India: Corruption distorting the retail market

21 Aug 2014

A report on bribery and corruption in India outlines the challenges to investment

India ranks as one of the world’s top four destinations for retail investment, but the relatively high risk of bribery and corruption while doing business in India is a major obstacle to sustainable development, according to 39% of 1,700 businesses surveyed by the World Economic Forum.

And the problem isn’t just national: 10% of overseas whistleblower tips received by the Securities and Exchange Commission in 2012 came from India, making foreign investment less attractive.

The retail and consumer industry in India is particularly prone to threats of bribery and corruption because of, among other reasons, the high level of interaction with government officials, the lack of adequate reliable information on third parties and the thriving ‘parallel economy’ and black money markets.

India’s new Companies Act is designed to help with some of the causes of corruption, including proactive fraud risk management policies and the assumption of formal responsibility by the Board for the company’s code of professional conduct.

But due to the local, political and business culture characterised by a high demand for corrupt payments, avoiding bribery and corruption even in everyday business can be difficult. A PwC report ‘10 Minutes: Weathering the headwinds of bribery and corruption’ looks at the challenges to employees’ integrity in more detail, such as:

  • Disbursements processes: Risks may be identified by answering such questions as ‘Are adequate records of meetings being maintained?’; ‘Did any government officials participate?’ and ‘Were any of the gifts exchanged outside the bounds of corporate policy or local law?’
  • Channel management: Is the due diligence process sufficient for identifying potential issues such as whether or not the company deals with government officials?
  • HR processes: Is the organisation aware of the need to screen local staff with good connections in the marketplace – such as relatives working as government officials?
  • Logistics: Does the organisation perform adequate checks to verify if agents or employees meet their expectations of timely clearances?
  • Licensing process: Does the organisation hire consultants recommended by the government or does it employ retired agency officials to assist with the approval and licensing process for an organisation’s products?

The report also warns of the market-distorting effect of corruption and bribery (as well as the considerable increase that it can bring to the cost of doing business). It notes that record fines are being imposed, as well as civil and criminal corporate and individual penalties.

Its recommendations include drawing up a comprehensive code of conduct; rolling out appropriate training to help employees combat bribery and corruption; and undertaking thorough counter-party due diligence before investing or entering into third-party business relationships.