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FLEX INDUSTRIES LIMITED1 Anurag Mishra wrote this case under the supervision of Professor M. Akbar solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected] Copyright © 2007, Ivey Management Services Version: (A) 2008-01-29 On the morning of November 8, 2001, the Indian subcontinent woke up to read in dismay the news of the arrest of a dynamic and well-known entrepreneur industrialist, Ashok Chaturvedi, the owner of the Flex group of companies (see Exhibit 1). The Central Bureau of Investigation (CBI) had arrested the central chief excise commissioner, Someshwar Mishra, after recovering US$12,500 (Rs500,000) from his office and US$12,500 from his car. The money was allegedly delivered to him by an employee of Chaturvedi so that Flex Industries Ltd. could evade paying excise duties. Chaturvedi and his accomplice were arrested in the parking lot of the customs office. For a country overburdened by frequent political and governmental scandals, industry was one of the last sectors untouched by corruption. The scandal gave rise to heated debates and arguments expressing lost hope in the bureaucracy system. While to most Indians, corruption in the government bureaucracy was an open secret, the incident begged dialogue on whether industrialists were exploiting the desires of greedy and inefficient government officials. There were other incidences reported by the media regarding the corporate governance practices of the company. It gave rise to many questions regarding the checks and balances that the policy-making board of directors implemented, the powers of the public shareholders and how minority interests were guarded. In May 2004, the court exonerated both Chaturvedi and Mishra due to lack of evidence. Yet, by now, reputations had been seriously damaged. Questions remained as to whether Flex Industries had succeeded in resolving its governance issue. BACKGROUND Ashok Chaturvedi started his entrepreneurial stint in 1984 through Flex Engineering Limited, although the controversial unit, Flex Industries Limited (Flex), was started as a plastic packaging good company in 1988 (see Exhibit 2). An astute entrepreneur with sharp business acumen, he started building his fledgling

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Flex Industries Limited or any of its employees.

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empire at a time when the flexible packaging industry in India was relatively young and immature. Armed with a clear vision, he gradually expanded his reach to the input side of the packaging industry and also started manufacturing packaging machinery. The evolution of the flexible packaging industry was largely credited to his effort. THE FLEXIBLE PACKAGING INDUSTRY IN INDIA AND FLEX INDUSTRIES Flexible packaging is made of multi-layered laminated sheets of plastic and paper (sometimes metal foils and cloth) for varied packaging applications. It has the widest application in the food industry where laminates of plastics in layers are combined to offer a unique set of properties. The packaging thus made is tough, resistant to moisture and bacterial formation, retains the original taste and aroma of the packed material, is ter-proof and protects the packed material from environmental deterioration. Flexible packaging material also is widely used in packing, oils, detergents, shoos etc. Industry Prospects The flexible packaging industry during 2000-2001 in India witnessed a rapid growth of 25 to 30 per cent. Inhabited by a large populace and an ever-increasing consumer base, India was one of the most rapidly expanding flexible packaging industries in the world. With a segment capacity of half a million tons, the industry had become very lucrative as multinationals like Huhtamaki Van Leer and Tetra Pak made inroads. Due to lower prices and affordability by the semi-urban and rural population, there was a high demand for affordable packaging. This had fuelled both packaging innovations and volumes. A substantial part of the operations was still managed by more than 200 small flex-pack manufacturers with smaller processing capacities. However a few large players dominated the flexible packaging industry with capacities comparable to their international counterparts. Major Players2 Positioned as the number two player in the industry, Huhtamaki Van Leer, from its acquisition of Paper Products, had a major presence in the organized sector. The company provided total packaging solutions including flexible packaging, labeling technologies and packaging machine design. Essel Propack, a speciality laminated tubes and laminates manufacturer, through its acquisition, emerged as another large packaging company. Its packaging products had major applications in the oral care, cosmetics and packaged food. Akar Laminators was another major player with a good presence in both the unorganized and the organized sector. It produced multi-laminated hygienic packaging used in food, tea and cosmetics applications. VFC Limited, a small, low-profile company with a solid presence amongst select customers in the organized sector, benefited from the rise of rotogravure based flexible packaging material demand. Metafilms3 (India) another large scale (3000 tons per annum) producer of packaging material exported to middle-east Asian countries. Metafilms housed an eight-colour rotogravure press imported from Japan, as well as a solvent-less laminator and a high-speed slitter/rewinder. With a production capacity of 19,000 tons per annum and a market share of 40 per cent, India Foils was the largest aluminum foil manufacturer

2 Source: Company websites, 2007; Sacharow, 2001; Prowess, 2006. 3 The company later filed for bankruptcy in 2003 with the Board for Industrial and Financial Reconstruction, Government of India.

