Email: rkhurana@kroll.com
Website: www.kroll.com

v14i8_KrollWhile the political winds of the past 12 months seem to reflect an anti-globalisation sentiment in many major economies around the globe, it remains to be seen how this will impact the global flow of investment funds. Corporations tend to be opportunistic and Asian markets continue to present an arguably significant and growing investment opportunity, which is too large to ignore.

Strategic investors often choose to operate in emerging markets via joint ventures with local partners who control the operations of the local companies. Foreign investors in India, for example, often believe local partners are better able to manage India’s operating environment, where there is a close nexus between business, government and bureaucracy. These arrangements may create a perception to the foreign investors that there is something going on that is not visible.

While local businesses can often “see” behind the scenes, foreign investors struggle to do the same, especially in the due diligence phase, when the investor usually has limited access to the company’s financial information and management teams. In this case, it is not easy for a potential foreign investor to judge whether a suspicious transaction is potentially fraudulent or not. For example, local management may engage in related-party transactions to generate cash. However, it may be difficult for potential foreign investors to ascertain whether the cash is being generated for legitimate business purposes or for paying kickbacks to government officials.

It is similarly challenging for foreign investors to understand the performance of their local subsidiaries, joint venture partners and portfolio companies once the investment is complete. This may be because the foreign investor holds a minority position or because they do not control the management and operations of the local company. This leaves foreign investors with limited tools to monitor the performance of the local companies after investment.

Add to this the fact that regulatory oversight mechanisms in many emerging markets are still evolving and complex judicial systems often make it difficult for investors to enforce non-compliance with contractual rights and obligations. Tools available in developed markets — such as efficient courts and dispute resolution systems — cannot necessarily be relied upon in emerging markets to resolve disputes or recover investments in a timely manner, if at all.

As a result, it often becomes difficult for foreign investors to determine the true health of the target business and ethics of local partners. While on one hand foreign investors may end up making poor investment decisions and exposing themselves to regulatory risk, such as the US Foreign Corrupt Practices Act, on the other hand, foreign investors may also miss out on making good investment decisions due to insufficient or conflicting information from various due diligence providers on the ethics of the company. Investors may err on the side of caution and forego investment opportunities due to a lack of information.

However, it is possible to manage and ride these risks. The tips we give to both new and experienced foreign investors looking to invest in emerging markets, with regards to their concerns about fraud include:

  • Assess: A qualitative assessment of the operating environment and any potential partners, such as their reputation, political connections, ethical standards and business practices are as important as reviewing growth numbers, financial records and legal documents.
  • Understand: Foreign investors need to understand the full dynamics of the business and political environment in the country in which they are investing, to ensure that they make investments with a certain level of confidence. That is an art.
  • Prepare well: Investors should not be swayed by the competitive pressures of the investment environment in India, where often too many investors pursue the same opportunities. They should take their time so they are well-prepared and well-informed.
  • Never compromise: Investors should select advisers on a “no compromise basis” to ensure that they are truly independent and the integrity of any due diligence process is maintained.

Email: rkhurana@kroll.com
Website: www.kroll.com

[sharethis]
Tags: Due Diligence, Investigations
Related Articles by Firm
Statutory Registration of Standard Terms and Conditions in Tanzania
All companies doing business in Tanzania should know the salient points of the Standard Form (Consumer Contracts) Regulations 2014 which takes effect on 29 December 2015.
Tanzania Bill Establishing the Petroleum Act 2015
Tanzania's proposed Petroleum Act 2015 introduces key changes to the Petroleum Exploration and Production Act 1980 and the Petroleum Act 2008.
Clasis Law (India) Newsletter August 2015
Analysis of the revocation of a company's drug patent and other key court rulings and updates on corporate and commercial matters
The new CIETAC Arbitration Rules 2015
The New Rules adopt both best practices and the latest developments in international commercial arbitration and accommodate the increasing needs of the parties arbitrating at CIETAC.
Tanzania: Prospecting for and mining of radioactive minerals
New uranium mining projects have recently been announced in Tanzania. This briefing looks at the legislative framework surrounding radioactive minerals in Tanzania.
Related Articles
Anti-Trust & Competition: China - Anti-monopoly enforcement in China’s healthcare industry
The healthcare industry has gradually become one of the key focal points of the anti-monopoly law enforcement in China ...
Anti-Trust & Competition: Philippines - Towards robust yet balanced competition in the Philippines
The state of Philippine competition regulation has been slowly taking shape barely over two years after the passage of the Philippine Competition Act (RA 10667) ...
Anti-Trust & Competition: Asia’s evolving competition landscape
After a period of rapid adoption of competition laws in Asia, only Bhutan and North Korea are compliance safe spaces ...
Related Articles by Jurisdiction
Latest Articles
ZICO celebrates 30 years with charitable donation
Yokuk provides therapy and welfare services as well as educational support for children and adults suffering from various disabilities ...
Crime vs. Ethics: Changing corporate culture to reduce modern slavery
The second of four reports from Kroll and Liberty Asia on how to mitigate any hidden compliance and reputational risks relating to human trafficking issues …
The Assistant Registrar’s Role in the Judicial Hierarchy
The decision in Peter Low LLC provides the latest judicial pronouncement on the role and position of an Assistant Registrar in the judicial hierarchy ...