The Hindu : Parmalat founder admits diverting funds

Online edition of India's National Newspaper
Wednesday, Dec 31, 2003

Business

Business

Parmalat founder admits diverting funds

By Batuk Gathani

Calisto Tanzi

BRUSSELS DEC. 30. The Milan magistrates are now investigating Europe's `biggest and spectacular' corporate scandal, where equivalent of some Rs. 25,000 crores to Rs. 50,000 crores cash assets in euros, have `just vanished' from the company's Cayman Island (tax haven) accounts. According to the investigating Magistrates, the founder of the Parmalat Company, which employs about 39,000 staff, himself `instigated fraud plan' which has led the company on the verge of bankruptcy. Trading in Parmalat shares on the Milan Stock Exchange has been indefinitely suspended today.

The Italian authorities investigating Parmlat's slide into bankruptcy have accused Calisto Tanzi, its founder, of instigating a complex chain of financial schemes that has brought the huge dairy and food chain giant crushing down. Mr. Tanzi has now admitted misappropriating about euro 500 million over seven or eight years, according to Italian investigating authorities.

Analyst's today point that the current scandal at Parmalat is seen as model of what is wrong with corporate Italy particularly at big family controlled firms. The non-Italian western observers have also been taken aback by the way the Italian Government of Prime Minister, Silvio Berlusconi, has tried to contain the Parma scandal. The normal procedure followed by other European and American governments is to initiate drastic reforms to ensure more transparency and better corporate governance in corporate affairs, essentially to ensure that the public shareholders are not cheated.

It is ironical to note that Mr. Berlusconi is also Italy's richest and most influential businessman with extensive holdings in media and retail chain stores. The Italian Government has now decriminalised accounting fraud and last week has even rewritten Italian bankruptcy laws to contain the Parmalat scandal. It would, however, be churlish to doubt the bona fides of the Italian Government to contain financial consequences and political fallout of jeopardising future job security of 39,000 workers. Hence, the Prime Minister, Mr. Berlusconi, has initiated an impressive strategy to ensure that Parmalat remains somehow in business. The company could become government owned and Italian investment banks are already scouting for foreign investors to restructure the Parmalat corporate empire, which is now on verge of bankruptcy.

The leading Italian family owned companies are essentially structured on a corporate strategy of creating holdings within holdings. It is argued that such presence of such structures is an invitation to abuse and lead to fraud. In Italian case histories, this may be further compounded by governance structure of Italy's big family-owned companies with more than necessary family members on the board of directors and weak checks on their powers. That is the sort of corporate structure, which has now paved way for the collapse of one of the eight leading Italian companies.

At present, the Italian authorities are busy questioning Mr. Calisto Tanzi, who for the first time has admitted that he organised a fraud of some 500-800 million euros, through companies controlled by his family beyond the reach of Parmalat. According to Italian authorities Parmlat's total financial liabilities may amount to as much as 16 billion euros or Rs. 90,000 crores. These estimates were contained in a document presented by investigating Italian magistrates to a judge, this week to facilitate arrest and detention of Mr. Tanzi

To increase Parmlat's size and stoke its cash flow, Mr. Tanzi and senior Parmalat executives created and launched increasingly sophisticated and complicated financial instruments, partly designed by their own auditors and ideally anchored in offshore financial tax havens The Italian analysts and authorities are now arguing if their motive was to stage a financial fraud basically to enrich themselves or they were engaged in a massive corporate megalomania. These are the imponderables, as the Italian public and establishment wonder in which black hole and how some Rs. 90,000 crores equivalent sum has just vanished. According to an Italian news agency report the search for the missing cash has begun in Equator, South America, because this was the last country visited by Mr. Tanzi. Endorsing the arrest of Mr. Tanzi, a Milan judge is quoted saying that Mr. Tanzi and his family members were immediate beneficiaries of alleged illegal diversion of company funds in tax haven family holding companies.

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