Corporate governance is a board issue for Japanese investors: Kageyama

Q&A with Tadashi Kageyama, regional managing director and head of Kroll's Asia operations

Foreign direct investment inflow to India from Japan has seen a sizeable leg-up over the past three-four years, growing from $1.7 billion in 2013-14 to $4.7 billion in 2016-17. Corporate investigation and risk consulting firm Kroll Inc’s regional managing director and head of Asia operations, TADASHI KAGEYAMA, has over the years worked closely with many Japanese businesses and investors and helped them shape their India strategy. He shares with Sudipto Dey the key regulatory challenges that are of concern for many Japanese investors looking at India. Edited excerpts:

With Japanese investor interest in India entering a new phase, are there any regulatory challenges that are of concern?

Japanese investors find two key challenges when it comes to regulation in India. First is the complexity of India’s regulatory frameworks. Many industries in India may face regulations from multiple regulators and enforcement agencies which could even be working at cross-purposes. Add to this the fact that some regulations are formed centrally and some are state-specific. 

The second challenge they face is that these regulations change frequently because of which many Japanese investors feel that there is always something going on in the background of which they may not be aware. Japanese business people like to have the blueprint of their business plans fixed, ahead of starting new businesses. This becomes difficult in a complex and ever-changing regulatory environment.

How much are corporate governance standards and practices discussed at the board level, going by past experience of some Japanese businesses in India?  

Corporate governance is slowly but increasingly becoming a board issue for Japanese companies that operate in India. Historically, Japanese investors liked to enter India through partnerships with Indian promoters. They are beginning to understand that in promoter-controlled businesses, the ethics and track record of the promoter and the corporate governance practices at the company are key to the success of the business on the ground. In the past, these issues were considered the responsibility of the local management. Increasingly, these issues are now being flagged at the board level where Japanese investors are directly involved.

Do you see any trend in Japanese businesses going for pre-deal due diligence of prospective business partners in India? 

Yes, they are (going for pre-deal due diligence). Figures published by JETRO suggest that in 2015, only about 50 per cent of Japanese companies operating in India were profitable. This is a serious concern for several Japanese investors in India. In this environment it is critical for them to understand the true nature of their prospective partners ahead of an investment.

Has there been any change in strategy from Japanese businesses when it comes to dealing with the regulatory challenges?

Japanese investors are learning from their past challenges. They are becoming more nimble in developing and executing their business strategies in India as they understand that the local market, consumers and regulations evolve fast in India and they need to respond to these changes in real time. They also increasingly understand how businesses actually operate on the ground may be different from how their performance is captured in the books and records. They are trying to understand this gap better. 

Finally, they understand that being successful in India requires local or Japanese management that understands the operating environment on the ground. This is different from how Japanese companies have operated traditionally in foreign markets where Japanese expats spend two-three years in a foreign market which may not be sufficient time for them to truly understand the local environment. This is slowly changing.

Has the operation of the Insolvency and Bankruptcy Code given a fillip to fraud investigations in the country?

So far the insolvency and bankruptcy process is focused on restructuring of distressed assets. This involves finding ways to revive/rescue and resurrect businesses and to find potential buyers and investors in these businesses. The focus has not been on identifying the underlying reasons for the distress in this business, which may be fraud in many cases. It is up to the insolvency professionals and potential buyers of the distressed assets to ensure that they understand if there is any fraud in the company.