India wants foreign capital. However, foreign investors also need confidence that when they acquire an asset in a bona fide manner through the regulatory system, they will not inherit litigation risks arising from the actions of a previous promoter years after the transaction.
That concern is particularly relevant in the case of Fortis. Alleged wrongdoing by a former promoter in their personal capacity, despite having no connection with the company’s conduct, risks becoming a lingering overhang for every subsequent investor in India. If that becomes the expectation, professional investors will have to factor unknown litigation risk into transactions that may otherwise satisfy every regulatory requirement.
In 2018, IHH Healthcare emerged from a competitive process run by reputable investment bankers to acquire control of Fortis through a primary infusion of Rs 4,000 crore, competing with bidders including the TPG-Manipal, Burmans, Munjals, and KKR-Max consortiums. Fortis’ board, comprising three independent directors, selected the IHH proposal, and the transaction proceeded through corporate and CCI approvals and the Sebi takeover process, including a mandatory open offer to public shareholders.
The Delhi High Court on August 31 directed a forensic audit into the dissipation of the Singh brothers’ (erstwhile promoters of Fortis) shareholding, the subsequent change in control, and the role of various stakeholders. It also sought a probe of the transaction through which the IHH acquired control. The IHH disclosure says the court has imposed no liability, penalty, or fine on it or Fortis, and that the IHH is not a party to the execution proceedings. The Supreme Court too had cleared the transaction.
The arbitration award at the heart of the proceedings was passed in Singapore on April 29, 2016. It directed the judgment debtors to pay Rs 2,562 crore, with pre-award interest of 4.44% and post-award interest of 5.33%. The Delhi High Court records Daiichi’s position that approximately Rs 5,300 crore was due. The award arose from misrepresentations by the Singh brothers when they sold their shares in Ranbaxy to Daiichi Sankyo, and has nothing to do with Fortis, besides the shares they owned in Fortis being offered to satisfy the decree.
Those judgment debtors are the Singh brothers, who had held their Fortis interest through Fortis Healthcare Holding Private Limited. It is no one’s case that Fortis received any benefit from the sale of shares by the Singh brothers. Fortis is also suing the brothers to recover monies they allegedly siphoned off while in management control.
The court records that, by February 2018, the Singh brothers had resigned from the Fortis board. A submission recorded in the judgment says that by the time the IHH transaction was concluded, the combined holding of the duo through intermediate entities had fallen to 0.66%, and that the transaction was negotiated under new management and by an independent board.
The court is now examining whether the IHH/NTK transactions were bona fide or represented an attempt to keep assets beyond Daiichi’s reach. That is why the forensic audit has been ordered. But an investigation is different from a finding that the subsequent investor acted improperly. The court itself notes the distinction between directing a forensic audit and adjudicating civil liability.
Private equity funds typically invest with a defined value-creation and exit horizon, often five-seven years. That model has its place in Indian healthcare, but differs from a long-term investor willing to stay invested. Such investors provide FDI that stays and leads to growth.
The IHH’s investment in Fortis falls into the latter category. It acquired control in 2018 and has remained invested since then, rather than treating Fortis as an asset to be sold after a predetermined holding period. Its Rs 4,000-crore infusion brought Fortis back from the brink, preserved thousands of jobs, and restored value for retail and institutional shareholders. The order now risks turning that recovery story on its head and sending a dangerous signal to foreign investors looking at India.
The court’s task is to determine what happened. The concern for India should be what the process and certainty look like to the next foreign investor bringing FDI. If an investor enters a listed Indian firm through an open, regulated transaction, puts substantial capital into the business, and remains invested for years, but the transaction can later be examined in litigation arising from an earlier promoter’s conduct, the perceived risk of investing in India increases.
That risk does not disappear because the investor ultimately wins the case. Capital is priced before it is committed.
Daiichi is pursuing enforcement of a foreign award. That is a legitimate legal objective. The court is equally entitled to investigate whether assets were dissipated and whether anyone assisted in frustrating enforcement. But those objectives shouldn’t become indistinguishable to the detriment of innocent bystanders, global investors, and, most importantly, lakhs of public shareholders who have committed their savings to companies like Fortis.
Indian courts can enforce awards and investigate alleged wrongdoing while also giving legitimate subsequent investors confidence that a transaction completed through the country’s regulatory system will eventually be treated as settled. Foreign investors need to know that when they enter through the front door, the rules governing that transaction will continue to mean something after the deal is done. This comes at a time when the government and India Inc are doing everything to woo foreign investment into the country.