manappuram finance ed raid: ED’s searches at corporates may tarnish business prospects, constrict funding access: Fitch

Indian law-enforcement agency’s investigations may not lead to regulatory action but that hurts business and access to funds, Fitch Ratings said on Wednesday, adding that the recent searches at Manappuram Finance also expose the complexity of country’s corporate governance landscape.

“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 rating agency said in a note.

Kerala-based Manappuram Finance, whose assets worth Rs 143 crore were frozen by the Enforcement Directorate earlier this month, had claimed that the agency’s visit was based on a “malafide FIR” pertaining to now defunct Manappuram Agro Farms. Manappuram Finance, a major Indian gold-backed non-bank lender, disclosed that the searches pertained to legacy non-compliant activities at its branches up until 2012.

The issue highlights the corporate governance challenges that can arise in emerging markets like India, Fitch said. 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,” it added.

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, the agency said.

Risks to creditors rise for these dynamics.Fitch said any new findings from the latest investigations or negative market response could affect MFIN’s credit profile. Significant adverse disclosures could lead Fitch to reassess corporate governance, execution and risk controls, among other factors, and may also prompt regulatory action that could weaken the business profile.