Rajesh Desai, a 48-year-old man from a lower middle-class family in Gandhinagar, Gujarat, was thrilled when he secured a business deal to distribute household products of a multinational company to retailers. It was January 2004 and the South Korean giant LG had just entered the FMCG (fast-moving consumer goods) sector in the Indian market through a joint venture with the India Household & Healthcare Ltd (IHHL).
Impressed by the brand value of LG, which had already made a mark with its electronic products, Desai invested his father’s lifetime savings from a government job to buy LG Care products. He would wake up early in the morning and take the products such as soaps, shampoo and toothpaste to various kirana stores on his two-wheeler.
But things took a bad turn just a year later. In January 2005, LG announced the termination of the contract with its Indian partner and asked distributors across the country to destroy the stocks lying with them. Desai was shocked. The multinational’s decision crushed his dreams of a better life for his family as it meant losing the investment he had made, including the security deposit and advance payments.
Desai’s was among the nearly 3,000 families in India that bore the brunt of the end of the LG-IHHL joint venture. The victims include employees of the company’s offices in several cities, who lost their jobs, besides around 50 major and 500 small- and medium-sized distributors. IHHL pegs its total loss at around
Rs 500 crore, of which Rs 76 crore had been spent on procuring LG products.
A policy decision made by the then UPA government at the Centre enabled LG to terminate the contract with its Indian partner. On 12 January 2005, the upa scrapped Press Note 18, which made it mandatory for foreign companies doing business in India through joint ventures with domestic partners to obtain a ‘no objection certificate’ from the partner before cancelling their existing agreement and changing their partner or entering the market directly. Within hours of the Union Cabinet clearing the decision, LG served a termination-of-contract notice to IHHL and followed it up with a legal notice demanding that all LG Care products in their stocks be destroyed. The multinational threatened to launch legal action against IHHL and its direct and indirect business partners if they did not destroy the stocks.
The issue was then raised in Parliament by CPI leader D Raja, who demanded the reinstatement of Press Note 18 to protect the interests of Indian businesses. However, nearly a decade after the episode, the matter is yet to be settled and stocks of LG Care products imported by IHHL are still lying in the godowns of the Central Warehousing Corporation in Chennai.
The Prime Minister’s Office did not respond even after a group of 25 MPs submitted a memorandum seeking action against LG. IHHL, on its part, knocked on the doors of UPA ministers, including the then commerce minister Kamal Nath and his successor Anand Sharma. It also met the then corporate affairs minister Sachin Pilot seeking investigation into the matter by the Serious Fraud Investigation Office. However, there was no action.
Tehelka’s investigation into the case reveals the whimsical manner in which the South Korean giant pulled the shutters down on its joint venture with an Indian partner. This was made possible by a policy decision of the government, which failed to protect the interests of Indian businesses while aggressively pushing for foreign direct investment.
It all began in 2003, when LG decided to enter the FMCG market in India after having already become a household name for its electronic goods. In fact, FMCG used to be the multinational’s primary business when it had started out in South Korea as Lucky GoldStar. Now, the company wanted to make a mark in India’s fast-growing FMCG sector — the fourth largest segment in the Indian economy.
Having established contact with a Saudi Arabia-based NRI, Krishna Pillai Jayaram, through its offices in that country, LG made IHHL — a company owned by Jayaram — the sole licensee to sell LG Care products in India. LG Household and Healthcare Ltd (LGHHL) signed an MoU with IHHL after terminating its previous contract with Kolkata-based Global Agencies citing underperformance.
In all, IHHL signed three MoUs and clinched three licence agreements with LG group companies — LGHHL(MoU signed in November 2003 and licence agreement in May 2004), LG Cosmetics (MoU signed in March 2004 and licence agreement in May 2004) and LG Computer Network Solutions (MoU signed in October 2004 and licence agreement on 1 January 2005). The first licence agreement was signed at a five-star hotel in Chennai in the presence of 12 senior executives from LG’s headquarters in Seoul, South Korea.
On 12 January 2005, the day the scrapping of Press Note 18 was announced, LG sent the termination notice for IHHL’s agreement with LGCNS. And on 5 February, LGHHL and LG Cosmetics sent their termination letters to IHHL.
Shockingly, the contracts were terminated at a time when the joint venture was doing well across the country. A massive ad campaign with the tagline ‘Life’s Good!’ had earned the brand good recall value. LG’s entry was being hailed as being a unique experience for India’s FMCG sector as it was the only multinational that used the same brand name ‘LG Care’ for its entire range of products.
After the termination of the contracts, C&F (clearing and forwarding) agents and distributors across the country started lodging complaints against IHHL in various states. “It was a terrible time for us,” recalls Jayaram. “I and other officials of my company were arrested and had to spend time in jail. The saddest case was that of Cyra Paul, an assistant general manager who was arrested when her child was just three months old. She spent more than three months in jail in Agra along with her child.”
At the initial stage of the investigation, the economic offences wings (EOW) of the police in several states considered Jayaram and IHHL managing director Vijay Singh as the conspirators. Most of these cases were settled after IHHL compensated the c&f agents and distributors for the losses they incurred. Jayaram says that after losing his entire investment in the joint venture, he had to spend an additional Rs 25 crore to pay the agents and distributors.
However, the investigation into one of the complaints — lodged by Desai, the Gandhinagar-based trader — brought a new twist to the tale. This case was taken up by the EOW of the Gujarat Police. Inspector MH Pathan, the investigating officer, issued summons against Jayaram and the directors of IHHL, including managing director Singh. Singh was arrested and kept in police custody for more than a month in Ahmedabad.
