Weighing the Compliance and Regulatory Risks of India

From rampant corruption to bureaucratic red tape to unique cultural practices, doing business in India is fraught with compliance and regulatory challenges. But for many companies, the benefits of its growing economy and skilled workforce outweigh those perils.

With a $1.85 trillion gross domestic product and projections of becoming the third largest economy in the world by 2050, “India, overall, remains an attractive investment destination,” said Dinesh Anand, partner and head of forensic services at KPMG in India, during a recent Compliance Week Webcast.

Manufacturing, healthcare, infrastructure, education, and retail are just a few of the sectors that are currently experiencing significant growth in India. Though the rapid push to outsource back-office and IT processes to India has slowed, it is still the number one destination for outsourcing business functions. Of the ten leading cities for offshoring, according to “The Handbook of Global Outsourcing and Offshoring,” six are in India.

Still, U.S. companies must familiarize themselves with India's cultural nuances and unique risks if they are to build successful operations and partnerships there. “There are still certain challenges that exist,” said Anand. “Bribery and corruption remain the biggest risks of doing business in India.”

Transparency International's 2012 Corruption Perceptions Index highlights just how much room for improvement still exists. It ranked India 94 out of the 176 countries it evaluated, giving it a 36 out of 100 on a scale of 0 to 100.

Anti-corruption reform, however, may soon be on the horizon. In March 2011, India introduced the “Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations” bill, which is India's version of the U.S. Foreign Corrupt Practices Act.

Under the proposed law, any person “holding a legislative, executive, administrative, or judicial office of a foreign country” who accepts or gives a bribe to secure a contract in India could face fines and up to seven years in prison. The law additionally would criminalize the offense of abetting bribery.

While such a bill is a step in the right direction, corruption in India remains a deep-seated concern and will take more than legislation if true reform is to result. For example, according to the Association for Democratic Reform, India's election watchdog, 158 of India's 543 parliament members faced criminal charges—from murder to robbery to extortion—as of 2012.

Getting most projects completed in India often requires going through government officials. In fact, many companies seem to disagree on whether it's even possible to do business in India without paying a bribe. According to KPMG's “India Fraud Survey,” 50 percent of respondents said business can be done in India without paying bribes, while the remaining 50 percent disagreed.

The KPMG survey further revealed that 55 percent of respondents have faced bribery and corruption in India. And 71 percent said bribery and corruption caused a “significant risk to their organization.”

The good news on the anti-corruption front is that India's culture is ripe for a “major upheaval,” said Gaganpreet Puri, a partner in the forensic services practice of KPMG in India, who also spoke during the Webcast. “It all started with anti-bribery protests three years ago, which has developed into a major movement.”

“Our public databases are still evolving, so there is a lot of human intelligence that's involved. All these factors create issues to doing business in India.”

—Gaganpreet Puri,

Partner,

KPMG in India

In addition to intensified civil activism when it comes to fighting bribery, media scrutiny of bribery and corruption has also intensified. “In India, the press has tremendous freedom of speech,” stressed Puri. That has also significantly helped in bringing the rampant issue of corruption to the forefront, he said.

The corruption risks in India mean U.S. companies need to put strict compliance measures in place. For companies operating there, “I cannot underestimate the importance of having a separate anti-corruption and bribery policy,” said Puri.

“You would do well to ensure it speaks properly to all the other policies you have in place in your organization,” added Puri. For example, the anti-corruption policy should also link to the gift and entertainment policy, he said.

In-person training and communication on anti-corruption bribery and policy is also important. “In India, online training isn't as effective because people like to ask questions,” said Puri. “Make it interactive.”

Red Tape

Another common challenge of doing business in India is the bureaucratic red tape. It takes a lot of time to get clearance to achieve anything in India, noted Puri.

FRAUD AWARENESS

Below are two charts from KPMG's India fraud survey.

Source: KPMG.

One piece of “landmark legislation,” he said, that has eased the bureaucratic red tape somewhat was enactment of the Right to Information Act of 2005, which provides access to information for citizens of India. “It gives people the right to go to any government department and demand any information,” said Puri.

Thus, if an application is delayed or it's taking too long to get a contract approved, the law “makes government departments liable to provide that information,” said Puri. It provides a lot more transparency in the way things operate, he said.

Another barrier to enforcing contracts in India is that the court system is so clogged that resolving any sort of lawsuit becomes nearly impossible.  India's court system has more than 350 years worth (more than 30 million) backlogged cases.  As a result, many companies fail to take any action against wrongdoing by business partners and other third parties.

What is happening, as a result, is that more companies that have entered into commercial contracts in India are choosing to arbitrate their cases outside the country.  Singapore and London, in particular, are favored destinations to settle disputes, said Puri. “We see that as one way to enforce commercial contracts.”

What's more, inaccessible information makes conducting investigations a challenge. In India, a person may not get a receipt for purchases, making recordkeeping challenging.

Also, despite the advanced IT environment, it is still common for records and other information to be paper-based. Data is often boxed up, stored away, and difficult to search. “Our public databases are still evolving, so there is a lot of human intelligence that's involved,” said Puri. “All these factors create issues to doing business in India.”

Another area where U.S. companies commonly struggle is in the area of choosing—and trusting—joint venture partners. Conducting simple due diligence on the joint venture partners, including sales reps and agents, is a must.

“Background checks are extremely important for anybody coming to do business in India,” said Anand. These background checks should be done not just on employees, but also joint venture partners and any third parties that you do business with, he said.

Doing business in India in an ethical manner is possible, said Anand. As with doing business anywhere in the world, however, a robust compliance program needs to be in place, including regular in-person training on anti-corruption measures and an overall commitment to an ethical corporate culture supported by senior management.