12/02/2015 10:52 AM IST | Updated 15/07/2016 8:24 AM IST

Lack of Quality Information Major Concern In India, Says Kroll's Asia Head

Kroll Inc

Kroll is a corporate risk management firm with headquarters in New York. The company has been active in India mainly helping Japanese businesses take decisions on investments in a fast-changing economic environment, after Prime Minister Narendra Modi reached out to Japan’s Shinzo Abe to boost bilateral trade and invest in high-tech projects such as the bullet train.

In this interview, Tadashi Kageyama, senior managing director and head of Kroll's Asia operations and Japan, and Reshmi Khurana, Managing Director, India, talk about their job helping clients make decisions about entering new markets, and also the tricky business of recovering dues from borrowers reluctant to pay.

What is the attitude of Japanese businesses towards India, after their experience of last few years of operating here?

Japanese investors are more pragmatic now. Yes, expectations are high after the meeting between Modi and Abe but businesses know that progress won’t happen in a week. There is still concern over what happened with Nokia’s tax issue, the complications in the Ranbaxy-Daiichi deal, and what happened with Tata DoCoMo. Some senior executives in DoCoMo in Japan had to resign because of that.

"Policies still remain to be sorted out, and risks remain in doing business in India."

There is an expectation that bilateral trade will pick up, but they know that policies still remain to be sorted out, and risks remain in doing business here, and that you will need to do more investigative research prior to any transaction. You need to come here with a healthy skepticism.

Are they doing due diligence?

Our concern is that some of them are expanding very rapidly in India and are unprepared. They think finding a local partner will take care of all issues in India. That doesn’t happen. The issues won’t just go away.

We find examples where our accounting systems or auditing is not of world standards. It is non transparent over here. Some senior managers think ‘I’ll fix it later, things will change.’ And this is true for not just Japanese companies but any foreign company in India, this optimism because lots of capital is chasing few opportunities. We are advising a company that discovered after three years that the promoter who sold was running a scheme of siphoning funds from the company. In our investigation, we are looking at 3 years of email data. Our client has to file for arbitration in the next 10 days, because after that period limitation of liability goes away because they can sue only up to 3 years since entering into a partnership.

There clearly was no in-depth due diligence. Maybe a lower level of diligence would suffice in the US or Europe, where you look at books and legal contracts and that would be sufficient, but in India there is always something deeper going on – not necessarily terrible or fraudulent – but perhaps not get what you are paying or planning for in future.

But doing that diligence might not be easy, given that public information and records are not necessarily of good quality. What are the challenges you are facing?

Lack of good quality information is our biggest challenge in India, given that accounting and auditing standards are not up to the mark. If I am a buyer, I cannot just rely on the target companies’ books and figures. Many companies lack good accounting systems such as SAP or other ERP systems, which are designed to show true business performance. So I’m dealing with some red books and excel spreadsheets. In other words, data that can be manipulated. They present the picture they want to present.

The same is true for filings you have to do, such as at SEBI or with Ministry of Corporate Affairs. There too there is lack of good quality information because these guys are overstretched. You have to keep your eyes and ears open after the investment.

This is true for any country where enforcement of laws is lax, and accounting standards still evolving. Where else do you see such problems?

We operate around the world except for the U.S.-sanctioned countries such as Iran and North Korea. We tell our clients that even if they want to engage with a company that is publicly listed, they should still do basic diligence.

The problem is that in such countries where public information is sketchy, such as India, businesses need to do more diligence but you would be surprised at how few of them do those. In China, one of our clients wanted to buy another company that claimed to have four factories. Our client never checked that out. We sent a guy to one of the locations where a factory was supposed to be, and he called back to say there was a rice field there with a small house. The house had a large label of the company so in public records they appeared as a factory.

China has made some progress though. As of now their public information is of better quality and is more accessible than it is in India.

How do you go about investigating, since you are not a federal agency and are not protected by laws?

We have to be very careful about what we investigate and how we investigate. We are not a government agency. It’s like going on a fishing expedition with a little boat. The skill sets we use are basically a tedious process of looking at and linking dots to dots.

We do that in three steps. One, gather publicly available information about the company across the horizon. Get a 360-degree view by looking at businesses, founders, management, and directors. We go through this information and identify leads that require investigation. Second step is human intelligence. We deploy investigators and consultants and gather more intelligence. Third is analysis phase where we write reports based on the intelligence we gathered. In more transparent markets like Singapore or Hong Kong, 80 percent of what goes in the report is public sources.

"With proper training you can spot leads."

Training makes a difference. Like you do a Google search and someone else does the same, you guys might get completely different results. With proper training you can spot leads. You also know the right places to look. You have to be quite studious, not unlike investigative journalism. When you dig deeper you find disturbing litigation history in many cases.

Social networks have also become a source of information because people post pictures of apartments or luxury boats that was bought because they fled and did not pay what they owed to lenders. That’s quite overt. One pic said “My friend’s plane”. And the picture had a number of the plane, which is public information. And it was then easy to locate it – and this was in Nevada, US. The company was located in the Caymans somewhere.

How do you help companies get more information on regulation?

We have companies asking us what is the government’s view on this sector or policy. They want advance insights before they decide to invest. We do not do anything that can constitute insider trading. We are into economic intelligence, and business intelligence. Or competitor intelligence, to understand your competitors’ strategies. Our help with understanding and getting more information on government policy is part of market entry information. India is similar to Indonesia in that you have opaque lists. For example in Indonesia there is a ‘negative list’ but companies have to guess what that means. Same holds true for China. Information on that helps clients. How they act on it is upto them. We provide independent intelligence that helps the client make decisions. We don’t make decisions for them.

You also investigate assets, such as recovering what is due to the companies who are your clients. Can you talk about that?

When companies discover illegal activity or missing money, the cause can be related to information security, intellectual property disputes, cyber crime etc. We investigate them. We also have a physical security service, including providing executive protection, or asset protection. We also had a private military contract business until 2006, and had presence in Afghanistan as well.

In the early 90s we were tasked by the U.S. Senate to investigate Saddam Hussein’s hidden assets at one point, because the Kuwaiti companies wanted to recover what was taken from them. Following that we have investigated various dictators, such as Alberto Fujimori of Peru. We can name only those which are in the public domain.

"We were tasked by the U.S. Senate to investigate Saddam Hussein’s hidden assets"

Our asset investigations are about helping clients settle disputes. For instance borrowers typically say that they can’t pay back because they are bankrupt or do not have enough. Our job is to verify their claims, and to find hidden assets so that our client can recover their money. That also happens after court rulings. A court in Singapore ruled in favor of our client and awarded substantial compensation, which the losing party had to pay. It is one thing to win in court, and another to actually recover that amount. We also work for defense of companies who are targets of hostile takeover bids. Companies going for such buyouts are typically criticized for doing that. We take the other side. Asset searches are crucial in such cases to get the right valuation or to fend off a bid.

Such work would require specialized skills. Who do you hire to do such work?

We have several ex-journalists, former prosecutors, former policemen, people from intelligence agencies, management consultants, and so on. When I joined Kroll fifteen years ago, it was a bunch of former spooks running it. Now we have many accountants from large firms who do valuations and corporate investigations. We are globally, in our division, currently 1500 people. In Asia we are still small at 200 people. Still small compared with US and Europe. It’s a very interesting service. You get to see people’s dirty laundries every day. There are some fascinating frauds. And it’s a low key business. You won’t ever hear that Kroll advised this client. Or that Kroll’s investigation led to a court case. But sometimes a client might give out our name or we just fail. We make sure our hires are aware of the importance of confidentiality.