India's Achilles' heel

An American private equity fund was ready with a $100-million purse to invest in a large Indian infrastructure company's project. The investment plan was pulled back after a study raised red flags on corruption related to the project's land deals.

A multinational pharma company sought a US Foreign Corrupt Practices Act review of their Indian arm - the result of the study led to the sacking of the India CEO.

Corruption has been endemic in India and is perhaps the biggest blemish on the India Shining story. "Corruption in India is systemic, and corrupt nations do not develop their human capital. A country that scores low on the human development index is never considered a developed country," management guru C.K. Prahalad observed in 2008.

A sorry saga India fares poorly on Transparency International's Corruption Perception Index India scores 3.3 on a scale of 10; 0 is highly corrupt and 10 stands for very clean India is ranked at 87 among 178 countries Denmark, New Zealand and Singapore score the highest at 9.3

The Commonwealth Games row once again highlighted how graft at the highest level continues to be the undoing of independent India. "The Games saw widespread fraud and the credibility of the country was dented. Every investor will now be thinking whether he should be investing in this country at all and will be looking at how we handle the investigations," says Deepankar Sanwalka, Head of Forensic Services at KPMG.

A July report by the investment arm of the World Bank, the International Finance Corporation (IFC) showed that countries that had good regulation and scored well on Transparency International's Corruption Perception Index (CPI) also ranked high on the Investing Across Borders Study of the IFC (see Corruption Impacts FDI).

Incidentally, China fares slightly better than India, ranked 78th globally on the CPI while India is ranked 87th. But China today attracts around three times the FDI India does - it received $95 billion in 2009 against India's $35 billion, according to the United Nations World Investment Report 2010.

This could be because, as Prahalad pointed out, corruption in China was more personal than systemic. India is aware of the need to weed out corruption. The Central Vigilance Commission (CVC) has formulated and released the Draft National Anti-Corruption strategy.

The Ministry of Corporate Affairs (MCA) is planning to set up a new redressal body along the lines of other MCA subsidiary bodies such as the Competition Commission of India and the Serious Fraud Investigation Office, with statutory powers to deal with investor concerns in case of a corporate scam. MCA has suggested that the new Companies Bill contain a provision that will make auditors pay retail investors for corporate fraud in order to restore investor confidence in audit companies.

The World Economic Forum (WEF) has its own global front against corruption and plans India-centric initiatives as well. The WEF initiative - Partnering Against Corruption Initiative (PACI) - formed in 2004 brings together more than 150 companies. It is a global multi-sectoral anti-corruption initiative, developed by and for companies.

"With India's increasingly globalised economy we see a potential to explore how more India-specific activities could be developed. We have already begun discussions with our many Indian partners and constituents to explore what this could be," says Alex Wong, Senior Director and Head of the Center for Global Industries at the WEF.

PACI is trying to initiate dialogue between its members and various government agencies, particularly where there are examples of aggressive extra-territorial anti-corruption legislation being discussed, such as in the United Kingdom and the United States.

The US Foreign Cor rupt Practices Act is already making it tough for many American companies to operate in countries like India, where corruption is rife. According to the law, US-listed companies can be penalised for bribes paid in other countries. Today, even the UK has passed a similar law - the UK Bribery Act - and British companies can be hauled up under this law in the UK, even if their contractors or suppliers pay a bribe in India.

In India, law enforcement authorities such as the Central Bureau of Investigation or the Directorate of Revenue Intelligence focus on the bribe-taker but there needs to be an effort to dissuade the bribe-giver too. Wong argues that the fight against corruption worldwide is best enabled by "robust action on both the demand (or government side) where many of the demands for bribes emanate and the supply (or private sector) side which usually provides the money used for corrupt practices".

There are now examples of companies launching anti-corruption initiatives on their own. For example an MNC arm like BASF India has actually tried to go ahead and make its employees participate in a campaign against bribery with focus on the bribe giver. BASF People Against Corruption often joins hands with different organisations to carry on its campaign. One of the organisations that BASF has worked with is Public Concern for Governance and Trust, an organisation that has former super cop Julius Ribiero closely associated with it. When such efforts spread, India will start to shed its image of a graft-prone economy.