By Sanjay Kaushik

The investor community very well recognises the significance of equity markets for achieving long-term wealth. This financial asset tends to appreciate in the long run despite the market experiencing turbulence in the short to medium term.

Apart from the domestic markets, international investing offers investors the opportunity to take part in the global growth story. At the same time, adding international companies to one’s portfolio provides a provision for diversification and offers higher returns.

However, as investing in the global equities market can offer numerous benefits, there are some associated investment fraud risks, such as asset misappropriation, bribery and corruption, and financial statement fraud.

In this context, a significant question arises: How can one ensure their investments are right? To answer that, due diligence emerges as a potential solution that lets investors look behind the façade by uncovering the facts and leading to intelligent decision-making. However, before delving into solutions, one must know about the risks related to investment fraud in global investments.

Risks related to global investments

Investments in emerging international markets have growth potential; however, they come with their risks. On the one hand, there are known risks, such as political, economic, and fiscal risks, and on the other hand, there is a huge risk of investment fraud.

This particular type of fraud has been present for long; however, it has undergone significant changes in recent years due to its global reach.

One is a pre-initial public offering scam, where investors are lured into higher returns in a company whose prices are fraudulently inflated. Investment fraudsters target this set of investors since nobody wants to miss out on the lucrative train.

There is another scenario where investors are intrigued by penny stocks owing to their low prices and higher earning potential. However, these stocks attract fraud due to a lack of information disclosure, and regulatory oversight does not allow risks to be discovered. The prices tend to inflate owing to a ‘pump and dump scheme’, where some investors hold large amounts of shares in an international company and sell their shares as soon as the price goes up, leading to a sudden fall in the prices.

Lastly, the businesses may be misleading investors with false promises of ground-breaking technology or a big contract announcement for an unidentified business. The corporation may be little more than an idea or a shell with little to no operations, earnings, or audited financial statements.

This is the result of investors frequently neglecting their due diligence or lacking the knowledge necessary to investigate the reputation of the broker or organisation making these offers. As a result, instead of earning huge returns, they end up losing a huge chunk of capital, impacting their portfolios drastically. This enhances the role of due diligence.

Due diligence: significance in the pre-investment period

For an investor, due diligence offers a chance to discover the intricacies of the potential investee company. It allows you to view the associated risks and pitfalls accompanying the investment.

For any investor, a critical analysis of a company, especially an international one, is necessary to mitigate risks and avoid any investment fraud. The key objectives of due diligence are to verify the legitimacy of a target business, identify legal, financial, operational, and strategic risks, ensure the accuracy of financial statements, access the competitive landscape, and determine potential returns.

Pre-investment due diligence is a vital process involving meticulous examination and evaluation of a prospective investment opportunity. It acts as a preventative strategy to safeguard investment funds, optimise profits, and reduce potential losses.

Investors can obtain crucial details about the investment target, spot any possible issues or risks, and make well-informed judgements based on a firm grasp of the investment’s potential by performing pre-investment due diligence. However, because the companies are located overseas, gathering pertinent information, and carrying out the due diligence procedure can be difficult and time-consuming.

Considering due diligence services

Investors can reap significant advantages by selecting a solution provider with experience in due diligence services. These enterprises can carry out in-depth research, evaluation, and verification of numerous investment-related aspects. These aspects include financial data, registration & ownership assessment, legal history, regulatory compliance, PEP Sanctions and reputation & integrity.

Additionally, these solution providers can investigate civil and criminal litigation records, along with credit/bankruptcy defaults. To further ensure that investors are funding the correct project or business, it also offers a broad range of value-added tools to search conventional and digital media for information relevant to the project.

All things considered

Investing in the international equities market is a wise choice as it can offer diversification and significant potential for enhancing portfolio performance. However, it’s essential to be aware of the ongoing risks of investment fraud, which could negatively impact the portfolio’s performance.

The risks might be inflated prices, pre-IPO fraud, bogus promises, shell companies, etc. Investing in the international equities market is a wise choice as it can offer diversification and significant potential for enhancing portfolio performance. However, it’s essential to be aware of the ongoing risks of investment fraud, which could negatively impact the portfolio’s performance.

(Author is Managing Director, Netrika Consulting)