Rifts between Indian firms, foreign partners increase

Foreign companies no longer need Indian firms to help them run operations in the country. Instances of friction between Indian companies and foreign partners in the fast-moving consumer goods and retail sectors appear to be on the rise. Cases in point through the past year are Reebok, Bharti-Walmart, McDonald’s, Faber-Castell, Gillette, Beam Global, Bunge and Di Bella Coffee.

Though lawyers and experts blame this on growing difference over business issues, the timing isn’t lost on many - it comes at a time when sectors such as retail are being opened (100 per cent foreign direct investment, for instance, has been allowed in single-brand retail). As such, foreign companies no longer need Indian firms to help them run operations here.

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A senior lawyer from one of the top three law firms in India says: “You’d be surprised to note having an Indian partner can actually increase the risk for a foreign promoter. This is because more often than not, the foreign promoter has no control over the business here. If an Indian partner is involved in fraud or misappropriation of funds, it can actually set the international company back, impacting its potential to do business in India and nearby countries. Also, its brand name and credibility are hit.”

In the case of Di Bella Coffee, Australia’s fastest growing coffee chain, the feud between the company and its Indian partner Sachin Sabharwal surfaced within a year of operations being launched in India. The two sides dragged each other to court over allegations of professional and personal misconduct, defamation and damage to the Di Bella brand name.

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Founder Phillip Di Bella said: “We repeatedly received complaints from suppliers that he (Sachin Sabharwal) hadn’t cleared bills. There are criminal charges pertaining to cheating and rape against him in Mumbai. Also, he had attempted to register completely unrelated Australian brands in India, in complete violation of the licence agreement the joint venture company (Di Bella India) had with Espresso.”

Sabharwal, however, claimed Di Bella was defaming him, adding he was pressing charges against Phillip Di Bella under section 499 of the Indian Penal Code, as well as the Income Tax Act.

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Experts say patience between Indian and foreign promoters is slowly wearing thin, prompting many to opt for early break-ups. “Differences between partners on how the business should be run and how much time and money should be put into operations are growing. Often, both sides allege the other isn’t working according to the plan, claiming the agreement between the two has been violated. In my view, there is a trust deficit that exists between partners today,” says Arvind Singhal, chairman of Gurgaon-based retail consultancy Technopak Advisors.

A lawyer from the Zia Mody-led-AZB & Partners says often, Indian companies are mired in corporate governance issues, with foreign partners frequently accusing these of not being transparent and, more importantly, of siphoning off funds from the company.

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In a police complaint filed in Gurgaon, Reebok had alleged its managing director Subhinder Singh Prem and chief financial officer Vishnu Bhagat were involved in fraud and misappropriation of goods, resulting in a loss of Rs 870 crore (Rs 8.7 billion) to the sportswear maker.

At the Indian unit of Beam Global, the world’s fourth-largest spirits maker, managing director Harish Moolchandani, along with other senior executives, was asked not to report to work, following allegations of financial irregularities last year. On Wednesday, the company announced it had appointed Vidyut Arte managing director.

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At McDonald’s, Indian partner Vikram Bakshi has accused the world’s second-largest fast food chain of colluding with franchisee Hardcastle (owned by the Mumbai-based BL Jatia Group) in pressuring him to exit joint venture company Connaught Plaza Restaurants at a cheap price. The matter is being heard by the Company Law Board.

In another such case, Faber-Castell, which has 90 per cent stake in Indian arm AW Faber Castell, has accused Indian partner and managing director Anup Bhaskaran Rana, who has 10 per cent stake in the company, of mismanagement. This case, too, is being heard by the Company Law Board.