Fitch slams corporate governance challenges in India

Fitch Ratings on Wednesday said the recent search by the enforcement directorate at gold-backed lender Manappuram Finance highlights corporate governance challenges that can arise in emerging markets like India.

"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," Fitch added.

The rating agency said Manappuram Finance Ltd has disclosed that the Enforcement Directorate's 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 its rating, "including our assessment of the company's corporate governance", Fitch said.

"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," Fitch said in a statement.

India sets minimum governance standards for listed corporate, 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, Fitch said.

The global rating agency said the law-enforcement search at the gold-backed non-bank lender highlights the complexity of the country's corporate governance landscape.