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in Asia. The company also produced laminated products. India Foils was also the first company to introduce aluminum foil in India. Although a quarter of the size of India Foils, Annapurna Foils produced aluminum foils and composites for the food and pharmaceutical markets. A modern Indian converter, Positive Packaging operated two brand new Cerutti eight-colour rotogravure presses, a solvent-less duplex laminator and a solvent-based triplex laminator. Amongst its competitors, Flex had emerged as a leader and one of the most integrated manufacturers in the packaging industry. It served both the organized sector as well as the unorganized4 sector of the economy. Raw Material Availability5

Raw materials used in flexible packaging were bi-axially oriented polypropylene (BOPP), poly ethylene terpthalate (PET), poly ethylene (PE) granules, aluminum foil, adhesives and printing inks. All these materials were manufactured in India and also supplied to Europe and the United States. The capacity to produce BOPP was about 45,000 tons per annum and for PET (polyester film) it was more than 95,000 tons per annum. India Foils and Indian Aluminum were two of the largest sources of aluminum foil used by the packaging industry in India. There were many paper mills in the country with installed capacity greater than 30,000 tons per annum and adhesives and ink supplies needed by the flexible packaging industry were also easy available in India. The printing ink industry dominated by Hindustan Inks had an installed capacity of over 50,000 tons per annum in India. The easy availability of raw materials in the domestic market supplemented the high growth rate of the flexible packaging industry in India. Capital Goods Supply6 Equipment needed by the converting industry included rotogravure printing presses, laminators, slitters filling, wrapping and pouching machines. These machines were being made in India, although they lacked the sophistication of their European counterparts. The majority of the small-scale flexible packaging manufacturers ran these machines as they provided good returns on investment. There were only a dozen converters that ran European machinery. Only a handful of these had bought top-of-the-line machines in the last few years to augment their capabilities to supply laminates that met international standards. A complete range of filling, sealing and wrapping machines was being manufactured in India. These machines were of good quality, competitively priced and supplied to developed markets as well. As the packaging industry in India grew, the capital goods industry within was expected to fuel this growth with increasing investment in technology and quality. Future of Industry As had happened in most developed economies, the role of the packaging industry was expected to shift from a mere protector and carrier to a major marketing and brand communication tool. Packaging was integral to brand communication, differentiation and recognition. Both technology and scale economics were expected to lower the cost of packaging while making the packaging lighter, lower in material usage and easier to use and dispense. In India, the food processing industry was in its nascent stage. In the future, it was expected that the demand for packaged foods and agro products would grow as consumer awareness to hygiene factors rose. From the supply side, there was a growing need to enhance the shelf life of agro-

4 In India, the unorganized sector had a major share of the manufacturing production across many industry segments. 5 Source: Sacharow, 2001; India Biz Club, 2007; Prowess, 2006. 6 Ibid.

