Reputational risk has become more prominent globally. In India, reputational risks in financial and other sectors have led to significant losses that are often much higher than direct financial losses. Events that can damage corporate and individual reputations in India include financial frauds, auditor or director resignations, loan defaults, transactions with politically exposed persons or involving conflicts of interest, and notices from government investigative agencies. Case studies found market capitalization declines after reputational events were much greater than direct financial losses, showing the high costs of reputational risk. Global investors, companies doing business in India, and others should monitor Indian corporations and individuals to detect early signs of potential reputational damage.

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Reputational Risk in India

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Background
Reputation risk has grown in prominence, with headlines around the world highlighting the importance of
effective reputation risk management. In the recent past India has witnessed significant reputation risks in the
financial services and other sectors. Historical trends suggest that such losses could be 20 times higher than the
direct loss. India is a demographically unique country with numerous cultures, languages, religion etc. It has
similar uniqueness with respect to its business environment. Crony capitalism, concentration of wealth in the
hands of a few business families, lack of transparency, complex laws etc have led to unfair advantages to select
business houses in the past. With the changes in laws, greater social activism, digitization in government
departments and active enforcement action, corporations and individuals are under the scanner like never before.
Global investors have heavily punished corporations who face reputational damage by immediate exits followed by
class action suits and long drawn legal battles.
What is Reputation?
Oxford dictionary meaning of the word reputation is “The beliefs or opinions that are generally held about
someone or something”
In a business environment, reputation is the perceived impression that stakeholders have about how a company is
managing its business processes.
Events that lead to reputational damage in India
Following are a few events which can cause substantial reputational damage
to corporations & individuals in India:
 Financials frauds reported by entities
 Auditor and director resignations

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 Default in repayment of bonds and bank loans
 Transactions with politically exposed persons, related parties and other transactions involving conflict of
interest
 Notices/Summons to top management from agencies such as Enforcement Directorate, Serious Fraud
Investigation Office, Central Bureau of Investigation
 Names of promoters/top management appearing in the list of off-shore accounts
How do you measure cost of reputational risk?
Reputational risk is a secondary consequence of other risks hence difficult to accurately measure it. Hence indirect
methods of like loss of revenue, decline in market capitalization, reduced market share, lower price earnings
multiples etc can be used to quantify them. Recently, the Indian banking industry has faced so far the biggest
fraud of INR 1,230 MN. Taking change in M-Cap as proxy for reputation risk, we found that post 1-month of the
event; the decline in M-Cap is 13.2 times more than the fraud amount. A beverage company where a reputed audit
firm recently resigned faced a decline of market cap of INR 35,292 MN after the event. A leading steel company’s
came down by a whopping INR 57,733 MN after being probed by an Indian enforcement agency. Similarly a large
telecom company’s market was reduced to half after the news of a potential loan default which resulted in a
market cap loss of INR 47,484 MN.
Who should watch out for reputational risks in India?
 Global investors investing in India.
 Companies who want to procure from India
 Companies who are doing key hires in India/ from India
 Companies who are entering into long term contracts with Indian entities for procurements, services, joint
ventures etc.

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Conclusion
Events which dent reputation of individuals and corporations in India erode considerable investor wealth as can
be seen from the above research. With the rapidly changing business environment, stakeholders must build in
processes and procedures before entering into a relationship with individuals and corporations in India. It is of
utmost importance to continue monitoring them to detect early signals of potential reputational damage.
How can we help?
At U.S.Gandhi & Co we are helping global investors and stakeholders on the following:
 Reputational due-diligence of corporations and promoters
 Background checks of corporations and promoters
 Potential reputational risks faced by corporations
 Quantification of reputational damage for class action suits and legal battles
 Continuous monitoring of target and sector.

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