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Regional Spotlight: Special Considerations for Due Diligence in India

COVID-19. Corruption. High levels of bureaucracy and complex legislation. These and other extensive factors create nuanced obstacles to maintaining regulatory compliance for businesses operating or partnering with vendors in India. A complex regulatory environment with state and national authorities makes it difficult to fully understand the rules; international relations blur the lines between legal and political issues; and unreliable data sources complicate the task of background checks and due diligence. In this piece, we will explore the unique challenges of conducting thorough due diligence and special considerations for businesses operating there.

1. Economic Disruptions

Ahead of the COVID-19 pandemic, an ongoing downturn had been established in the Indian economy from 2017-2018, leading to the lowest economic growth rate (3.7 percent in 2019-2020) since the global financial crisis. Once the pandemic hit worldwide in 2020, India imposed one of the world’s most strict nationwide lockdown regimes to curb the spread of the virus. In addition, due to better access to the internet, other countries could adopt alternative business continuity plans, including shifting to remote work policies. However, with only 43 percent internet access across the population, this was not a realistic option for many businesses. This inhibited India’s ability to shield businesses and jobs with remote business options, resulting in a deeper contraction in economic activity. With few alternatives, India applied approximately $300 billion in government-issued fiscal support measures to safeguard businesses and reinvigorate the economy, leaving the country’s financial reserves in uncommonly low territory.

In response, “the level of GDP fell 8.3 percent below the pre-pandemic (or corresponding 2019-2020) level,” according to the Reserve Bank of India. Despite fixed investment finally rising above pre-pandemic rates in 2021-2022, the high-frequency benchmarks of investment indicate a government capex-driven recovery with low levels of private investment.

Why does this matter?

The Indian market is still in considerable flux, with sentiments about future recovery ebbing and flowing daily. Protecting investments and organizational operations in a region with such economic uncertainty requires companies to closely track changes in regulations, fluctuations in the market, and third-party concerns that could impact production and distribution. Quality, knowledge-based due diligence can assist in this monitoring-type effort.

In India, maritime support contributes to 95 percent of trading by volume, and supply chain disruptions (SCDs) cut that support by over 10 percent or, 414 million tons, in the several months following the global pandemic outbreak. Although supply chain obstacles are improving worldwide, the need to speed up processes and bypass blockages can, in many cases, make third-party vendors look the other way on regulatory concerns to get products out the door. This heightened urgency is exactly the reason businesses should be ramping up supply chain due diligence initiatives to facilitate thorough compliance checks for third-party vendors feeling rushed by SCDs.

2. Legal & Regulatory Challenges

There are dozens of regulators and tax authorities in India, such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority of India (IRDAI). With so many agencies to report to, it’s particularly challenging to understand exactly which regulations are relevant to your investments or organization, and to ensure that all compliance requirements are met.

There are also dozens of business compliance regulatory acts that may or may not apply to your business. It is critical — and difficult — to know which ones matter to your business and what actions are necessary for you and your supply chain to comply. The regulations could refer to something as (theoretically) straightforward as maternity benefits or minimum wage to more complicated processes such as Tax Deducted at Source (TDS) deductions, among others.

For example, commerce transaction compliance, as determined by India’s IT Act, is one regulation that is particularly hard to maintain. The country’s low percentage of the population with internet access in 2020 resulted in a new prioritization for nationwide internet access improvement. In addition, supply chain disruptions also contributed to a reinvigorated need to implement online and digital third-party supply chain management tools. However, in the effort to make these enhancements quickly and outpace SCDs, your individual vendors may not have the necessary infrastructure in place to facilitate safe e-commerce transactions — and without knowing what to look for, it can be very challenging to verify if they do.

It’s equally important for brands to be aware of legal requirements when cases are brought against them. In 2020, the telecom company Vodafone won a legal case against India in which the country had claimed 279 billion rupees ($3.79 billion), including $2 billion in taxes. India’s imposition of tax liability on Vodafone, as well as interest and penalties, were in breach of an investment treaty agreement between India and the Netherlands.

