ABAC Diligence

Introduction

The objective of this webinar was to address how international investors can calibrate Anti-Bribery and Anti-Corruption (ABAC) risk in India without killing deals.

The real challenge is not to pursue perfection, but to focus diligence in the right areas, identify red flags that truly matter, and use practical transaction tools, such as conditions precedent, contractual protections, and post-closing remediation, to manage risks. The goal is proportionate diligence and smart structuring, not theoretical perfection.

The session was moderated by Karun Cariappa, Partner, Corporate & Commercial and led by speaker Susanah Naushad, Counsel, Dispute Resolution.

Please see below a summary of the key points discussed in the webinar. Views expressed in the webinar are those of individual panel members and not those of Khaitan & Co. and are subject to the disclaimer set out in the webinar recording.

The recording of the session can be viewed here: (718) Anti Bribery & Anti Corruption Due Dilligence | Investing in India - YouTube

Why ABAC Diligence is Essential in India

India's High-Touch Environment

India continues to attract capital in infrastructure, manufacturing, technology, pharmaceuticals, healthcare, and financial services. However, many businesses operate in a "high-touch" environment with frequent interaction with government departments, PSUs, and regulators for permits, inspections, renewals, procurement, land clearances, and operational approvals.

Risk sits in points of friction: intermediaries who "handle relationships," approval-timed payments, or facilitation payments. These risks may not be visible in written policies and can surface years later through whistleblower letters, tender challenges, PSU vigilance references, or investigations.

Legal and Regulatory Framework

Indian Law Exposure

Indian law exposure typically comes through:

1. Prevention of Corruption Act (POCA): Payments to public servants for approvals.
2. IPC/BNS: Cheating and criminal conspiracy involving inflated invoices, sham contracts, false documentation.
3. Companies Act: Falsification of accounts, internal audit issues.
4. PMLA: Where proceeds are layered through entities or related parties.

Extra-Territorial Exposure

FCPA: Prohibits bribery of foreign officials; applies to non-U.S. companies with U.S. nexus. Books-and-records/internal controls provision is often the bigger acquisition problem, as continuing weak controls post-closing triggers enforcement.

UK Bribery Act: Captures public and private bribery; penalizes corporates for failure to prevent bribery. UK-connected investors must demonstrate adequate procedures post-closing.

Successor Liability Risk

In share purchases, you buy the same legal entity that made payments and kept books. Historic misconduct becomes a post-close problem: management time loss, reputational fallout, debarment, and in money-trail cases, attachment/confiscation risks.

Calibrating the ABAC Diligence Exercise

Key Variables Driving Scope

1. Government Touchpoints: When revenue of a company is dependent on licences, approvals, inspections require deeper diligence. A high-touch ₹300 crore transaction may need more ABAC diligence than a low-touch ₹3,000 crore transaction.
2. Sectoral Risk:
   
   • Infrastructure: Concessions, clearances, PSU procurement create demand for liaisoning agents. Risk sits at site-level.
   • Real Estate: Land aggregation, building permissions create approval-timed payments to "facilitators" with limited proof of deliverables.
   • Manufacturing: Higher-touch when expanding across states requiring licences, inspections, customs/tax interfaces.
   • Pharma/Healthcare: Higher-touch where revenue depends on government tenders, PSU procurement, product approvals.
3. Control and Structure:
   
   • Control acquisition: Identify critical immediate risks; implement 100-day remediation plan post-closing.
   • Minority investment: Secure governance, audit, and veto rights to detect issues early.

How to Conduct ABAC Diligence

The Diligence Process

Information Requests: Compliance policies, internal audits, governmental approvals, bribery/corruption/fraud allegations, litigation/regulatory actions, blacklisting/debarment issues, expenses for promoting business/hospitality.

Forensic Involvement: When red flags appear, forensic consultants provide evidence-led testing through payment sampling, proof-of-service verification, third-party diligence.

Two Threshold Questions:

1. Are issues already on the regulator's radar? (If CBI/ED proceedings exist, consider walking away)
2. Can red flags be remediated without breaking the business?

Scope of Diligence

• Government Interface Mapping: Map touchpoints (permits, inspections, PSUs, tax/customs, land), intermediaries, and spend buckets (commissions, consultants, CSR, petty cash).
• PEP-Related Risk: Check promoter/key management connections. Test whether business runs through "relationship capital."
• Third-Party Diligence: Focus on agents, consultants, distributors who interact with public officials. Test legitimacy, proportionate payment, proof-of-service.

Common Red Flags

1. Consultant retainers with vague/no documented scope
2. Excessive commissions around government business
3. Frequent "facilitation" reimbursements near license renewals/inspections
4. Last-minute vendor onboarding, incomplete KYC, bank-account changes
5. CSR/sponsorship spends clustered around approvals
6. Layered subcontracting chains obscuring end-vendor identity
7. Advisors with undefined roles and influence-based compensation

Transaction-Specific Remediation & Deal Protections

Deal Protections – Layered Toolkit

Representations & Warranties: Tailor to government interfaces, agent usage, PSU/tender history, pending investigations. Force seller to confirm specifics on improper payments, investigations, accuracy of books/records.

Indemnities: Seek special indemnities for identified ABAC concerns, supported by escrow/holdback. Ordinary caps may not fit ABAC exposures (investigations, disruption, debarment, remediation cost).

Conditions Precedent / Covenants:

• Pre-close: Terminate/re-paper intermediaries, implement payment approvals, complete targeted investigation, remediate control gaps.
• Post-close: Convert to remediation undertakings with timelines and deliverables.

Conclusion

Key takeaways:

• ABAC diligence is about proportionate checking, not perfection. Find where bribery risk exists, then decide what must be fixed before closing, what should be covered in deal terms, and what can be cleaned up after closing.
• Sector and government interaction matter more than deal size. Smaller investments in high-touch sectors can be riskier than larger low-touch deals.
• Start early to preserve options. Late issues leave only two choices: delay or accept risk. Early identification enables structured solutions.
• India risk is manageable if addressed deliberately. Most ABAC risk is controllable through mapping touchpoints, controlling intermediaries, tightening payment approvals, and monitoring post-closing. Avoidable damage comes from treating "local practices" as unavoidable and not turning diligence findings into real protections.

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.