Contrary to some reports released in the last couple of years, not to mention major cases of large-scale corporate fraud, India remains a great place for Western and Asian companies to do business, says a key player in the business investigations world…
Paying attention to recent goings on, it seems you would need to tread carefully if you are going to do business in India; with a requirement to check everything thoroughly to eliminate the risk of later discovering fraud or other illegal activity in an Indian company’s financial records.
KPMG India’s latest bi-annual fraud survey indicated that almost half of respondents, including Chairmen and MDs, CFOs and other senior management personnel across various industry segments had experienced fraud in the last two years.
Their report stated that ‘India has had its share of frauds and their incidence has often significantly impacted investor confidence… In an atmosphere of doubt and disbelief financial statements are often viewed with scepticism. This has also led to erosion of confidence and reduced trust among participants in the financial system.’
However, Adrian Ashurst of the Swiss-based business background and investigations company Worldbox Business Intelligence (http://www.worldbox.co.uk) believes such statements are exaggerated.
“We do business with quite a few companies in India and I would say a lot of them are pretty solid. I think you could say that there’s a degree of risk there, but I don’t see it as being extremely high,” he says.
Cause for concern
One of the biggest cases of corporate fraud in India’s recent history is the case of Satyam Computer Services, who during their 2008 audit provided PricewaterhouseCoopers with figures that showed they held $176 million in fixed deposits. Another division of Satyam, in Hyderabad, later told PWC the company had no fixed deposits. The conflicting reports were not investigated…
Satyam’s management was later found to have often used a ‘super user’ function in the company’s billing software to create fake invoices, which amounted to $1 billion during the entire period – an accounts receivable fraud that PwC as auditors could not detect, according to US markets regulator Securities and Exchange Commission.
Through its background-checking service, Worldbox has identified similar types of financial irregularities or worse, on behalf of international businesses who were about to sign deals with Indian companies…
In one, the director of an Indian company was found to have been arrested by the Central Bureau of Investigation in the 2G Spectrum Scam (involving under-pricing and spectrum allocation to favour select companies); another company was found to have been involved in illegal mining where its directors had been charged; one company was found to be diverting its funds to an external firm where directors had interests; another Indian business was using a company name that had been struck off; corporate financial records were found to contain window dressing for loan purposes; another company and its officials were found to have been involved in the Commonwealth Games scam; other companies were found to have connections to politically exposed persons on their boards and individuals were found to be using PAN Numbers which belonged to others.
Joining the dots
A PAN (Permanent Account Number) can be a useful identifier when doing business in India. It is a unique 10-digit alphanumeric identifier, issued by the Indian Income Tax Department to individuals and firms alike.
Ashok Paranjape, Worldbox’s manager in Mumbai, explains: “Based upon a PAN, we can ascertain the validity of a person or company: whether they are legitimate or whether their organisation has been closed down. Through our contacts on the ground we can obtain scanned copies of PAN certificates and verify whether they’re legitimate copies too. We’ve had cases in the past where they have been forged.”
Adrian explains what to look out for broadly, when doing due diligence on a company in India…
“One sure way to check a company initially is if people have been in business for a long period of time. The age of the company can indicate the stability of the company,” he says. “And there are quite a few companies in India that have been around a long time and have grown progressively over the years and have built a solid organisation.”
Even so, the KMPG report claims 75% of respondents – from new and old companies alike – thought fraud in corporate India was on the rise.
Regulatory activities, the economic downturn of 2009 and recent corporate frauds have all combined to impact the perceptions of fraud levels in India, it says.
Supply chain fraud (procurement, distribution and revenue leakage) was found to be the single most exposed area. Weak internal control systems, eroding ethical values and a reluctance on the part of the line managers to take decisive action against the perpetrators are cited as the most vital underlying reasons for fraud increasing.
Some 81% of respondents to KPMG’s survey stated financial statement fraud is a major issue, with a desire to achieve or exceed targets, and earnings of senior executives linked to financial performance, being the main reasons for senior management’s involvement in fraud.
Adrian says those figures are “overblown” and over-generalise the real situation, and that of the 3,500 reports Worldbox has generated on Indian firms – comprising anything from a name check to a short profile, to a full credit report – only around 15% of those reports raised a result that implied something was wrong with business or its accounts, that they would advise caution in dealing with as a consequence.
Due diligence
So, how can a domestic or international company protect itself from dealing with a company that either has or is likely to commit some sort of wrongdoing in India?
Adrian says most of his work involves business-checking on behalf of clients wishing to do cross-border business or of foreign subsidiaries of foregoing corporations doing business in India. He cites an example of one of his partners in Hong Kong who has a contract with a large Asian firm doing business in India.
“They’re one of the more developed such services thanks to the way in which they check out the people who apply to trade over their platform. They initially experienced a lot of fraud problems in India, where people were passing themselves off as things they weren’t. Today, their staff in Hong Kong have to verify whether a user’s company exists, whether the user works for that company or not, and whether is it a legitimate business… In all of these, they come to us for verification of companies in India. And in India you either have a registered company or a limited company, which you can check the company register against. You can get their annual returns and ascertain whether they are legitimately doing business or not. Or they may be a proprietary company or partnership, which also have to be registered.”
He notes it is more difficult getting access to those proprietary and partnership company records because they are not available publicly. “In this respect we ask for a PAN certificate,” he adds. “Firms can also verify a company’s credentials by obtaining a copy of their Export/Import certificate.”
Then there are the company records, which must be filed annually by all companies incorporated in India, including: subsidiaries of foreign companies, joint venture companies and others, and include: a Balance-Sheet, Profit and Loss Account, Annual Return and Compliance Certificate.
However, Ashok explains that sometimes, even if they can access these records, (80,000 companies in North India have not filed annual returns for the past five years, according to the Ministry of Corporate Affairs) the records could be wrong in the first place.
“Then you come down to sole traders,” he adds. “They can also have a PAN number and be in business… so if we can’t verify their registry data, we verify their PAN certificates or import/export licences.”
Outside demand
The US Foreign Corrupt Practices Act (FCPA) is also something Worldbox checks companies against. It is becoming increasingly applicable to many companies in India as more Indian companies expand into foreign markets, and must consequently gain a good understanding of the regulatory environment in these markets, specifically involving bribery and corruption.
These spectres are viewed as an inevitable aspect of doing business in India. They are most rampant in seeking routine regulatory approvals and to win new business from prospective clients.
Despite the presence of anti-corruption laws, weak regulatory enforcement has contributed to the current impasse. With Indian companies going global, KPMG has reported an increasing trend of Indian companies pro-actively taking measures to adhere to international anti-bribery laws/ regulations and strengthening their code of business ethics at the board and senior management levels to regulate dealings with external stakeholders.
Adrian says: “There are several databases we can cross reference to ascertain whether they confirm to money laundering or drugs trafficking checks. We also have people on the ground in India to check for compliance with regard to big initial purchase agreements at large factories.”
In India, by comparison to other emerging economies, their records system is becoming quite good, he add.
“The Indian authorities keep proper government databases of companies and tax records, which our agents on the ground can go and physically source, deriving paper documents from local government archives, if need be. The access to documents is better in India than the rather patchy access we continue to see in neighbouring Pakistan. And although we do business in Sri Lanka, we find their records situation quite hard to work with too”.
India is growing and expanding exponentially. Many international companies are keen to embrace the offers of business from firms looking to come out of India to expand their marketplaces and do business with companies for direct group sales.
“For this reason, we’ve seen huge growth in the number of firms using us to perform background checks and derive company profiles,” Adrian adds. “So they know who they’re really doing business with, and we expect to be doing even more in the region next year”.
