BackWho’s going to stop fraud in Indian companies?
Most instances of fraud are being detected at the prompt of whistle-blowers and new managements
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The skeletons can’t seem to stop tumbling out of the closets of Indian companies. ICICI Bank will soon have as many committees investigating its past workings, as there are bad loans on its books. Meanwhile, Fortis Healthcare continues to be a can of worms without an end. And those are just the more visible ones. Multiple surveys on frauds in companies rank India at the top of the heap of infamy, with growing incidence of various acts of corporate corruption.
The Reserve Bank of India data reveals that public sector banks alone reported 8,670 cases of “loan fraud" between 2012 and 2017. Similarly, the number of investigations completed every year by the Serious Fraud Investigation Office (SFIO) has quadrupled over the past five years. That’s not even counting the cases that are being handled by other agencies such as the Central Bureau of Investigation, Enforcement Directorate, Directorate of Revenue Intelligence and the Economic Offences Wing.
Sadly, 27 years after economic liberalization eased the rules of doing business for Indian companies, frauds, manipulation, insider trading, kickbacks, diversion of funds and downright theft are rampant. Ironically, this is happening at a time when there’s a huge effort to further improve the ease of doing business.
So, is it that in post-liberalization India, many more companies and their presiding executives are fiddling with the rules? Or is it that, as happened in the case of crimes against women, where more women are now emboldened to file reports, more such acts are being taken up by investigating agencies?
Unfortunately, that doesn’t seem to be the case since most of the fraud detection is happening at the prompt of whistle-blowers and new managements, rather than the internal and external control mechanisms of companies. Otherwise, how does one explain the clear irregularities in both Fortis and ICICI Bank that went on for years, without being flagged?
The SFIO acts either on receipt of a report of the registrar or inspector or on intimation of a special resolution passed by a company requesting an investigation into its affairs or on the request of any department of the central government or state governments. It is also mandated to act in public interest, but mostly it has done so after company boards have been pressed into recommending a probe into the affairs of the firms they were expected to be monitoring in the first place.
If anything, internal audit committees, boards, external auditors and even market regulators, expected to provide the necessary checks, have patently failed to deliver. Market regulator Securities and Exchange Board of India, which should be the final gatekeeper for listed companies, has been toothless so far if one goes by its low indictment rate. What’s more, technology, which should ideally make systems tighter and processes foolproof, has actually facilitated the frauds in several cases, including at Punjab National Bank and ICICI Bank.
No wonder that the public perception is that of an unholy nexus of companies and institutions with a benign regulator looking on. A survey by EY on the changing dynamics of white-collar crime in India stated that a whopping 87% of the respondents believe that the rise in non-performing assets or stressed asset numbers is due to the diversion of funds to unrelated businesses or fraud.
What’s the answer then to this worrying trend? Idealistic homilies are clearly not enough. The trouble is, most companies and executives believe they can get away with it. After all, a weighty phone call goes a long way in the world of business and politics. Armed with batteries of lawyers, who can often run rings around the inadequate forensics of the investigating agencies, the worst that can happen to a top executive charged with white-collar crimes is a fine and some censure. We do treat our business icons with exaggerated respect.
On that subject, it is worth recalling the words of judge Jed Saul Rakoff during the hearings for the insider trading charges against former McKinsey head Rajat Gupta. “If Mother Teresa was charged with bank robbery, the jury would still have to determine whether or not she committed a bank robbery," Rakoff told Gupta’s lawyers before eventually sentencing him to two years in prison.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider looks at current issues and trends in the corporate sector every week
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