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.
12_Subhiksha.indd 14412_Subhiksha.indd 144 6/5/2012 5:49:06 PM6/5/2012 5:49:06 PM
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
12_Subhiksha.indd 14512_Subhiksha.indd 145 6/5/2012 5:49:06 PM6/5/2012 5:49:06 PM
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
12_Subhiksha.indd 14612_Subhiksha.indd 146 6/5/2012 5:49:06 PM6/5/2012 5:49:06 PM

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