Over the past year, investors have expressed growing enthusiasm regarding India's healthcare assets, which encompass a diverse array of entities such as pharmaceutical companies, hospitals, and diagnostic chains. However, this optimism is tempered by a significant shift toward more rigorous and critical scrutiny of the sector. Investors are proceeding with heightened caution, engaging in extensive due diligence prior to committing substantial financial resources.

This cautious approach stems from widespread concerns about potential malpractices that could jeopardize their investments in an industry that is consistently subject to both regulatory oversight and consumer scrutiny. Gone are the days of merely conducting standard financial checks; investors are now diving deeper into a variety of factors. They are meticulously examining the backgrounds of prominent medical practitioners, the protocols for treatment, and the dynamics of doctor-management relationships. Additionally, they are investigating how often doctors leave their positions, the nature of patient referrals to hospital networks, and any potential referral fees that might be involved. There are also significant concerns regarding the prescription of unnecessary tests and proceduresan issue that has plagued the industry for years.

Amit Rahane, a partner at Forensic & Integrity Services at EY, highlights this trend, mentioning a noticeable increase in forensic due diligence. As investor interest continues to surge, private equity (PE) firms and venture capitalists (VCs) are demanding more thorough investigations that go beyond conventional accounting methods. This shift is aimed at ensuring compliance regarding third-party transactions and addressing vulnerabilities to fraud, Rahane stated.

The trend towards increased scrutiny can also be attributed to the influx of negative consumer feedback, which has prompted investors to take a closer look at consumer sentiment. They are increasingly utilizing online reviews and various feedback platforms to gauge public perception and to understand employee sentiment. Factors such as employee workload, compensation, long working hours, and general working conditions are becoming critical criteria for investors as they decide where to place their capital.

In the realm of pharmaceutical companies, investors are not only focusing on compliance but also evaluating marketing and promotional strategies, the ethics of doctors' trips funded by pharmaceutical firms, and the monitoring of drug safety, known as pharmacovigilance. Moreover, with a significant number of drugs recently going off patent, there's heightened scrutiny on generic drug manufacturers poised to capitalize on these opportunities.

For instance, the multinational corporation AbbVie Healthcare recently found itself under investigation by the Department of Pharmaceuticals due to allegations of unethical marketing practices, including the expenditure of nearly 2 crore to sponsor international trips for 30 doctors. As regulations governing marketing and promotional activities by pharmaceutical companies tighten, the repercussions of non-compliance have become increasingly severe. This has made potential investors in India, a country that is seeing intensified interest in its healthcare sector, somewhat apprehensive due to the unregulated nature of prescription inducements and the heightened risk of malpractice.

In response to the intensified scrutiny from investors, hospitals and pharmaceutical companies have started implementing more thorough background screenings for their employees. This includes not only key medical personnel but also nursing staff, paramedics, and even housekeeping and blue-collar workers. Ajay Trehan, the founder and CEO of AuthBridge, noted that the demand for such employee background checks has surged by 70% in the combined healthcare and pharmaceutical sectors from FY24 to FY25.

Several factors contribute to this rising demand for scrutiny. A prevailing negative perception of Indian manufacturing facilities, a spate of FDA defaults, and heightened litigation risks that could affect companies are all prompting investors to take a closer look at potential investments. Furthermore, experts highlight that the increasing interest from major private equity funds in healthcare facilities located in non-metro areas is driving this trend. Tier-2 and -3 citiesincluding Lucknow, Siliguri, Guwahati, Jaipur, Bhubaneswar, and Patnaare becoming focal points for investor interest, leading to an even greater demand for thorough due diligence in these less populated regions.

Particular treatment areas such as in vitro fertilization (IVF), nephrology, maternal and childcare, and diagnostics have caught the attention of PE firms, as they see potential for future value creation. However, these fields have also been marred by allegations of malpractice, including the proliferation of fertility centers and links to organ transplant rackets involving doctors from major hospitals. Such concerns are prompting investors to exercise increased caution before committing capital to the healthcare sector.