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based commodities, which had a short storage life or were perishable. Both supply-side and demand-side economics were expected to bolster the fortunes of the packaging industry in India. Being one of the largest producers of food products and agro-based commodities, achieving scales and low cost was thus only a matter of time. Packaging technology in India was used in many novel ways that did not have similar application in developed economies in the past. One such innovation exle was the 10-millilitre disposable one-use sachet (pouch) which was used to dispense liquids such as shoos, oils, detergents, etc. Many factors like smaller wages and reluctance to purchase larger packs drove this kind of packaging innovation. The smaller package enabled low cost packaging, affordability and the penetration of consumer goods into rural and urban markets. With respect to the global packaging industry, India was well positioned as an emerging market. Being a low cost, efficient producer of packaging material and equipment, India was in a position to emerge as a major source of packaging raw material to the world. Arable land was more or less fixed and limited the ability to increase the food production in proportion to the increase in population. However, food production in India suffered from huge inefficiencies. Therefore, to cater to the demands of the rising population, increasing the efficiency of the land produce and improving food distribution promised to offer the two greatest potential sources of innovation. Packaging could greatly improve the distribution systems and help in extending the food supply to vast stretches of the population while cutting on waste. Preventing waste held great promise as the packaging industry was in a healthy cycle of long-term growth. About the Flex Group of Industries7 Established in 1988, Flex Industries (see Exhibit 2) became the largest flexible packaging company in India with an annual turnover of US$140 million in 2001-2002. One of the leading companies in the Asia-Pacific region, the company was into the production of polyester films, bi-axially oriented poly ethylene terpthalate (BOPET) and BOPP films, printing and coating inks. It also housed a facility for holography, metallization, poly vinylidene chloride (PVDC) coating, lamination and pouch formation. The company also made rotogravure printing cylinders, anilox/coating rollers for flex printing and shims for holographic embossing. It manufactured sophisticated machinery for converting and packaging applications. Flex industries started expanding its export markets in 1993 with the first joint venture in the United States being set up in 1996 with Vinmar. The company served global markets in the United States, Canada, the United Kingdom, Russia, the CIS countries, South Africa, the Middle East and the South Asian countries. Its partial list of Indian clientele included Godrej, Heinz, Henkel, ITC (BAT subsidiary), Nestle, Pepsi, Perfetti, Smithkline-Beecham, Tata Chemicals, Tata Tea and Unilever Group. Flex emerged as a reputed supplier of polyester film serving 60 per cent of the international market covering fifty countries. The shareholding pattern of Flex Industries from the period between 2001 and 2004 is given in Exhibit 2 while Exhibit 3 details the financial performance. The other companies of the Flex group are Flex Engineering, Flex Securities, Flex Foods and FCL Technologies (see Exhibit 2). Ashok Chaturvedi, a first generation entrepreneur, had been the architect and chief promoter of the fledgling Flex group of companies. A professional holding a baccalaureate degree in science, he had about twenty-four years of experience in the packaging industry. It was due to his sustained efforts, knowledge, dynamism and visionary leadership that Flex Industries was regarded as a leader in the packaging industry. 7 Source: Prowess, 2006.

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THE CBI CASE Having grown to the largest player in the packaging industry, the charges levied on Chaturvedi did not augur well for his business empire. Apart from the CBI, the Department of Company Affairs (DCA), under Section 237 of the Indian Companies Act, 1956, initiated a probe against the company and appointed an independent investigator. Under this section the DCA was authorized to investigate the company’s affairs in any of the areas of operations, not necessarily limited to a specific case or event. Thus, Flex Industries’ involvement in other cases of evasion and bad reporting and auditing practices was not ruled out and could also be investigated. CBI alleged that Chaturvedi acted as a middle man to the Pan Masala8 (chewable tobacco) industry and the central chief excise commissioner. It was on his request, they claimed, that the central chief excise commissioner withdrew the divisional Preventive Wings Team9 and dropped charges of under-assessing the excise duties by one of the tobacco companies10. Flex Industries was accused of evasion of excise duty and bribing the central chief excise commissioner on the behest of the Pan Masala companies, who stood to benefit from the move. The commissioner was in turn accused of accepting the favour. The market reacted adversely to the news of the arrest (see Exhibit 4). Concerned investors responded by panicking and short-selling the Flex stocks. At the same time, the BSE 500 (Bombay Stock Exchange) stock was witnessing a positive upward movement. Suddenly, Flex Industries, which was leading in a promising industry segment, found itself in the eye of a storm as harried investors reacted in dismay. The event also negatively impacted the market valuation of Flex Engineering Limited, an associated company. The industry witnessed the reaction in disbelief, speculating on the fate of a company blessed with an extremely positive industry future. But why would a company want to ruin its reputation by evading excise duty, which in any case was an irreversible, cognizable offence? It is important here to understand the Indian taxation structure and appreciate its comprehensive and complex nature. The Indian Taxation Structure11 India has a well-developed three-tier federal tax structure (see Exhibit 5), which involves the Union government, the state governments and the urban/rural local bodies. Within the provisions of the Indian Constitution, the power to charge taxes and duties is distributed among the three tiers of government. The Union government is authorized to charge income tax (excluding tax on agricultural income, over which the state governments have jurisdiction), customs duties, central excise duty, education cess (tax), central sales tax and service tax. The taxes charged by the state governments are sales tax (which is tax on the intra-state sale of goods), state excise duty (charged on the manufacture of alcohol), land revenue (levy on land used for agricultural/non-agricultural purposes), st duty (duty on the sale and transfer of property), duty on entertainment and tax on professions. Local bodies levy tax on properties (i.e. buildings), markets, octroi (which is tax on the entry of goods for use/consumption within areas of the local bodies), and usage charges for utilities like water supply, drainage, civic expenses, etc.

