Private equity firms investing in India seek government action on alleged fraud with portfolio firms

By Marc Castro

Nov 13, 2013 09:41 AM EST

Several global private equity funds are seeking government action from the state of India in the form of investigations into their portfolio companies as poor corporate governance standards and suspicions of fraud resulted to a general environment of distrust in the market. More than half a dozen fund officers have sought out the engagement of corporate investigatory services to bring forth crucial information about their portfolio companies.

This process is known as 'post investment due diligence' These kinds of investigations relate to the financial, corporate and legal aspects of a specific firm or company. According to one managing partner of a global fund who spoke on condition of anonymity, "We are not sure that a couple of our portfolio companies are actually growing at the stated pace. We are in the process of hiring a firm to help us ascertain that."

A cursory review of Indian newspapers had reported three such incidents. Just last month, private equity firms General Atlantic and India Equity Partners, whose partnership had invested nearly USD114 million in logistics firm Fourcee Infrastructure, confronted the promoters of the logistics firm in a review with the Company Law Board . The two private equity firms claimed Fourcee perpetrated fraud after a six month investigation.

Another one that hit the headlines was the special audit conducted by KPMG on South India-based gold trader Manappuram Finance upon the request of India Equity Partners and Barings India. A similar incident occurred between MCX and NSEL, both of whom are institutional investors that sought a government probe on the firm they have invested in.

For each reported incident, at least more than half a dozen are under the radar as both the investor and the beneficiary seek to avoid the bad press. According to another fund manager, who referred to his recent experiences as to the investigations conducted into a portfolio company, "We realised that the company's clients suddenly stopped paying and receivables kept mounting. The order book seemed to be dwindling."

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