Fitch Ratings calls ED searches bad for business as they can tarnish the image of corporates

Whenever an Income Tax or Enforcement Directorate team turns up at a company's office or someone's residence, it triggers all kinds of speculation among the general public. With ED and CBI raids against politicians and firms, even a search at the premises points towards the possibility of a crime, and the onus of clarifying otherwise is on those affected by the actions.

Taking note of this in the aftermath of ED's search at Manappuram Finance's premises, ratings agency Fitch has stated that it could affect access to funds even for those who are innocent.

Concerns over ED's visit to Manappuram

• Fitch has expressed concern days after the Kerala-based gold loan provider clarified that the visit by ED was linked to a malafide FIR against the defunct Manappuram Agro.

• The market research agency added that the ED action also highlights how corporate governance in India is riddled with complexities.

• It mentioned how the searches similar to the one at Manappuram, could dent investor confidence in a firm, and reduce its access to funds.

The innocent may also bear the brunt

• In case a firm is involved in wrongdoing, the raids or searches are justified, but Fitch argues that they could adversely impact the business's prospects even if no evidence of violations is found.

• According to the agency, the ED's actions shed light on the governance challenges in emerging markets, and also the lack of governance to match the scale at which businesses expand.

• In addition to the raids, Fitch highlighted the risk that family-owned businesses pose to creditors, since decision-making can be tilted in favour of equity-holders.