8 In India, chewable tobacco is referred to as pan masala and sold in small pouches made of flexible packaging for which Flex Industries was a major supplier. 9 The Preventive Wings team was posted across different divisions and checked excise duty evasion. 10 Excise duties payable is ascertained by the payee company based on the invoice value of goods leaving the factory premises. Misrepresentation of the invoice value by a company affects the excise payable to the government. The excise commissioner’s office conducts random audits and checks documents and records maintained by the company as a deterrent. Evidence of excise evasion, if found, is a serious punishable offence. 11 India Portal, 2007.

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Excise Duty Excise duty is a central tax and is a duty on the production or manufacture of goods. The liability to pay excise duty arises immediately on the manufacture or production of goods and is recorded and collected at the time material leaves the plant gate. In India, excise duty is levied in accordance with the provisions of the Central Excise Act, 1944. Small scale industries are exempted from the payment of excise duty from annual production up to a turnover of Rs10 million. For all intermediate goods on which excise has already been levied, the destination company (for which the good is an input or raw material) is provided relief (MODVAT — modified value-added tax) for the charged amount. The destination company is refunded the excise paid by its supplier of intermediate goods12 by the excise department. Thus, only value added on the raw material is charged and double taxation is avoided. The current excise duty rates do not exceed 16 per cent of the item value. To evade paying excise duty, although it can result in huge gains, is an illegal and severely punishable offence, which can lead to closure of the suspect unit. The excise taxes are enforced by excise commissioners, who ensure that every company in their territory diligently and correctly pays taxes to the government. Flex Industries fell under the domain of then-central chief excise commissioner, Someshwar Mishra, who was one of the accused in the bribery case. MORE CONTROVERSIES The excise duty evasion case was not the only controversy that mired Flex Industries’ reputation. Flex Industries also rocked the proceedings of the Indian parliament. A Congress13 member of parliament alleged that the company had printed and supplied material for the 1999 election caign of Yashwant Sinha of the BJP, the then-finance minister of India (see Exhibit 1, News 3). The accusations had cast a shadow on the clean functioning of the government. It questioned the impartiality of the ongoing investigations against Chaturvedi of Flex Industries. Later, Sinha, on the floor of the house, denied any such tacit association with Flex Industries (see Exhibit 1, News 3). He gave the details of the transactions of election materials purchased from suppliers of which Flex Industries was one. The transaction amount of Rs45,583, for which the bill was raised against Flex Industries, was filed in the statutory return on the election expenditure14 with the district election officer of his constituency. Another controversy surrounding Flex Industries surfaced as a result of which Prabhat Kumar, the governor of Jharkhand, was forced to resign from his post (see Exhibit 1, News 2). This was after Chaturvedi, in an interrogation, confessed to the CBI that he had paid for three parties held between 1999 and 2000 and hosted at the official residence of Kumar, who was then the cabinet secretary. Although a nexus between the two needed substantiation, it was hard to believe that Chaturvedi would finance the party from the company account without expecting any favours from Kumar, a top civil servant. If incriminating evidence of such a nexus was to be found by CBI, Kumar would be found violating the Central Civil Services conduct rules, which prohibit a government servant from accepting any kind of favours or hospitability from individuals, industrial or commercial, with which he has official dealings. In any case, a nexus, if established, would only position Chaturvedi negatively in the excise duty evasion case already under scan. 12 This is the raw material for the destination company. 13 The Congress party and the Bhartiya Janta party (BJP) were the two largest political parties in India at the time of the case. 14 Election and caigning expenses (materials, travel, etc) incurred by political parties have to be filed as a return statement with the district office of the election commission (an autonomous body). This is necessary to ensure transparency and fair accountability of money donated to and spent by political parties.