However, during the interrogation and verification of various documents, Pathan came to the conclusion that IHHL was a helpless entity at the hands of LG. The investigation team then travelled to various parts of India to collect evidence and verify all the documents related to the case.
In 2010, Pathan issued summons against 11 top officials at the LG headquarters in Seoul, including global vice-president YC Choi and vice-president (overseas) CH Kim, and sent them a questionnaire with 66 queries. The India office of LG Electronics also came under the scanner. However, the officials in Seoul refused to respond to the summons and the questionnaire, arguing that an investigation body of a foreign country had no right to issue summons to them.
Pathan and adgp (EOW) KD Patadia were transferred from their posts soon after the summons was issued. The probe has been in cold storage since then.
Jayaram says that his experience shows the influence of multinational companies on the Indian legal and investigative systems. “A red corner notice was issued against me and my wife’s passport was impounded, preventing us from going to India and seeking justice through the courts,” he alleges.
IHHL filed a petition in the Madras High Court against the termination of contract and got a stay order in early 2005. The court also restrained the LG group from signing business agreements with any other company in India. However, LG, too, managed to get an injunction order from the same court, restraining IHHL from selling the goods it had imported from LGHHL.
IHHL then approached the Supreme Court for appointing an arbitrator in the case, but the plea was rejected. The apex court said that it could admit the plea only after IHHL gets the Madras High Court’s injunction vacated and settles all the
In 2008, while accepting a petition by a distributor, the Delhi High Court called LG’s move a “unilateral decision”. But nothing more was heard about that case.
In the termination-of-contact letter, LG had termed the contract between LGHHL and IHHL as “fraudulent” as the LG officials who signed the MoU were not authorised to do so. However, documents available with Tehelka show that the same officials had signed a similar agreement in Saudi Arabia with a company named DERAAH EST in 2002. This contract was terminated by LG in 2005 citing non-fulfillment of the targeted sale, but the company did not question the authority of the officials to sign the deal.
After IHHL got the stay order from Madras High Court, the multinational alleged that its officials — Kim, BK Jung (manager, overseas business) and Saji S Anthony (in-charge of LG’s Riyadh office — had misused their positions and signed the deal after being bribed by Jayaram and Singh. LG also lodged a complaint against the officials at the Prosecutor’s Office of the Southern District of Seoul, following which Kim and Jung confessed that they had signed the MoU with IHHL “in a crowded coffee shop at the Chennai Airport without fully reviewing the content” and that too “under the influence of alcohol”. The multinational submitted copies of the complaint and the officials’ testimonies to the Madras High Court.
But, if the deal was fraudulent, why did LG allow IHHL to do business for almost a year after the signing of the MoU? Kim and Jung were present at the launch of LG Care products in India and also attended the joint press conference by LGHHL and IHHL. Why did it take so long for the multinational to realise that its officials had signed a fraudulent deal?
One of the questions posed by the Gujarat EOW to LG was how were 100 containers of products shipped to India between 2003 and 2005 if only a few “corrupt” officials of the multinational were involved in the deal.
That was not all. Officials of the government-run State Trading Corporation had held a series of meetings with LG and IHHL officials and sanctioned Rs 100 crore and Rs 20 crore, respectively, as “import assistance”. If it was a fraudulent deal, then was the government-run body also taken for a ride?
The Gujarat EOW has accessed all the commercial invoices that LG received from IHHL. It also has the travel details and minutes of meetings and joint press conferences by LGHHL and IHHL officials.
Jayaram alleges that both Kim and Jung are still serving LG with the same designations. “While seeking punishment against Kim and Jung in its complaint before the Seoul prosecutor, LG admitted that if the validity of the agreement with IHHL was proved, it would be forced by Indian courts to pay a huge amount of compensation to IHHL,” Jayaram told Tehelka. “Then, why did LG allow the two officials to continue working for the company? It seems the accusation against them was just a drama staged by the company to mislead the Indian courts.”
The Gujarat EOW’s questionnaire to LG also brings the India office of LG Electronics into the picture. The investigators accessed the minutes of IHHL’s meetings with top officials of LG Electronics in India, including its former India CEO KR Kim, who used to be known as the poster boy of India’s consumer durables industry. The probe revealed that there were serious disputes between LGHHL and LG Electronics in India over the use of the LG logo for FMCG products. The minutes show that LG Electronics had raised questions over the pricing and television ad campaign for LG Care products.
Jayaram alleges that KR Kim, who continues to enjoy great popularity in industry circles in India, had even threatened him to accept LGHHL’s termination letter. “I suspect he is the most instrumental player in this whole dubious game,” Jayaram told Tehelka. Kim was unavailable for comment.
Till the time of going to press, LGHHL’s Seoul office and LG Electronics’ India headquarters had not responded to Tehelka’s emails. A few executives from both the offices said on phone that it was an “old case” and hence they could not comment.
Industry experts say that the reason for LG’s decision to scrap the contract with IHHL remains a mystery. “There were rumours that LG Electronics, which had already made deep inroads in the Indian market, was against the idea of using the LG logo for FMCG products,” says an expert on the condition of anonymity.
Another source in the industry told Tehelka that LG might have realised the huge potential of the FMCG business in India after entering the market and might have wanted to exploit the market directly without its domestic partner. “The scrapping of Press Note 18 by the Manmohan Singh government may have triggered this,” the source says.