ED Searches At Manappuram Finance Highlights Potential Governance Issues In India, says Fitch Ratings

Fitch Ratings on Wednesday stated that the recent enforcement directorate investigation at gold-backed lender Manappuram Finance underscores potential issues with corporate governance in developing countries 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.

According to the rating agency, Manappuram Finance Ltd. revealed that the Enforcement Directorate searched its facilities in relation to historical non-compliant activity at its branches up till 2012.

Even though these kinds of searches are rather uncommon and can highlight possible governance problems, Fitch has already taken into account the actions the firm has so far identified as being involved in its rating, "including our assessment of the company's corporate governance," according to Fitch.

"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,"

In a statement, Fitch said. India imposes basic governance standards for publicly traded corporations, and in recent years, there have also been stricter rules for non-bank financing organisations.

However, Fitch noted that the preponderance of founder- and family-driven firms can concentrate decision-making and that the alignment of interests among important company decision-makers may be biassed in favour of equity-holders.

The law enforcement search at the non-bank lender backed by gold, according to the international rating agency, underscores how complicated the corporate governance environment is in the nation.