Lack Of Trust Will Make Private Equity Inflows Harder: KKR India’s Sanjay Nayar
When private equity comes into India, there is an element of trust. That trust is breaking down, says KKR India’s Sanjay Nayar.
For Sanjay Nayar, member and chief executive officer of KKR India, the biggest concern for foreign investors in India is what he calls “leakage” of capital through related-party lending, something that could potentially hurt inflows.
“When investor money comes in, it to refinance somebody or for capital expenditure,” Nayar said during a session on Corporate Governance Related Party Transgressions-Within Harm’s Length, at the Gatekeepers of Governance conference in Mumbai.
“There is quite a massive amount of leakage that’s going on. That’s really the most disturbing trend right now,” he said, adding that something needs to be done to fix this since India is bereft of foreign capital.
“Lending and borrowing to companies where the beneficial ownership might translate back to a director is not being captured. It is hurting investor confidence big time,” Nayar said.
Borrowing and lending to related parties is a new and very big area, something that will have to be looked at carefully, he said. “If this is not captured in the related-party transaction, you can miss it completely.”
When private equity comes in, there is an element of trust that it comes with, Nayar said. “That trust is breaking down, and that’s unfortunate because foreign capital, beyond a point, can never do, or be expected to do the diligence that you think you can capture everything. In the long run, this will make cost of capital higher and make inflows more difficult. We could see a slowdown from FDI in this segment.”
Still, the outlook has a silver lining. India still hasn’t lost the status as a country which has the best corporate governance standards in Asia, Nayar said, citing CLSA reports which puts India in the top three.
Nayar was in conversation with Kiran Karnik, former president of Nasscom, and YH Malegam, former chairman at National Advisory Committee on Accounting Standards and former member of the board of the Reserve Bank of India.
Discrepancies In Definition Of Related-Party Transactions
Malegam said related-party transactions carried high risk for directors, because the penalties in the Companies Act were "draconian", with punishments varying from imprisonment to being debarred as a director of a company for five years.
But the ability of directors to detect a related-party transaction is somewhat limited, according to Malegam. A director has to rely to a large extent on declarations made by other directors and mechanism within the company to identity such transactions, he said.
Malegam cited discrepancies in the definition of related-party transactions in the Companies Act and the listing agreement.
Who Is A Related Party?
- Under Companies Act: It lists out a number of entities and individuals, but surprisingly, while it lists relations, it doesn’t list entities which are controlled by some of these people. “My understanding is if tomorrow, the wife of a director had a private limited company, under the Companies Act, that would not be a related party. That is clearly a loophole.”
- Under Listing Agreement: A related party is defined as under the Companies Act or as specified in the accounting standards. And the definition under the accounting standards is much wider, he said.
The question to be considered is what happens if there is an offence by a person, or a transaction with a related party under the listing agreement, but not a related party under the Companies Act, said Malegam. Would the penalties under the Companies Act be applicable to such a transaction, or would they only be the penalties under the listing agreement. This is an issue which needs to be flagged, said Malegam.
Watch the full discussion here: