Scam-wary foreign investors put Indian firms under close watch

Nov 12 2012, 20:38 IST
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SummaryWith corporate India getting embroiled in various scams and corruption charges, foreign equity investors are increasingly investigating the target Indian firms for any corrupt practices or untoward behaviour.

With corporate India getting embroiled in various scams and corruption charges, foreign equity investors are increasingly investigating the target Indian firms for any corrupt practices or untoward behaviour.

Potential equity investors from the US and UK are asking Indian companies if they have any political exposed persons (PEPs) as co-promoters; any retired government officials or even Army personnel on their boards.

Foreign companies are conducting 'due diligence' before closing any deals, and according to sources in the deal-making circles, many overseas investors are turning down proposals in companies suspect of corrupt practices. In a straight impact, experts say this could make raising foreign equity funding difficult for companies especially in sectors like real estate or natural resources firms, where political meddling typically yields better than superior business model or commercial knack.

“It's more of a smell test,” said Somasekhar Sundaresan, partner at law firm J Sagar Associates, alluding to FDI investors scrutiny of ethical conduct of target Indian client. He said, some FDI deals have fallen through as Indian companies did not pass this smell test. Clients are even engaging basic market intelligence people, private agencies and forensic service providers to carry out an insightful assessment of the target companies, Sundaresan added.

Potential foreign investors have backed out from five large deals in the recent past, mainly due to suspicion on target companies being co-owned by politically exposed persons, a senior corporate lawyer engaged in negotiation of such deals said, asking not to be named. Promoters are being grilled regarding an indirect economic interest of PEPs in the target company.

“FCP (foreign corrupt practices) due diligence is becoming increasingly the trend now,” said Diljeet Titus, managing partner, at law firm Titus & Co. FCP Act of the US requires American companies to comply with the law. Last year, the UK enacted an anti-bribery law to combat corporate corruption. The UK Bribery Act prohibits even 'facilitation payments', which are allowed under the US FCP Act.

Trilegal senior partner and M&A expert Anand Prasad said: “Recently, a lot of our clients are wanting us to give a detailed analysis under FCPA of the Indian firm with whom the joint venture is being proposed. This helps in analysing the business risk involved in the venture and alarms the foreign player of the risks involved.”

With corporate India recently facing allegations of deriving undue benefits in sectors like steel, mining, coal and real estate through political links, FE's

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