India's corruption crusade will pay off for Australia

Thanks to Narendra Modi's hardline stance on corruption, investing in India is becoming more attractive to Australian investors.

Indian Prime Minister Narendra Modi’s recent visit to Australia has drawn investors’ minds to the prospect of stronger economic ties between the two countries and the business opportunities that this is likely to present.

In September 2014, we wrote an article discussing the scale of corruption in India and the new government’s stance towards combating corruption in an effort to attract foreign investment in much needed sectors.

The release of Transparency International’s Corruption Perception Index 2014 shows that these efforts are not going unnoticed and that progress is being made. The Index gives countries a score between 0 and 100; with 0 being highly corrupt and 100 being honest and transparent. Last year, India scored 36 out of 100. This year it has jumped two points to 38 out of 100. This has improved India’s placing 9 positions out of the 175 countries surveyed and India is now the 85th cleanest country (compared to last year’s position of 94th).  

As the war on corruption continues, Modi and Abbott have made it clear that increased bilateral trade between India and Australia will help contribute to the health and growth of their respective economies. Bilateral trade between India and Australia last year totalled only $15 billion, in comparison to trade between China and Australia, which totalled $150bn.

It is predicted that by 2031, 11 per cent of the world’s urban population will be living in Indian cities. In order to achieve this level of urbanisation, India will need to increase its development of modern urban infrastructure. This is one area, of many, where there are likely to be significant opportunities for Australian companies.

One example of infrastructure-related opportunities for Australian companies is in relation to the Indian railway sector. where recent developments have meant that 100 per cent foreign direct investment in railway infrastructure is now possible. There is a clear lack of supply of railway infrastructure in the country as is evident by the overcrowded passenger trains.

As urbanisation progresses and the incomes and living standards of potential passengers increase, there is a significant need for reliable, safe, modern and efficient railway infrastructure. Further, in response to the demands of the middle class and the 800 million youth under the age of 35, Modi has outlined plans for high-speed rail projects to commence in India. Australian companies with experience and expertise in railway infrastructure can look to India as a new opportunity to diversify and expand their global presence.

The opportunities in infrastructure are just one example of the many sectors in which foreign investment is required in India. However, foreign companies are often hesitant to do business in the country because of the bribery and corruption risks. In particular, there are significant risks associated with investing in infrastructure, as this is one sector in which foreign companies have to deal with public officials in order to obtain permits, licenses and various other approvals. 

A challenge for India will be to ensure the confidence of foreign investors by continuing to demonstrate the steps it has undertaken in reducing bribery and corruption.

Below are some key risk management strategies that Australian companies can adopt to protect themselves against the risks associated with bribery & corruption when operating in India.

1. The top level management of a company needs to demonstrate a commitment to preventing bribery and corruption by people associated with the company (e.g. employees and third party agents).

2. Identify the bribery and corruption risks associated with the proposed transaction. These will include country risks, sector risks and transaction risks. It is important to assess how vulnerable the company is to these risks and to then design procedures to counter them.

3. The procedures to combat bribery and corruption risk should include an anti-bribery and corruption policy. The policy should address the identified risks and provide clear guidance to employees and third parties carrying on business for the company as to their duties and obligations.

4. Ensure the effective implementation of the anti-bribery and corruption procedures by conducting regular training for employees to embed a zero tolerance approach towards bribery and corruption.

5. Apply due diligence procedures in respect of individuals and third parties who perform or will perform services for the company, with regard to their perceived level of risk.

6. Monitor and review the adequacy of the company’s anti-bribery and corruption procedures by carrying out regular audits and create a mechanism that whistle blowers can use to report corrupt conduct.

7. Stay up to date with anti-bribery and corruption laws and developments in Australia and any foreign countries in which the company operates.

With the strategies above in mind, now is the time for Australian companies to start collaborating and building relationships with India. It is clear that India perceives Australia as a key partner to help it achieve progress and prosperity. Modi has made a name for himself in Australia and time will tell whether his proposed reforms will result in stronger economic ties between the two countries. 

Natalie Caton is a senior associate and Akshay Naran is a solicitor at King & Wood Mallesons.