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The print media’s reference to evidence about former Flex Industries board members added a convoluted twist to the controversial episode (see Exhibit 6). Flex Industries once had on its board of directors a Samajwadi party15 leader and Rajya Sabha16 member, Amar Singh, and former journalist and Rajya Sabha member, Rajeev Shukla. Such political affiliations acted as undercurrents to the main accusations against the Flex Industries owner. At the time of reckoning, the sequence of events and facts about board members having political affiliations created doubts in the dealings of the company. Flex Industries, with the promoter Chaturvedi at the helm of daily affairs, was mired with one controversy after another. Needless to mention, the ensuing events had a damaging effect on the reputation of the company. Flex Industries, until 2001, was a highly geared company with a huge interest burden (see Exhibit 3). Naturally, investors and financers were shaky about the company’s future prospects, in spite of the bright future prospects of the packaging industry. THE COURT DECISION In May, 2004, (see Exhibit 1, News 4) the Delhi court exonerated Chaturvedi of Flex Industries and the Delhi zone central chief excise commissioner, Mishra, for lack of any incriminating evidence in the bribery case. The investigating agencies failed to provide evidence of any favours in the 34 years of Mishra’s service who, at the time of the incident, was due for promotion. The court noted that the circumstantial evidence pointed to a conspiracy to ruin Mishra’s prospects. Although justice came as a respite, it was not before the harm was done and the reputation of Flex Industries adversely affected. Though there was a sense of relief and celebration at one quarter, the market was a mute observer to the exoneration news (see Exhibit 4). The incident raised several concerns of the stakeholders about the lack of corporate governance within the company. Although the company, immediately after the year of the incident, started filing corporate governance reports (see Exhibit 6) in its annual statements, it was more driven by the listing agreement of the stock exchange rather than proactive action. Had Flex resolved its governance issues? BIBLIOGRAPHY Annual Reports, (No. 12, 13, 14, 15), Flex Industries Limited, 2000-2001, 2001-2002, 2002-2003, 2003-2004. Also available for download from ISI emerging markets, http://site.securities.com. Direct Taxes, Government of India, Central Board of Direct Taxes, http://www.incometax.gov.in, last visited on December 20, 2007. Indirect Taxes, Government of India, Central Board of Excise and Customs, http://www.cbec.gov.in, last visited on December 20, 2007. Industry Analysis, “Flex Industries Ltd,” Datamonitor, Reference Code 14125, December 2003 and August 2004, 1-12. National Portal of India, http://india.gov.in/business/taxation/taxation.php, last visited on December 20, 2007.

15 Name of a political party in India. 16 Indian Parliament is made up of two houses. The upper house is known as Rajya Sabha. The lower house is known as the Lok Sabha; its members are the elected representatives of the people.

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Prowess Database17, Center for monitoring of Indian economy, 2006. Stanley Sacharow, “Many new players join India’s flex-pack boom,” Paper, Film #038; Foil Converter Magazine, October 2001, http://www.pffc-online.com, last visited March 12, 2007. Website of Essel Propack, http://www.esselpropack.com, last visited on December 20, 2007. Website of Paper Products, http://www.pplpack.com, last visited on December 20, 2007. Website of Positive Packaging, http://www.positivepackaging.com, last visited on December 20, 2007. Website of VFC, http//:www.vfcindia.com, last visited on December 20, 2007. Website of Indiafoils, http://www.indiafoils.com, last visited on December 20, 2007. Website of India Biz Club, http://packaging.indiabizclub.com/info/packaging_industry_in_india, last visited on December 20, 2007. Website of India Markets, http://www.indiamarkets.com/imo/industry/industry_home.asp, last visited on December 20, 2007. Website of Hindalco, http://hindalco.com/about_us/tapping_new_markets.htm, last visited on December 20, 2007. (Annapurna Foils was acquired by Indian Aluminum Company. Indian Aluminum was later acquired by Hindalco Industries).

17 Prowess is a subscribed database by the affiliate institution and contains information of over nine thousand Indian companies operating across various industry segments.

