Corporate governance norms promote outbound investments

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The quantum of outbound investments in India has been increasing exponentially. In 2007, the amount was to the tune of $33 billion. Of course, a couple of very large transactions such as Tata-Corus and Hindalco-Novelis have skewed the figures somewhat. Having said that, the fact is that Indian companies are increasingly making acquisitions abroad at a scale which could not have been thought of a few years ago.

A very interesting dimension of this trend is of smaller or at least mid-sized companies increasingly getting into the act in terms of making these acquisitions or entering into Joint Ventures (JVs). In the context of the economic slowdown that seems to be setting in globally, this might be a good opportunity for Indian companies to acquire a global footprint.

Indian companies have been viewed by the world outside (especially by the West) as family controlled and not professionally managed. The fact that Indian industry has made substantial strides in terms of their corporate governance processes and professionalising their management is still only hesitantly accepted. It is important to recognise that this professionalism is not across the board and the development and progress on this front is quite uneven.

Is this relevant to outbound investments? The answer to this is a resounding yes. The reason is that a potential overseas seller or JV partner could look at a potential Indian acquirer from the perspective of the acquirer’s overall credibility, not just financial standing. This credibility would often be demonstrated by the professional attitude of the acquirer. Clearly, a company which is well governed, even if family controlled, would stand a better chance of making the acquisition or entering into the JV because there would be a cultural fit, both in the context of an ongoing relationship (such as a JV) and indeed in consummating a potential transaction. The corporate governance practices in the West are characterised by majority of outside directors on board, an active and strong audit committee, stringent provisions for assuring the independence of auditors, detailed disclosures and financial reporting norms, heavy penalties and prosecutions for violations.