Global giant KKR red-flags bribery, fraud risks in India

KKR (Kohlberg Kravis Roberts) is a leading global investment firm managing assets worth over USD 94 billion  (nearly Rs 6 lakh crore). It specialises in leveraged buyouts globally. It has made significant investments in India as well through various funds and entities.

 

In its latest annual report filing with the US market regulator SEC, NYSE-listed KKR, however, said its funds also  "invest throughout jurisdictions that have material perceptions of corruption according to international rating standards (such as Transparency International and Corruption  Perceptions Index)." 

 

India has been named by KKR as one such jurisdictions, while others are China, Indonesia, Latin America, the Middle East and Africa. 

 

KKR said that "due diligence on investment opportunities in these jurisdictions is frequently more complicated because consistent and uniform commercial practices in such locations may not have developed. 

"Bribery, fraud, accounting irregularities and corrupt practices can be especially difficult to detect in such locations," it added. 

 

"Several of our funds invest in emerging market countries that may not have established laws and regulations that are as stringent as in more developed nations, or where existing laws and regulations may not be consistently enforced," KKR said. 

While KKR has flagged off risks factors related to India in previous years also, those were mostly related to taxation matters and foreign exchange rates, and certain generic risks. 

 

Disclosing one such 'risk factor', KKR said in its latest report that India and some other countries "have sought to tax investment gains derived by nonresident investors, including private equity funds, from the disposition of the equity in companies operating in those countries". 

 

"With respect to India, a general anti-avoidance rule was introduced that would provide a basis for the tax authorities to subject other sales and investments through intermediate holding jurisdictions such as Mauritius to Indian tax. The proposed rule is presently scheduled to become effective for tax years beginning on or after April 1, 2015," it added. 

 

Incidentally, the latest annual report filing came at a time when KKR co-founder Henry Karvis was on a visit to India and was heard telling select media groups about the group's interest to invest in mid and small size companies there. 

About risks arising from foreign exchange rates, KKR said the Indian rupee depreciated by 11.1 per cent against the US dollar in 2013 and "higher interest rates and weaker currencies in some emerging market currencies may increase country default risk". 

 

The reference to India has been made in the annual report's 'Risk Factors' section under a sub-section titled "due diligence process that we undertake in connection with our investments may not reveal all facts that may be relevant in connection with an investment". 

 

KKR group has about seven entities that are focused on Indian markets, with activities spread across various segments  including capital markets. 

 

At least five of them — KKR Capital Markets India Private Ltd, KKR India Advisors Private Ltd, KKR India Financial Services Private Ltd, KKR India LLC and Motichand Finance Private Ltd — are based in India. 

 

Two others — KKR India Asset Investments Pte Ltd and KKR India Finance Holdings LLC are in Singapore and Delaware, respectively, according to the report. 

 

"Investing in companies that are based in countries outside of the United States and, in particular, in emerging markets such as China, India, Turkey, countries in south and southeast Asia, Latin America and Africa, involves risks and considerations that are not typically associated with investments in companies established in the US," KKR said. 

 

Such risks include greater levels of corruption and potential exposure to the FCPA (Foreign Corrupt Practices Act) and other laws, political risks (including political hostility to investments by foreign or private equity investors), lack of uniform accounting, auditing and financial reporting standards, and difficulty in enforcing contracts. 

 

KKR has so far completed more than 230 private equity investments in portfolio companies with a total transaction  value in excess of USD 485 billion.