Lilliput fiasco: Kroll, BMR join hands to battle India's PE fraud claims

In the past few years, India has seen several high-profile corporate fraud cases - the alleged Rs 870 crore siphoning claim from Reebok and the Lilluput-Bain-TPG Capital mess, valued at approximately Rs 850 crore, come to mind immediately. Gradually, the practice of post investment due diligence has gained popularity.

Intent on riding that wave are Kroll Inc and BMR Advisors, involved in risk mitigation and financial services, who announced their strategic partnership on Tuesday.

In just the past year, Kroll Inc., a global risk mitigation firm that deals in due diligence based on external evidence, has seen at least a 50 percent increase in business, according to Reshmi Khurana, MD of the group. She attributed this to, among other things, dubious accounting practices, insufficient regulatory oversight and a slow economy that creates an “at whatever cost” situation that allows promoters to take advantage of willing investors.Issues like limited access to information, insufficient investigation of red-flags early on and conflict of interest help perpetuate corporate frauds.

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[caption id=“attachment_683225” align=“alignleft” width=“300”]  Reebok was involved in an multi-crore corporate fraud claim. AFP[/caption]

Sanjay Mehta, head of the risk and business advisory team of BMR Advisors, also spoke about the axe of the US Foreign Corrupt Practices Act and the UK Bribery Act that hangs over foreign investors everytime they consider an Indian investment. “With corporate governance standards still evolving and auditing standards that have not fully matured, private equity investors in India face serious challenges when applying due diligence and risk mitigation practices from developed markets to India,“he said.

Khurana and Mehta stressed on ‘synchronisation’ of their services with Kroll handling most of the external due diligence like verifying business ethics and reputation checks with outside sources and BMR covering the internal financial records.

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The Reebok fiasco cost parent company Adidas 211 million euro in losses while Bain and TPG transferred their holding to Lilliput’s promoters before washing their hands off the entire issue.

Perhaps alliances like the one between BMR and Kroll will reduce the frequency of such debacles in the future.