In what is representative of the falling corporate governance standards, global risk mitigation firm Kroll on Tuesday said there has been 50 per cent jump in fraud related investigations commissioned by private equity funds this year for possible mismanagement at investee companies.
“There has been a 50 per cent increase between 2012 and 2013 in fraud related investigations of portfolio companies of private equity firms,” its Managing Director and country head Reshmi Khurana told reporters here.
She pointed out a slew of cases in the public domain such as Lilliput, Fourcee Infrastructure, Shubhiksha and KS Oils, among others where the relationship between a PE fund and the investee company have soured, and added that for every two cases which come out in public, 98 go unreported.
A majority of the increase has come from PE investments in export-oriented companies, she said.
“Typically, the company reports stress on overseas clients and blame them for poor performance. There is no way of ascertaining if the ‘client’ really exists or if the promoter is funnelling money into a sister concern through this route,” she said, adding that the company puts its international offices into work for culling information in such cases.
Apart from the exports-linked sectors, other cases are sector agnostic and cannot be attributed to a single sector.
In the lifecycle of an investment for a PE fund, questions arise in the minds of a fund manager when the cash flows from a company dry up, even though the promoter would show a good performance on other parameters.
Kroll also entered into a strategic alliance with the home-grown BMR Advisors for working together in various aspects, including due diligence for deals.
Ms. Khurana said Kroll will bring in its expertise on the external investigations front like undisclosed business interests and reputation issues, while BMR will get its expertise on the forensics on the internal front like assessing true financial health of a company and suspicious transactions.
“At present, companies hire us separately and the results can be conflicting. What we are planning to do is to work together in synchronisation and jointly present the findings for our clients,” she said.
BMR’s partner Sanjay Mehta said it is essential for end to end services to be given, given the fact that the fraud prevalence risk in the country is over 70 per cent.