Related party risks

Bharat Bio-Brazil investigation reveals dangers of offshore agencies

A scandal to do with the alleged approval, import, and procurement of Bharat Biotech’s Covaxin vaccine is rocking the Brazilian government of Jair Bolsonaro. Some lawmakers and prosecutors have accused Bharat Biotech and its Brazilian importer of not going through the right processes; Bharat Biotech has, in response, said that it is following “step by step” the requirements for regulatory approval in Brazil and that no payments eventually fructified. It should be remembered that the Brazilian regulator had earlier denied an application for emergency use authorisation for Covaxin, which had been pushed by the Brazilian government. In the course of the investigation into the Brazilian government’s Covaxin procurement, it has come to light that an invoice was raised for an initial payment of $45 million for 300,000 doses of the vaccine. This invoice was raised not by Bharat Biotech but by a Singapore-based company named Madison Biotech. Brazilian senators have argued that Madison Biotech’s registered address in Singapore is the same as those of shell companies identified in the “Paradise Papers” investigation by the International Consortium of Investigative Journalists.

Bharat Biotech, of course, has not been shown to do anything wrong, but its actions can and do raise questions about related party transactions, pricing and offshore issues. The issue also shows how shell companies and “marketing agencies”, particularly in Singapore, cast a shadow over corporate governance in India. Bharat Biotech is not a listed company, and so there are fewer restrictions on its behaviour as long as it follows the relevant tax laws. Its management has also insisted that its approach to procurement in Brazil — presumably including this routing of payment through Singapore — is how it structures all its foreign payments. It is true that similar concerns about Madison Biotech have reportedly also been raised by Paraguayan diplomats to the government of that Latin American country.

While there are multiple reasons why companies that should logically incorporate in India choose instead to do so in Singapore — Flipkart being only the most famous example — the use of offshore marketing or logistics agencies that are essentially related parties of company promoters is hardly good corporate practice. In some cases, this can be used for money laundering or tax evasion. This practice can also be used to siphon money out of companies without the clear oversight of boards or, for listed companies, minority shareholders. Policymakers must constantly re-examine India’s tax treaties with Singapore and other similar havens to close loopholes. But in the end, the main responsibility to curb such practices is that of company boards. It is true that promoters and chief executives have a great deal of power over what boards see and decide. But the responsibility remains the board’s. The Bharat Biotech example demonstrates that, even in the absence of any proven wrongdoing, the very presence of an offshore marketing agency leads to suspicions and can ruin a corporate reputation. Deals can be called into question and investigations are launched that serve as an impediment to business. Clean corporate governance, with all paperwork and procurement onshore and well regulated, is the best tool to minimise risk. Also, recent history shows that companies with better corporate governance tend to do well over a period of time.