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Exhibit 1

SUMMARY OF NEWS CLIPPINGS NEWS 1: News of Arrest on Graft Charges On Thursday, November 8, 2001, newspapers in India carried news articles of the arrest of the central chief excise commissioner, Someshwar Mishra, on graft charges. The owner of Flex Industries, Ashok Chaturvedi, along with his accomplice, was also arrested from the parking lot of the customs office. The Central Bureau of Investigations (CBI), which is a nodal agency (like the FBI in the United States), raided various offices of Flex Industries and the residences of the arrested to gather any incriminating evidence to nail the parties involved. Source: Website of The Indian Express (http://www.indianexpress.com/archive_frame.php) Last visited on July 26, 2005 NEWS 2: Flex Industries: Alleged Linkage with Bureaucracy Frontline, a fortnightly magazine, reported a statement made by Ashok Chaturvedi to the CBI. He confessed to having made payments from the bank account of Flex Industries for three parties between March 1999 and July 2000 hosted at the official residence of the then-Cabinet Secretary, Prabhat Kumar (a bureaucrat). As a result, Prabhat Kumar, who was the governor of Jharkhand at the time the confession was made, was forced to resign. Source: Frontline, volume 19, issue no. 4, Feb 16-Mar 1, 2002 Website of Frontline (http://www.frontlineonnet.com/fl1904/19040400.htm) Last visited on July 26, 2005 NEWS 3: Flex in News for Yet Another Controversy On Tuesday, May 14, 2002, a news article about the link between the Union finance minister, Yashwant Sinha, and the Flex Industries chairman was published. It was suspected that the minister took a favour from Ashok Chaturvedi, the owner of Flex industries. Allegedly, Flex Industries had dispatched the minister’s caign material through the railways. There is an assumption that Flex was not paid for the services. Source: Website of The Hindu (http://www.hinduonnet.com/thehindu/2002/05/14/stories/2002051404620100.htm) Last visited on July 26, 2005 On Thursday, May 16, 2002, the Union finance minister in his statement made in the parliament denied the link-up. Source: Website of The Hindu (http://www.hinduonnet.com/2002/05/16/stories/2002051604910100.htm) Last visited on July 26, 2005 NEWS 4: Postscript: News of Exoneration On Friday, May 28, 2004, a special court for CBI cases exonerated the central chief excise commissioner, Someshwar Mishra, and CEO and chairman of Flex Industries, Ashok Chaturvedi, as there was no evidence to prove them guilty. The court observed that both of them had no prior conviction record. Source: Website of The Hindu (http://www.hindu.com/2004/05/29/stories/2004052914960300.htm) Last visited on July 26, 2005 On Wednesday, May 11, 2005, the Delhi high court dismissed a review petition on the case that challenged the exoneration. The high court upheld the trial court judgment. Source: Website of The Hindu (http://www.thehindu.com/2005/05/11/stories/2005051109910400.htm) Last visited on July 26, 2005

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Exhibit 2


Company NameF C L

Technologies #038; Products

Flex Engineering

Flex Foods

Year of Incorporation 1985 1984 1990

Economic ActivityPolyethylene terephthalate

Packaging machinery


Industry Name ThermoplasticsIndustrial machinery

Agricultural products

Owner Flex Group Flex Group Flex GroupShareholding Data Snapshot as on Dec. 2001 Dec. 2001 Dec. 2001 Mar. 2001 Dec. 2001 Mar. 2002 Mar. 2003 Mar. 2004 Indian Promoters Share 74.19 76.75 59.00 41.28 44.18 29.90 29.90 44.18 Institutional Investors Share 0.06 0.16 10.44 3.96 23.19 27.49 26.81 21.42 Mutual Funds and UTI Share 0.06 0.05 10.44 1.58 4.35 5.79 5.74 4.26 Banks, Financial Institutions, Insurance companies 0 0.08 0 0.86 18.33 21.56 20.94 16.22 FIIs Share 0 0.03 0 1.52 0.51 0.15 0.13 0.93 Others Share 25.75 23.09 30.56 54.76 32.62 42.61 43.29 34.39 Private Corporate Bodies Share 15.95 9.42 1.96 5.55 4.91 5.70 6.39 4.26 Indian Public Share 8.92 13.65 28.55 23.64 15.82 19.19 19.20 16.07 NRIs/OCBs Share 0.88 0.01 0.04 2.49 0.26 0.55 0.54 0.39 Any Other Share/GDR 0 0 0 23.08 11.63 17.17 17.17 13.67Total

Flex Industries

Plastic packaging goods

Plastic packaging goods

Flex Group


Source: Bombay Stock Exchange, www.bseindia.com, last visited on November 4, 2007 National Stock Exchange, www.nseindia.com, last visited on November 4, 2007 Prowess Database, Centre for Monitoring of Indian Economy, 2005 Note: 1. All values in the table are percentage shareholdings. 2. GDR — Global Depository Receipts; FII — Foreign Institutional Investors; FI — Financial Institution; NRI/OCB — Non

Resident Indian/Other Corporate Bodies; UTI — During the period of the case, Unit Trust of India was the single largest state-promoted mutual fund company.

3. The financial year in India starts from April and ends the following year in March. Hence, the March 31st data is used to prepare company annual reports.

4. 1 US$ ~ 45 Indian Rupees (Rs) in 2001.

