Integrity pact between cos & vendors becoming a trend
A leading Delhi-based infrastructure company recently had to complete a Rs 300-crore engineering project in Punjab for which it had to source small but vital fan blades.
By MV Ramsurya, ET Bureau |
MUMBAI: A leading Delhi-based infrastructure company recently had to complete a Rs 300-crore engineering project in Punjab for which it had to source small but vital fan blades. It put out a tender inviting bids and short-listed four firms from among an initial list of nine companies.
A perfectly, normal simple process, one would think. It happens in every company in the world. But look deeper, and you would find little that is normal about this process.
Once the due diligence was over, the Delhi-based company said it wanted to sign an ���integrity��� pact, which apart from an undertaking on no-bribery clause, would have also opened the firms��� books to inspection by the larger company. Two of the four short-listed companies backed out as they didn���t agree to the terms of the integrity pact.
This was not what they normally encounter, and they refused. The project got delayed, but since the buyer insisted on such a pact, the companies had no choice but to agree. Although a small example, the insistence of an integrity pact between companies and their vendors is fast becoming a trend, especially among infrastructure, oil and engineering sectors.
These pacts also have third party audits, which give companies the right to access the books of accounts of their vendors on demand, said people familiar with the development. The pact aims at promoting more transparency and putting in place a legally-binding contract that makes malpractice difficult.
The integrity pact has now become vital in the to-do checklist of large private conglomerates, which want to order supplies call for tenders to execute contracts with their vendor companies, said executives of two large diversified firms.
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���Such pacts were initially between a government department and bidders with the undertaking that neither side will pay or offer bribes,��� said one executive of an infrastructure company. ���Now, it is common to see such agreements among all private companies,��� said the executive, who heads the purchase department of a large Mumbai-based infrastructure company.Indian firms are increasingly getting careful after the Satyam fraud and after contracts that were awarded to vendor companies could not be completed due to defaults. Such pacts also have a legal standing. ���It isn���t necessary to have such a pact when a government department is involved as we have the Prevention of Corruption Act that restricts such activities,��� said Sujjain Talwar, a partner with law firm Economic Laws Practice.
���But when it is between two private companies, such a pact is being insisted.��� The monitoring of such a pact ��� initiated by Transparency International ��� also insists that the company awarding the pact has the right to inspect the vendors��� books of accounts. ���This, in fact, has become part of the mandatory forensic checks that most firms do these days, including background checks on debtors, employees, to prevent any possible fraud,��� said KPMG executive director Arpinder Singh.
YM Shivamurthy, group legal president of GMR Infrastructure, another infrastructure company that executes projects through many vendors, agreed that such pacts are getting common. ���They were present in international contracts to ensure that all agreements are above board and are now also being seen among various contracts here in India.���
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Background checks have become imperative among all companies post-Satyam, especially after reports suggested that the Hyderabd-based software company had a large number of ghost employees. The trend is also getting pronounced after US companies issued strict guidelines to their Indian subsidiaries to be more vigilant in complying with the US��� Foreign Corrupt Practices Act.This, after US parent companies identified third party compliance to be a key area of concern. While the Satyam case was a fraud concerning an Indian company, international firms have tightened norms after several executives of engineering major Siemens were charged by authorities for allegedly bribing to get large contracts.
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