Corporate Detectives
There was a time when parents of a girl would hire sleuths for getting a background check of the potential groom done before the marriage was fixed. Irrespective of the fact Whether or not a marriage took place, the private eye would always rake in mullah.
Taking a leaf straight out of that, consultancies are offering a private eye for investigations before a corporate marriage and yes, this time too, the corporate sleuths are laughing all the way to the bank.
Consultancies offering due diligence for target companies and background checks for promoters before private equity investments, mergers or acquisitions are set to double and touch Rs 800 crore within the next five years.
Currently in India, “forensic services” offered by consultancies makes for Rs 400-crore strong business. The segment has been growing steadily as more and more companies wish to find out about the activities of the companies they are investing into. “There has been a tremendous growth in forensic and dispute services in India in the last five years. Revenues are expected to have a compounded annual growth rate (CAGR) in double digits for the next five to six years. There is an increased focus on fraud risk management and corporate governance following recent regulatory changes, including changes resulting from the 2013 Companies Act,” says Dhruv Phophalia, managing director, India leader, global forensics & disputes, Alvarez & Marsal India (A&M).
Currently Deloitte, E&Y, KPMG and PWC -- the big four -- command the biggest share in the forensic services pie. However, some of the other firms like A&M and Kroll too are seeing their revenues increase.
Some say that the increase in revenue of firms offering due diligence services somehow reflects the corporate governance issues of Indian companies. “I do not think that growth of forensics in corporate India is due to lack of corporate governance in Indian companies. I would say it is because of the maturing of the Indian corporate and in line with the more developed markets like Europe and the US,” says Amol Rane, senior director, Deloitte India.
Industry trackers say that a large amount of their clients are private equity funds who do not wish to run a risk of investing in a company that may not give them lucrative returns. Earlier, during the boom of 2007, many funds had invested in Indian companies that ended up in arbitrage or often in courts. Many other funds which did not garner enough courage to invest in India, are learnt to be sitting on dry powder of around $2 billion. Dry powder is a term that is used in PE circles to denote the deployable funds the PE is sitting on.
Learning from their old mistakes, many PE players and other investors alike are getting the background checks done before investing. “Private equity investors are concerned about the recent reported fraud and accounting scandals involving portfolio companies in India. Investors are demanding an increased level of pre-investment due diligence and post investment monitoring of fraud and compliance risks. Some of these portfolio companies have been alleged to have multiple books of accounts and/or created fictitious documents to attract investors,” adds Phophalia.