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Exhibit 3












LIABILITIES Share Capital 490.25 414.25 414.25 290.24 290.24 Reserves #038; Surplus 2,887.97 2,351.82 1,996.62 1,417.17 1,758.04 » Net Worth (1) 3,378.22 2,766.07 2,410.88 1,707.41 2,048.28 » Secured Loans (2) 5,081.11 5,322.08 6,258.10 6,957.02 6,918.65 » Unsecured Loans (3) 71.3 143.44 101.01 120.06 207.89

Total Liabilities (1+2+3) » 8,530.63 8,231.59 8,769.98 8,784.49 9,174.82 ASSETS

Fixed Assets Gross Block 10,731.72 8,766.28 8,558.78 8,539.07 8,378.41

(-) Acc. Depreciation 3,354.87 2,931.08 2,520.60 2,121.63 1,747.16 » Net Block (A) 7,376.85 5,835.20 6,038.18 6,417.44 6,631.24 » Capital WIP (B) 102.41 314.14 175.73 171.48 167.73 » Investments (C) 333.8 305.19 342 340.92 295.88 Current Assts, Loans/Adv Inventories 370.45 423.31 490.38 537.77 484.24 Sundry Debtors 1,056.30 899.01 1,293.04 1,353.03 1,314.74 Cash and Bank 607.42 861.8 380.04 53.93 56.33 Loans and Advances 1,481.04 596.07 761.57 787.18 804.03

(i) 3,515.22 2,780.19 2,925.03 2,731.91 2,659.34 Current Liab. #038; Provs. Current Liabilities 2,820.90 1,039.30 770.22 950.79 664.43 Provisions 30.11 28.43 16.57 13.54 13.25

(ii) 2,851.02 1,067.73 786.8 964.33 677.68 Net Curr. Assets (i – ii) (D) 664.2 1,712.46 2,138.23 1,767.58 1,981.66 Misc. Expenses (E) 53.37 64.61 75.84 87.08 98.32

Total Assets (A+B+C+D+E) 8,530.63 8,231.59 8,769.98 8,784.49 9,174.82



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n m


n R


Sales 6902.66 6678.71 6086.95 5306.41 5366.86 Other Income 145.18 162.57 99.62 81.91 52.44 Total Income 7047.83 6841.28 6186.56 5388.32 5419.3 Raw Material Cost 4158.2 4062.65 3557.14 3096.68 3191.32 Excise 751.81 765.83 748.02 591.87 771.49 Other Expenses 689.35 603.18 596.4 653.39 524.48 Operating Cost 1448.48 1409.62 1285 1046.37 932.02 Interest Name 224.52 347.77 392.69 930.15 537.76 Gross Profit 1223.96 1061.85 892.31 116.22 394.26 Depreciation 471.59 436.91 438.11 401.53 494.29 Profit Before Tax 752.37 624.95 454.2 -285.31 -100.03 Tax 316.7 277.42 163.61 0.66 1.19 Net Profit 435.67 347.53 290.59 -285.97 -101.22 Other Non-Recurring Income -39.53 7.64 -6.4 -54.89 -78.96 Reported Profit 396.13 355.17 284.19 -340.87 -180.18 Equity Dividend 0 0 0 0 0

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Page 12 9B07M076

Exhibit 3 (continued)







Profitability Ratios % Operating Profit Margin 21 21 21 20 17 Gross Profit Margin 18 16 15 2 7 Net Profit Margin 6 5 5 -5 -2 Turnover Ratios Inventory Turnover Ratio 15.11 12.83 10 8.07 9.27 Debtor Turnover Ratio 6.53 7.43 4.71 3.92 4.08 Fixed Asset Turnover Ratio 0.94 1.14 1.01 0.83 0.81 Solvency Ratio Current Ratio 1.23 2.6 3.72 2.83 3.92 Debt Equity Ratio 1.5 1.92 2.6 4.07 3.38 Interest Coverage Ratio 6.45 4.05 3.27 1.12 1.73 Performance Ratio % Return On Investment 19 23 20 15 13 Return On Networth 13 13 12 -17 -5 Dividend Yield 0 0 0 0 0

Source: The Economic Times,;exchange=n,;exchange=n Last visited Nov. 1, 2007

Exhibit 4

STOCK MARKET REACTION TO THE NEWS Period of Crisis: Impact on Stock Price of Flex Industries Starting from the day of crisis in November 7, 2001 (news of arrest), to January 28, 2002, the stock prices of Flex Industries began to plummet. The Bollinger band of the stock during the same period suggested very high volatility with a large market activity in the stock with most investors offloading their holdings. This was at a time when the BSE 500 Index (Bombay Stock Exchange) witnessed a strong upward movement. The crisis also negatively affected the stock price of Flex Engineering, another group company. Effect of News of Exoneration on Flex Industries’ Stock Performance A comparison of the BSE 500 Index (Bombay Stock Exchange) movement and the daily moving average stock price of Flex Industries coinciding with the news of exoneration (period between May 10, 2004 to June 15, 2004) suggests that the market response remained insipid. Obviously, the market did not share the same enthusiasm of the owners to the favorable court judgment. Source: The above analysis is drawn from charts of the moving average stock price, Bollinger bands and the BSE 500 Index movement, available from the Bombay Stock Exchange (website: www.bseindia.com; last visited on May 28, 2005).

