India Due Diligence
The Indian economy is for many foreign investors, companies, and brands one of the last big, largely untapped, opportunities on the globe. For these companies, the attractiveness of the destination is large enough to make braving India’s not unsubstantial obstacles and pitfalls worth the risk. The raw numbers alone make that sentiment easy to understand. Factors like a 1.2 billion person population, 300 million in the middle class, a rapidly growing, but still far from developed, economy are difficult to ignore. Low cost labor, the size and growing purchasing power of the domestic market, and a still nascent manufacturing sector are additional key factors making the country attractive to foreign companies.
Some Risk Factors in India
A Difficult Place to Do Business
With all of its attractiveness comes significant risk. Corruption is still a problem in India. Political infighting and regulatory unpredictability continue to cause problems for business, despite India’s long-standing democracy. Legal enforcement of IP rights takes time and the result of court cases is anything but sure. Internal fraud in companies in procurement, HR, and sales is difficult to investigate and difficult to extinguish. External crime can cause problems in the supply chain and distribution channels.
Bribery and Corruption
It’s no secret that the biggest problem facing companies in India is bribery and corruption. India routinely ranks poorly in Transparency International’s Corruption Perception Index (CPI). The latest country rankings place India 94th out of 177 countries. India ranks particularly poorly in Transparency International’s Control of Corruption Index, which reflects “perceptions of the extent to which public power is exercised for private gain. This includes both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.”
Bribery and corruption inside many private industry sectors is not only tolerated, it is expected as the norm. Fraud occurs in many of the areas inside organizations where it is regularly seen elsewhere, such as procurement and sales, and is uniquely damaging in others such human resources where pay-to-work schemes are prevalent.
Fortunately, many of these problems can be dealt with before they arise through regular and consistent use of due diligence in India. Vendors should be vetted for proper operating procedures, beneficiary ownership, and operating history. Suppliers and service partners should be checked for possible conflicts of interest with internal employees. New hires should be vetted by a third-party, outside of company HR. All service partners, vendors, and distribution channel partners should be examined for red flags in their operating histories, including scandals, past litigation, criminal histories, and potential political exposure.
Key Issues in Due Diligence in India
- India is very large country, with many different languages and many different cultures. Local knowledge and local contacts are crucial to being able to traverse the scope of the country. Research may produce results, but significant local knowledge is required to truly understand the ramifications of those results.
- Many searches must still be done manually, and therefore take longer to execute properly. Lack of national database coverage means that searches need to be done locally, in the right jurisdictions, and may not be conclusive. Time must be budgeted to do searches right.
- Human source comments and analysis is crucial to getting the whole story. Although official filings and data are usually available for companies, not everything is discernible from numbers alone. Source comments are crucial for uncovering the true reputation of the company or key personnel, how customers actually perceive products, and the existence of red flags that may not have reached the public eye.
Due Diligence in India is a must.
India is one of the most challenging business environments anywhere. If you are planning on doing business in India, such as investing, sourcing product or components, entering the market directly, entering the market through a local partner, or licensing your brand or technology, it is crucial to know all you can about the status, environment, and history of the parties you will be doing business with. A properly designed and executed Due Diligence effort can make India more transparent and your business safer.