Why does this matter?

With dozens of regulatory and tax authorities across India and an equally daunting number of legal acts, due diligence is imperative for businesses operating in the region to:

  • Understand which statutes are relevant for you;
  • Address issues of noncompliance within your operations; and
  • Verify compliance requirements with third parties and supply chain vendors that operate in India.

In addition, it’s clear from the Vodafone case that international relations can play a major role in legal issues. It was a major win against the Indian government, and it’s a critical example of using due diligence to understand international relations between India and other countries and knowing your rights as they pertain to the Indian government.

3. Heightened Bribery & Corruption

Currently, Transparency International’s Corruption Perceptions Index ranks India at position 85/180 (180 being the most corrupt) and gives it a score of 40/100 (100 being very clean). The country’s score has been unchanged since 2020. There is a clear negative attitude toward corruption within India, as 89 percent of people in India think government corruption is a significant problem. Indeed, at the time the last Global Corruption Barometer was published in 2020, 39 percent of public service users paid a bribe in the previous 12 months. An example of this took place in February of 2023 when seven government officials were arrested for taking bribes in the Indian state of Haryana within the space of 14 days!

India is considered the largest democracy in the world and holds steady on its CPI, but it continues to be criticized for the government continuing to consolidate power, encouraging the close links between politics and business, and limiting the public’s ability to respond.

Governing bodies are not ignoring violations relating to bribery activity, however. In 2022, the US Securities and Exchange Commission (SEC) charged the computer software company Oracle Corporation for violating the Foreign Corrupt Practices Act (FCPA) — for the second time. The company paid a $23 million fine due to its subsidiaries’ illegal activity bribing foreign officials in Turkey, United Arab Emirates (UAE), and India between 2016 and 2019. There were 36 total complaints for alleged bribery and corruption-related acts filed by the SEC in January and February of 2023 alone.

The most recent amendment to India’s Prevention of Corruption Act (1988) was issued in 2018, which made clarifications about which specific actions and performed by which individuals were punishable by the act. In addition, the Fugitive Economic Offenders Act (FEOA) was also issued in 2018 to help prevent economic offenders from evading prosecution within the country. Despite ongoing concerns of corruption and bribery nationwide, no further amendments have been made to address the issue since the PCA 2018 amendment and FEOA.

Why does this matter?

With such high rates of bribery and corruption in India, it’s critical that businesses operating in the region conduct thorough due diligence to ensure all business transactions and operations are being performed properly. In a region with high bribery rates, there may be an expectation that, to move certain processes along, government officials and other entities will need to take bribes. Using due diligence in every facet of operations in India will help to identify entities more prone to seek bribes and any third parties or supply chain vendors with possible corrupt connections or activities.

4. Unreliable Sources

Regulators and tax authorities in India publish their data at different times and in different locations. At best, Western database aggregators report information that could be useful but is only available in the local language. At worst, they are missing important data for compliance and reporting that is not in the public domain.

Political systems in India are also very much connected to Indian business. This means that Indian business leaders are often tied directly to political initiatives, making it even more important to perform due diligence against Indian business connections — and ever more difficult. Public domain information regarding business or political individuals is insufficient, and anything you can find is likely in a local language or steeped in cultural or political nuances that are difficult to decipher.

Why does this matter?

When it comes to the complex relationship between business and politics in India, background checks are of the utmost importance. To perform the most thorough due diligence background checks on individuals and business operations in the region, human intelligence in local language is critical to getting a full understanding. Human source intelligence can provide access to data that is not public domain, combat language barriers, and decode cultural and political nuances to ensure every step is conducted in the most appropriate way possible.

Enhance Your Indian Business Due Diligence

Economic disruptions and high corruption rates make it very challenging for companies to monitor partners and third-party vendor risk in India. With the right enhanced due diligence solution in place, companies with any business involvement in India can stay ahead of potential risks. Ready to learn more about how to protect your business in India? Contact the due diligence experts at IntegrityRisk.