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Page 13 9B07M076

Exhibit 5


Source: Information drawn from various sources is structured by the case authors in this exhibit for easy comprehension of Indian tax laws. Official Website for direct tax, government of India, http://www.incometax.gov.in; last visited on Dec 20, 1997 Official website for indirect tax, government of India, http://www.cbec.gov.in; last visited on Dec 20, 1997 Website of Seth Associates, http://www.sethassociates.com/taxation_system_in_india.php; last visited on Dec 20, 1997

Authority: Respective State Governments

Authority: Union Government

Authority: C



Authority: CBDT

Direct Tax

Indian Taxation System

Indirect Tax

Income Tax (Income Tax Act, 1961)

Wealth Tax (Wealth Tax Act, 1957)

Gift Tax (Gift Tax Act, 1958)

Central Excise Tax (Central Excise #038; Sale Act,


Customs (Customs Act, 1962)

Central Sales Tax (Central Sales Tax Act, 1956)

State Sales Tax (Respective State Sales Tax Acts)

CBDT: Central Board for Direct Tax CBEC: Central Board for Excise and Customs

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Page 14 9B07M076

Exhibit 6


Category 2000-20011

2001-20022 Oth3 2002-2003 Oth 2003-2004 Oth

Chairman #038; MD

Promoter/Executive Chairman

Ashok Chaturvedi

Ashok Chaturvedi (5/6)4

8 Ashok Chaturvedi (5/5)

7 Ashok Chaturvedi (5/5)


Wholetime Director

Executive Director

Rashmi Chaturvedi

Rashmi Chaturvedi (0/6)

5 Rashmi Chaturvedi (0/5)

5 Paresh Nath Sharma (2/2)

Wholetime Director

Executive Director

N. Sitaraman (2/2) 1

N. Sitaraman1 (5/5) 1

Nominee Director (ICICI)

Independent, Non-executive

A. Karati A. Karati (5/6) 5

A. Karati (4/5) 5

A. Karati (5/5) 7

Nominee Director


Independent, Non-executive

Ravi Kathpalia

KEC Raja Kumar (1/1) 3

KEC Raja Kumar (1/5) 4

P. Abraham (1/2) 2

Nominee Director (IFCI)

Independent, Non-executive

R.V. Rao R.V. Rao (4/5) 5

R. Loonkar (0/0) 3

R. Loonkar (3/5) 3

Director Independent, Non-executive

R. K. Khanna

Ravi Kathpalia (6/6)

5 Ravi Kathpalia (5/5) 5

Ravi Kathpalia (5/5)


Director Independent, Non-executive

Samir Ghosh

R. P. Agrawal (6/6) 3

M. G. Gupta (5/5) 4

M. G. Gupta (5/5) 4

Director R.P. Agrawal

M. G. Gupta (2/2) 3

Director Shailendra Swarup

Director Non-executive Pankaj Sharma

Pankaj Sharma (6/6) 1

Pankaj Sharma (5/5)

Pankaj Sharma(5/5) 1

Director Non-executive Amar Singh5

R. P. Agrawal (5/5) 1

R. P. Agrawal (5/5)


Secretary A. K. Vermani

R. K. Mishra

R. K. Mishra

R. K. Mishra

Auditors Vijay Sehgal #038; Co.

Vijay Sehgal #038; Co.

Vijay Sehgal #038; Co.

Vijay Sehgal #038; Co.

Auditors Jain Singhal #038; Associates

Jain Singhal #038; Associates

Jain Singhal #038; Associates

Jain Singhal #038; Associates

1 Data of board meetings, attendance and directorship positions held in other public limited companies is not available for 2000-2001 from company annual reports. 2 Corporate governance reports in compliance with Clause 49 of the listing agreement of the stock exchanges are reported from 2001-2002 onwards. Audit committee with representatives from the board to oversee compliance issues. 3 Directorship positions held in other (Oth) companies. FCL Technologies #038; Products, another Flex Group company, reported Rajiv Shukla, an individual with political affiliations as an executive director. 4 The number of board meetings attended out of the number of meetings held during the appointment tenure of members is shown in brackets. 5 Amar Singh, who held a directorial position in Flex Industries, had affiliations to a political party. Source: Published annual reports of Flex Industries Limited

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