In my years as a deal maker, I have developed some simple rules in business that have served me well no matter which part of the world I am conducting my business:
1. Do business with people who have a reputation of honoring their commitments.
2. Don't skimp on a good lawyer.
3. There is no permanent arbitrage, i.e. there is no sustainable unfair advantage that you can bank on in a business relationship, even if you have a contract that says you have the right to do so.
Finally, pick business partners you like and trust so can resolve your disagreements without legal recourse. However, we are all human and susceptible to making errors in judgment and that's where a good contract comes in handy. However, the legal system can protect your rights only if it works like it's supposed to. This is a fact that is often lost on the majority of western investors who are piling into emerging market assets these days. While the citizens of developed economies have grown to expect fair and speedy justice as a basic right, they err in extending that assumption to emerging economies. India inherited a legal framework based on British common law so it's largely predictable. However, we cannot say the same about it's reliability. Legal cases in India can easily get stuck for more than a decade! Indian civil lawyers are cheap and even the common man can afford to appeal for justice here. The flip side of this commendable aspect of our democracy is that we have become a notoriously litigious society.
At last count, there were over 20 million civil cases stuck in the back-log of India's notoriously slow and inefficient legal system. The cumulative impact of this legal morass is the unproductive lock-up of hundreds of billions of assets and transactions. Not surprisingly, the present value of time and money spent on obtaining justice in a deal gone bad is often times higher than the value of the consideration at stake! In an economy that erodes the value of money by 5% p.a (inflation), a creditor should theoretically be indifferent to collecting 14.4% of what is due to him today, rather than wait 10 years to collect the same amount when the courts finally dispense legal justice. If you add the cost of lost interest on the consideration, the legal fees involved and the opportunity cost of time, then the creditor will almost always be better off taking a discounted settlement above 14.4% of the value involved.
This is the reason Indian businessmen pay a lot of attention to the business reputation of the counter-party. In fact, Indian banks won't even lend money to a company with a default record, up to 2-3 years after it emerges from bankruptcy! As an investor specializing in distressed assets in India, I define risk simply as permanent loss of capital. I spend a substantial amount of my time conducting background checks on the company and it's management. If I conclude that the management is trustworthy, then I move to the next phase of the investment process which involves hundreds of man-hours of legal, financial and technical due diligence. If the company survives this grueling process of investigation, I move to the investment stage where deals can still break down because I expect the management to pledge their entire share-holding in the company as well as all the gross block of the company to my fund. My investment mantra is simple: In order to make money, try not to lose it.
Hi Vikram,
Just noticed this somewhat old post which made me think of lawyers and contracts. The first task for a returning NRI like me is to buy a home to live in and I wonder if I can get a list of reputable lawyers in and around Mumbai/Pune to help me with the purchase. (I have very few relatives/friends who can be helpful in this regard). Similar lists of doctors, hospitals, tax accountants,financial planners and other service providers would also be useful. Is it possible to start a list on this blog or is that complicated? At some point in India's development, we should be able to have this organized alternative (or supplement) to word of mouth networking - don't you think? Perhaps we can at least post our positive experiences with service providers with their names.
To answer a query from Vivek (re tax issues), I would direct him to a Q&A column in India Abroad authored by A N Shanbhag and Sandeep Shanbhag.
Suhas
Posted by: Suhas | October 19, 2007 at 08:37 PM
Great Post.
I guess Trust-worthiness and Reputation matters every where and in all Businesses. I have seen IT projects go haywire and waste millions of $$, coz of lack of trust between Users and the IT dept, or betn IT and its Vendors.
On a diffn topic, are you running some type of a value fund - specializing in distressed assests ? Would be interested in knowing more.
Posted by: Vivek | August 31, 2008 at 09:16 PM