The Xerox confession

Print edition : July 20, 2002

Xerox Corporation's Indian subsidiary is to be investigated for "improper payments" to government officials for procuring contracts to supply office equipment.

THE beleaguered reprography giant Xerox Corporation's announcement on July 1 that its Indian subsidiary Xerox ModiCorp Ltd had made "improper payments" to Indian government officials to procure contracts to supply office equipment was greeted with cynicism. Just a few months earlier the company had paid the biggest-ever penalty to the United States regulatory agency, the Securities and Exchange Commission (SEC), for having defrauded investors by adopting dubious accounting practices.

In a filing made to the SEC in late June, Xerox Corporation stated: "In India, we learned of certain improper payments made over a period of years in connection with sales to government customers by employees of our majority-owned subsidiary in that country." The company had earlier restated five years of results in one of a series of accounting scandals that rocked the U.S. in recent months.

The SEC filing stated that Xerox stopped the payments in 2000 when it became aware of them. "We estimate the amount of such payments in 2000, the year the activity was stopped, to be approximately $600,000 to $700,000," it said. (This amounts to Rs.2.95 crores to Rs.3.4 crores at current rates of exchange.) Media reports, quoting company sources, indicated that payments of $200 (about Rs.9,840) per "deal" were made to government officials for the supply of equipment.

After Xerox's own admission of pay-offs, it would have been embarrassing for the Indian authorities to remain quiet. Finance Minister Jaswant Singh ordered a probe on the day he took over the reins of the Ministry. The Department of Company Affairs, also under his charge, announced its own probe. Secretary in the Department of Company Affairs (DCA) V.K. Dhall said he had ordered a "limited inspection" of the company's account books under Section 209A of the Companies Act. "Further action," he said, "would be taken against the company after the completion of inspection work." Bharatiya Janata Party spokesperson Arun Jaitley, who until recently headed the department, said: "If what has been stated by Xerox is true, it is a serious violation of Indian laws and requires an investigation."

Other government agencies, among them the Central Bureau of Investigation (CBI), the Chief Vigilance Commissioner (CVC) and the Income Tax Department, also promised to investigate the matter. The CBI is also reported to have decided to gather intelligence about the beneficiaries.

There is speculation that the pay-offs could have reached either officials in the Directorate General of Supplies and Disposal (DGS&D), which is entrusted with the task of stipulating prices and norms for government purchases, or those of departments and Ministries that decided the quantities of office equipment to be purchased in 2000.

In April the SEC filed a suit against Xerox Corporation alleging that the company ran a "wide-ranging four-year scheme to defraud investors" between 1997 and 2000. A senior SEC official said: "Xerox used its accounting to burnish and distort operating results rather than to describe them accurately."

THE crux of the complaint relates to seven different accounting actions used, in what Xerox described as mechanisms to "close the gap" between the company's operating results and Wall Street's expectations between 1997 and 2000. The accounting jugglery was aimed at inflating current revenues of the company.

The SEC slapped a penalty of $10 million, the largest ever imposed by it on a publicly owned company in a case of financial fraud. Indeed, Xerox's latest filing before the SEC was part of the settlement that it reached with the SEC in April, whereby Xerox agreed to restate its financial results for the period between 1997 and 2000.

In late 1999, Xerox took a controlling stake in Xerox ModiCorp, the successor to Modi-Xerox, which was a joint venture between Xerox and the B.K. Modi Group. The joint venture with a 40:40 equity partnership commenced in 1983, selling copiers, scanners, fax machines and other office equipment. Although it had a dominant share in the copier market, it has been under pressure from competition in recent years. The shares of Xerox ModiCorp have been delisted from Indian bourses. While Xerox holds a 68 per cent stake, ModiCorp (renamed SpiceCorp in January 2002) holds 28 per cent and the remaining 4 per cent is in the hands of the public. Xerox ModiCorp's board has nine members, including six from Xerox Corporation and three from the B.K. Modi group. The board is headed by Jule Limoli, a Xerox Corporation nominee. Xerox ModiCorp reported revenues of $108 million in the fiscal year ended March 2002.

Xerox has tried to pin the blame for the pay-offs on its former Indian partner, but this is unlikely to wash because the facts are stacked against the U.S. company. By 2000, it was firmly in the saddle at Xerox-ModiCorp, having acquired a controlling stake the previous year. Moreover, the Modi group has asserted that the company being a "board-managed" one, its actions were scrutinised at all times by Xerox's own representatives on the board.

Meanwhile, in the wake of this scandal, the credit rating agency CRISIL has downgraded Xerox ModiCorp's Rs.100-crore commercial paper programme and the Rs.13.5-crore and Rs.20-crore non-convertible debenture programmes.

Significantly, the problems with the Indian subsidiary are not the only ones that Xerox has mentioned in its recent filings to the SEC. It has admitted that the earnings of its affiliate in South Africa may have been improperly booked. It has also admitted to problems with respect to tax payments by its affiliate in Brazil, to the tune of $380 millions.

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