India compelling market but fraud fears persist among global investors, finds study

Prime Minister Narendra Modi may be going all out to woo global investors to invest in India but the country's image among global investors may not be that clean. At least that is what a 2016-17 Kroll Global Fraud & Risk report released today revealed.

According to the study, commissioned by Forrester Consulting, India was the second on the list of countries where investors were averse to investing due to fraud fears. The study found that 19 percent or a fifth of the respondents were discouraged from operating in India, which is second only to China.

An equal proportion of respondents said that security risk – natural disasters, strikes, violence etc – acted as deterrent in India.

Representational image

Representational image

However, fraud is climbing steadily since last year’s survey. Overall, 82 percent of executives surveyed reported to have fallen victim to at least one instance of fraud in the past year, up from 75 percent in 2015. This continues to be the trend as revealed in previous Kroll Global Fraud Reports, with executives reporting fraud incidence levels at 61 percent in 2012 and 70 percent in 2013.

The India market is too compelling to be ignored for investors, and strategic investors often choose to operate here via joint ventures with local partners who control the operations of the local companies. Foreign investors believe such local partners are better able to manage India’s operating environment – which involves a close nexus between business, government, and bureaucracy, thus creating suspicions of improper dealings, the report's findings stated.

While local businesses can see behind-the-scene activities, foreign investors struggle to do so, thus creating an opportunity for fraudulent activity. For example, local management may engage in related-party transactions to generate cash by inflating vendor invoices or creating fake employees. Such practices can make it difficult for investors to understand whether the cash is being generated for legitimate business purposes (such as land acquisition or paying rural employees), or for paying kickbacks to government officials, the Kroll report said.

“Businesses often do not view fraud as a strategic risk,” said Reshmi Khurana, Managing Director and head-South Asia, who wrote an essay, Riding the contradictions, to explain the trends seen in India. Talking about bribery and corruption risk, Khurana said that businesses operating in India often accept corruption risk as a cost of doing business in India.

Talking about management conflict of interests and vendor and supplier fraud, Khurana said that in many fraud investigations that Kroll has conducted, senior executives who are in the position to award contracts, demand kickbacks from vendors and often vendors are forced to comply if they want to do business with these companies. "We have seen several cases where these types of fraudulent activities go right up to the top management when the necessary checks and balances are not in place," she said.

Khurana points out to the Non Performing Assets (NPA) in the banking industry (all listed banks) in India and said a significant portion of the NPAs have been classified as ‘wilful’ which suggests that the promoters have the ability to pay but have chosen not to. There are several cases of fraud and illegal diversion of funds in these instances and addressing such cases could help address the problem of NPAs. Consider this: As of end September 2016, gross NPAs at India's banking sector stood at around Rs 6 lakh crore. If one combines the portion of restructured loans to this, the total chunk of stressed assets can go up to 12 percent of the total bank loans. Interestingly, not many cases of bank officials being punished for being involved in cases of fraud came to light. Case in point, Citibank in 2010 and Axis Bank fraud in 2016.

One of the ways to prevent these incidents from repeating is to conduct background checks on senior officials holding key positions in organisations. “But the funny thing is that background checks on employees are still considered as a slight here. The Indian culture does not accept it unlike the west where background checks are done. Not that that has prevented frauds from happening in organisations but at least those organizations conduct in-depth background checks to prevent employee wrongdoing to the extent that is possible,” said Khurana.

The companies that participated in the survey range from consumer goods (11 percent), tech and media (10.5 percent), manufacturing (10.5 percent), construction, engineering and infrastructure (10.5 percent), financial services (10.5 percent), and other others ( 47 percent). The companies having annual revenues less than 500 million was 39 percent, between 500 million and one billion 31.6 percent, 1-5 billion 10.3 percent, 10-15 billion 4.8 percent and over 15 billion was 4.2 percent.

Respondents to the survey hold senior positions within their companies. Of the respondents, 11 percent were from India. All the respondents represent the C-suite. 61 percent of companies had annual revenues of $500 million or more. Respondents represented all major global geographies, including 25 percent from Europe, 20 percent AsiaPacific region, 20 percent North America, 19 percent Middle East/Africa, and 16 percent from Latin America.


Published Date: Jan 18, 2017 16:23 PM | Updated Date: Jan 19, 2017 18:56 PM

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