Local Funds vs Foreign Funds
September 30, 2015

Corruption In India

Corruption exists in India and is a problem which adversely impacts its economy. In 2014 India ranked 85th out of
175 countries in Transparency International’s Corruption Perceptions Index.This was an improvement from a ranking of 94th in 2013. However, India is not the only large economy which ranks highly in terms of corruption, given China ranked 80th in 2013 and fell to 100th in 2014.

A study on Bribery and Corruption in India conducted in 2013 by one of the largest global professional services firms Ernst & Young (EY)* , a majority of the survey respondents from PE firms said that a company operating in a sector which is perceived as highly corrupt, may lose ground when it comes to fair valuation of its business, as investors bargain hard and factor in the cost of corruption at the time of transaction. Corruption invariably increases transaction costs and uncertainty in an economy while lowering efficiency, by forcing entrepreneurs to divert their scarce time and money to bribery rather than production. It inhibits the development of a healthy marketplace and imbalances economic and social development by distorting the rule of law and weakening the institutional foundation on which economic growth depends.

Causes of Corruption in India

  • Excessive regulations,
  • Complicated taxes and licensing systems,
  • Numerous government departments each with opaque bureaucracy and discretionary powers,
  • Monopoly by government controlled institutions on certain goods and services delivery; and
  • The lack of transparent laws and processes.

Corruption has an Impact!

A November 2010 report from the Washington-based Global Financial Integrity** estimates that over a 60-year period, India lost US$213 billion in illicit financial flows beginning in 1948. Adjusted for inflation, this is estimated to be 462 billion in 2010 dollars, or about $8 billion per year ($7 per capita per year). India ranks 5th in the world in illicit outflows, and is the poorest country in the top-10 by per-capita GDP. The report also estimated the size of India’s underground economy at approximately US$640 billion at the end of 2008 or roughly 50% of the nation’s GDP.
The previous administration began to beef up efforts to curtail trade mis-invoicing at customs two years ago, recovering nearly $400 million in additional tax revenue in two years. However, India has just scratched the surface at curtailing illicit financial flows.

For 2015, the World Bank’s Doing Business Report^ placed India at 142 out of 189 countries that were ranked in terms of ease of doing business. India scores are low in the categories of starting a business, getting construction permits, paying taxes and enforcing contracts.

Fight Against Corruption

Indian Prime Minister, Narendra Modi vowed that uncovering and penalising corruption would be a focus of his government when he won a landslide victory in May. As a result, businesses are taking this pledge seriously, by increasing their focusing on governance and compliance systems, improving their transparency to global investors and hopefully resulting in better valuations, coinciding with the positive sentiment and momentum on the Indian economy.

Over the past few months, the World Economic Forum’s coalition against corruption has seen a significant uptick in interest from multinational companies with operations in India. 75 per cent of the 100-odd global firms that have committed to tackle the issue in their operations with the WEF, have a significant or growing presence in India, through direct operations, joint ventures and portfolio stakes. Six Indian firms being Infosys, Mahindra & Mahindra, Godrej & Boyce, Genpact, Wipro and Bajaj Auto are also part of the anti-corruption initiative.

Actions Taken to Reduce Corruption

Some of the actions considered to increase transparency include:

  • Minimising the number of touch points with bureaucracy;
  • Minimising the use of cash based transactions; and
  • Adopting digital tools to remove official discretion.

Importance of Corporate Governance in the Capital Market

Good corporate governance standards are essential for the integrity of corporations, financial institutions and markets and have a bearing on the growth and stability of the economy. Over the past decade, India has made significant strides in the areas of corporate governance reforms, which have improved public trust in the market. These reforms have been well received by the investors, including the foreign institutional investors (FIIs).
According to a World Bank study “Doing Business 2014”, India ranks 34th worldwide in terms of investor protection which is an important indicator of corporate governance across all countries considered^^.

The enactment of the companies Act 2013 was major development in corporate governance in 2013. The new Act replaces the Companies Act, 1956 and aims to improve the standard of corporate governance standards, simplify regulations and enhance the interests of minority shareholders. The new Act is a major milestone in the corporate governance sphere in India and is likely to have significant impact on the governance of companies in the country

India Avenue’s Value Add

Corporate Governance and Corruption issues sometimes can be detectable through strong operational due diligence. However, on a large number of occasions it cannot be detected.
Either way we feel the strong value proposition for India Avenue are the following:

  • Connectivity through locally built networks of investment managers, brokers and other market participants
  • Pure focus on India and its capital markets
  • All assets are owned by India Avenue – so our dedicated team will monitor in real time
  • Mandates will deal significant concentration in industry or over reliance in a single security

*Bribery and corruption: Ground reality in India, Survey by EY 2013
**Paper on Illicit Financial Flows, E.J. Fagan, Global Financial Integrity, May 2014
^Doing Business Report, World Bank, 2015
^^Corporate Governance in India: Developments and Policies, NSE India