Such searches need not lead to further regulatory action, but investigations raise reputational risk that could tarnish a lender’s business prospects and constrict funding access due to reduced market confidence – potentially affecting an issuer’s credit profile – even if no wrongdoing is identified
Mumbai:
A recent law-enforcement search at a major Indian gold-backed non-bank lender,Manappuram Finance Limited (MFIN) highlights the complexity of the country’s corporate governance landscape, says Fitch Ratings.
Such searches need not lead to further regulatory action, but investigations raise reputational risk that could tarnish a lender’s business prospects and constrict funding access due to reduced market confidence – potentially affecting an issuer’s credit profile – even if no wrongdoing is identified.
The company has disclosed that the local Enforcement Directorate search at its premises pertained to legacy non-compliant activities at its branches up until 2012. Such searches are relatively rare, and can flag potential governance risks, but the activities the company has identified thus far as being involved are publicly known and Fitch has already factored them into MFIN’s rating, including our assessment of MFIN’s corporate governance.
The issue highlights the corporate governance challenges that can arise in emerging markets like India. Governance standards are still developing and often lag those in higher-rated jurisdictions. Companies that expanded rapidly amid strong economic growth may also lack established governance structures to match their increased scale.
India sets minimum governance standards for listed corporates, and requirements for non-bank financing companies have also stiffened in recent years. Nonetheless, the prevalence of founder- and family-driven corporations can concentrate decision-making, and alignment of interests among key company decision-makers may be skewed in favour of equity-holders.
These dynamics raise risks to creditors and can be complicated to assess. That said, such issues are common in many emerging markets, and Fitch considers multiple factors in assessing corporate governance risks.
MFIN says recent events stem from retail deposits collected through its branches in the past on behalf of Manappuram Agro Farms, an entity owned and managed separately by MFIN’s founder and managing director. MFIN does not hold a deposit-taking licence, and its branches can not accept deposits even on behalf of other entities. MFIN stopped the practice in 2012, as instructed by the Reserve Bank of India, and its founder raised funds to repay the outstanding deposits, worth about INR1.4 billion (USD17 million). MFIN’s filings state that around INR0.9 million (USD11,000) remained unclaimed at end-September 2022, held in an escrow bank account.