filed to a Gurgaon court last week, has indicted the parent company, Germany-basedAdidas Group, on lapses in corporate governance practices and internal controls at its Indian subsidiary.

The SFIO said statutory auditors had taken up the issue of accounts receivable reconciliation for the India operations of Reebok India Company with the head office in November 2010, through emails and telephonic conversation. "However, sufficient attention was not paid to the issue, which finally snowballed into a virtual collapse of the company, with net worth getting eroded," it said.

"There are instances of gross negligence on the part of the German head office management to address corporate governance issues," said the SFIO complaint. The case is set to come up for hearing in the last week of March.

It has been alleged ex-Reebok managing director Subhinder Singh Prem, ex-chief operating officer Vishnu Bhagat, with a group of other employees, perpetrated the fraud by falsifying accounts, operating secret warehouses and raising funds through an unauthorised franchisee referral programme.

In an emailed response to a Business Standard query on lapses in corporate governance practices, as stated in the SFIO complaint, an Adidas AG statement said, "The actual perpetrators of the fraud against whom RIC (Reebok India Company) had initiated a complaint with the authorities have been implicated in the report. We also want to underline the SFIO report hasn't recommended any charges against the executive board of the Adidas Group. We are reviewing the details of the report. It will be inappropriate for us to comment further."

The SFIO complaint cites the "absence of a proactive response to issues on the part of the German head office management". Some of these issues included violation of Section 58A of the Companies Act, not acting on forensic reports, failure of internal controls and not paying enough attention to Foreign Investment Promotion Board-approval norms, the investigators said.

The SFIO added the "impairment of goodwill", pegged at EURO 25 million by Adidas AG, on account of the fraud in Reebok India raised certain domestic policy implications for an Indian subsidiary of a foreign multinational company (MNC).

Existing Indian standards on accounting of goodwill and its impairment do not prescribe mandatory disclosures by an Indian subsidiary of an MNC, even if the impairment is shown by the parent company in its consolidated financial statements. "Such disclosures regarding impairment of goodwill of the parent MNC need to be disclosed in the annual financial statements of the Indian subsidiary to protect the interests of the Indian stakeholders," SFIO said. Its complaint recommended this issue be referred to the Institute of Chartered Accountants of India's accounting standard board so that appropriate disclosure norms could be drafted for subsidiaries of MNCs operating in India.