Case Studies in Business Ethics and Corporate Governance

144 Case Studies in Business Ethics and Corporate Governance

CORPORATE GOVERNANCE ISSUES

Business decisions of reckless expansion throughout the country, in disconnected geographies, required

huge investments. All these investments were through debt and these decisions seem to have got the nod

from the board of Subhiksha.

The ambitious growth strategy adopted grew on the promoters, board members and other inves-

tors. The focus seems to have shifted from delivering “value to customers” to “creating valuation

for self.”

The cash-fl ow mismanagement by the company which ultimately led to the downfall showed a lack

of implementation of correct strategies and the lack of management control systems. The market seemed

to be getting “on” and “off” signals regarding the initial public offering (IPO) for the equity.

Transparency was lacking. There was the absence of audits and non-availability of the fi nancial

statements; a lot of things could be guesswork or estimation. For a business which was generating ap-

proximately Rs 200 crores in revenues per month (2007–2008, revenue Rs 2300 crores), why did it not

service the Rs 125 crores bridge loan? It appears that there was severe cash mismanagement. Subhiksha

made the hugely erroneous decision of funding expansion by diverting the working capital, which then

led to a severe cash crunch later, resulting in the nonpayment of salaries, vendor supplies, store rentals,

ultimately leading to the retail chain’s shut down.

ETHICAL ISSUES

Nonpayment of employee salaries 

For Mukand, one of Subhiksha’s 15,000 employees and a purchase manager for Karnataka, the

noise was deafening. “We had no money, no work, nothing,” he says, recalling the fear and despon-

dency among the staff of Subhiksha, which was regarded as a company that had found the magic

formula to make organized retailing a success in India.

Some over 15,000 employees of Subhiksha had not been paid since October 2009. The company

started offering two-month salary in return for a signed undertaking from the employees that they

would go on leave without pay until 31 May 2009. This resulted in salary arrears piling up and

Subhiksha ended up owing Rs 18 crores in wages.

Provident fund 

Subhiksha Trading also faced issues regarding the nonpayment of the provident fund of the em-

ployees. The PF commissioner began a 7-A enquiry for determining the EPF dues of Subhiksha

and came out with the fi gure of Rs 1.76 crores which were due.

Rental payment defaults 

The company even defaulted in payment of rents in respect of retail stores across the country since

August 2008. The dues were to the tune of around Rs 20 crores. Subramanian had fl oated several

private companies to act as a procuring agent for the company and had diverted the funds from

Subhiksha to those companies. The amounts, according to the petitioner, were diverted to various

associate entities like M/s Cash and Carry Wholesale Traders Pvt Ltd., Custodial Services India Pvt

Ltd., Pentagon Trading Services Pvt. Ltd., Shevaroy Holiday Resorts Pvt. Ltd., etc. Subramanian

was holding 59% of the company’s shares and this conduct of Subramanian necessitated a detailed

investigation.

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Subhiksha: Failed Business Model or Unethical Practices? 145

Vendor payments



Subhiksha defaulted on vendor payments also. The default was of the magnitude of Rs 35 crores.

Auditor 

The offi cial auditor of the fi rm Deloitte did not publish any fi nancial statements from 2007. There

was an overstatement of accounts, fake inventory, fake bills and fake companies that money was

transferred to.

EXHIBIT I: Major national players in the Indian organized retail sector

Store Name Started Group Name No. of

Stores*

Store

Segments

Positioning Strength

Reliance

Fresh

2006 Reliance

Industries

Limited

560 Supermarket Quality Strong

 nancial

support,

ef cient

inventory

management

More 2007

(merged

with

Trinethra)

Aditya Birla

Retail Limited

320 (100

Fabmalls +

220 Trinetra

stores)

Supermarket

Hypermarket

Convenience

Store

Local

presence

Spencer’s 2006 RPG Group N/A Supermarket

Hypermarket

Quality Strong

 nancial

support,

huge product

assortment

Food World 1995 Dairy Farm

International

(DFI) Group

60 Supermarket

Hypermarket

Express stores

Convenience

Store

N/A

Food Bazaar 2002 Future Group 102 Supermarket Discount

Store

Strong

 nancial

support,

huge product

assortment

Subhiksha 1997 - 1100 Supermarket Discount

Store

Huge network

of stores,

everyday low

pricing

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146 Case Studies in Business Ethics and Corporate Governance

EXHIBIT II: Supply chain stages involved in merchandise movement

from manufacturer to distribution Centre

Manufacturing

Plant

Delivery Truck

Distribution Centre

Receiving at DC

Put Away

Receiving Orders at DC from

Retailers

Kitting Process

Picking

Packaging

Shipping

Distribution

distribution centre

process at

Inventory Audit

Stacking in DC

DC Placing fresh

order to

Manufacturer

Source: Amarthi Consulting

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