By Rupinder Malik
The author is Partner, J Sagar Associates. Views are personal
With increased globalisation in the real estate sector, an increasing number of foreign players are making or looking to make a foray into India. The sector has been long beset by complex set of issues that have made compliance a lengthy process for market players. Investors from countries with extraterritorial laws like the US Foreign Corrupt Practices Act and the UK Bribery Act, which penalise illegal payments made in a foreign territory, have increased exposure in high-risk markets. Moreover, India introduced offering bribe as an offence in a recent amendment to the Prevention of Corruption Act, 1988, along with a provision for corporate criminal liability for the same. This is a shift in anti-corruption laws in India, where those who make illegal payments in a quid pro quo transaction with a government entity are made liable for their actions instead of merely being charged as abettors.
India has extensive and complex regulatory and licensing requirements, and most approvals involve significant paperwork and unpredictable time-lines. Given this, players in the real estate market resort to local third-party consultants for assistance in obtaining licences and clearances for operations and expansion, which could expose them to risk in case of improper payments or gifts to government authorities, particularly when faced with delays/procedural difficulties. The scope of ensuring compliance in the labyrinthine regulatory set-up in India, thus, goes beyond an anti-corruption undertaking. The Real Estate (Regulation and Development) Act, 2016, has streamlined compliance-related aspects and recent judicial pronouncements under the law will hopefully lead to a much-needed clean-up exercise in real estate sector, while the larger issue of corruption (or the perception thereof) still persists whenever the sector is talked about.
Risk-management mechanisms must ideally begin within the company and extend not only to the C-suite, but cover every single entity associated with the operations, including agents and third-party consultants hired to help with local compliance requirements. A comprehensive internal compliance framework can go a long way in ensuring that transactions with external parties conform to internal policies and unauthorised dealings with government authorities. Companies should consider setting up a dedicated risk-assessment vertical to assess and mitigate issues and have appropriate agreements with third parties, which necessarily include anti-corruption and compliance undertakings. Adopting modern technological tools to highlight potential areas of conflict and eliminate risk dynamically could also help.
Also, with increased mergers and acquisition activity, stringent compliance due diligence is crucial to avoiding the myriad issues associated with the real estate sector. The due diligence process must also focus on third-party contracts and other potential areas for violation of both local and foreign anti-corruption laws. The pre-acquisition due diligence process is critical to identify red flags in any proposed transaction. The Mondelez acquisition of Cadbury, which exposed it to a liability incurred by erstwhile Cadbury for certain violations in the past, is a strong reminder that regulators take an unforgiving stance towards corruption.
As companies aggressively restructure and consolidate in India’s burgeoning real estate market, diligence must go beyond pre-merger or pre-acquisition. Dealing with risk in the Indian real estate sector largely lies with handling government interactions with finesse and caution so as to stay on the side of the law, while ensuring that project time-lines and budgets do not suffer. As India looks to draw in increased foreign investment and step away from its image as a corruption-riddled and high-risk market, it will need active participation of private players to help it achieve its lofty goals.
(With inputs from Sriram SL, Associate.)