India’s new season of scandal rattles global investors

In India, the name of billionaire jeweler Nirav Modi was once synonymous with glamour and the good life. It could be seen on billboards next to Bollywoodstarlets, and his diamond-studded creations were sold as far as New York’s Madison Avenue. Now, the name is synonymous with allegations of fraud. On Valentine’s Day, one of India’s largest banks accused the jeweler of being the mastermind of a financial scam — a seven-year heist in which fake guarantees worth $2 billion were purportedly used to get loans. A string of other corporate scandals are also in Indian headlines right now.

Earlier this month, Bloomberg News reported the scions of New Delhi’s prominent Singh family were said to have taken about $78 million out of a hospital company they controlled without board approval. The brothers had already been accused by a New York-based investor of siphoning at least $300 million from the lending arm of their financial-services firm.

Then the owner of a pen manufacturer based near the Ganges was arrested with his son after accusations they defrauded banks of about $570 million. And in recent days, federal police registered a complaint against the chairman of a sugar company for allegedly causing losses to a state-run bank. The company soon after pledged to repay all the outstanding loans.

The executives in the spotlight all deny wrongdoing, but corporate India suddenly seems awash with cries of fraud. The accusations are a blow for a nation fighting to shed its reputation for entrenched corruption and win the confidence of global investors. They are “taking the shine off India at a time when India is firmly on top of every investor’s mind,” says Manish Singh, the London-based chief investment officer at wealth-management firm Crossbridge Capital LLP. “Just when more investors were ready to say “I do,” the past has come to haunt again.”

The bad publicity couldn’t have come at a worse time for Prime Minister Narendra Modi’s government. Capital-starved India is desperate for foreign investment to resuscitate employment and growth, which has slumped to a four-year low. Government bonds have suffered their worst sell-off in almost two decades, and the rupee and stocks have been under pressure.

The alleged corporate misdeeds have prompted wide-ranging government probes. India’s Central Bureau of Investigation is probing the claims against the jeweler, who denies the allegations.

Meanwhile, the stock market regulator and the government’s Serious Fraud Investigation Office are said to be looking into the movement of funds at the two companies controlled by the Singh brothers, Malvinder and Shivinder. They’ve denied siphoning money from their financial services firm and have said the transactions at the hospital company were in fact loans originally made to unrelated companies which subsequently became part of their corporate group, have since been declared, and are in the process of being repaid.

Now, the spotlight is on an opaque business culture dominated by powerful families — known in Indian business parlance as ‘promoters’ — and the absence of controls to rein them in. “There’s probably the highest level of sycophancy in India than anywhere you’ve seen,” said Krishnava Dutt, Mumbai-based managing partner at corporate law firm Argus Partners. “If the promoter does something, then short of murder it’s unquestionable.”

Concentrated Ownership

An annual survey of senior executives by the risk consultancy Kroll Inc. found reports of fraud rose in India last year, with 89 percent of those surveyed saying their firms had been affected. While the survey didn’t give reasons for the increase, it comes amid a backdrop of concentrated corporate ownership and weak regulation. A report last year from the Credit Suisse Research Institute showed that India ranks third globally — after China and the U.S. — on the number of family-run businesses.

The entrenched power of many business families, combined with a weak legal system offering few protections to whistleblowers, can contribute to a culture where no one wants to oppose a promoter, said J.N. Gupta, managing director of proxy advisory firm Stakeholders Empowerment Services. “If I make a complaint I will be harassed more than the person who has committed the fraud.”

Also, perpetrators of white-collar crime rarely have to fear serious regulatory consequences, said Sanjay Kallapur, a professor of accounting at the Indian School of Business in Hyderabad. He notes that the U.S. securities regulator has 15 times more employees in its accounting and corporate governance unit than the equivalent Indian regulator.

That culture of impunity is now the problem of Prime Minister Modi — no relation to the jeweler — who came to power four years ago promising to fight corruption.

Economic growth took a hit after his government imposed a disruptive cash ban late in 2016. More recently, Modi faced a bruising contest in his home state of Gujarat which highlighted voter anger towards his economic policies. To placate them before a general election in early 2019, he unveiled an expansionary budget that breached fiscal targets.

“The fiscal slippage was an unpleasant surprise,” said Komal Sri-Kumar, president at U.S.-based Sri-Kumar Global Strategies Inc., a macroeconomic consulting firm. “Global investors were of the belief that the deficit was on its way down until the deterioration was announced.”

For the people doing the investing, the recent scandals are a reminder to do it carefully, said Andrew Macintosh, Mumbai-based executive director at consultancy Control Risks. “You need to ensure you’re looking carefully at who you’re doing business with.”

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