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The Indian D&O Monsoon: The Impact of Recent Indian Regulation on Companies, their Directors & Officers, and Insurers


Recent elections, fraud scandals, and high-profile merger & acquisition activity have afforded corporate India plenty of press over the past few months. Indeed, India's growing economy has emerged largely unscathed by the global credit crisis, and its huge consumer base continues to entice foreign investors. Over the past few years, foreign independent directors have also been attracted to the boards of several of the country's blue-chip companies. However, in light of recent corporate governance scandals, foreign companies, directors, and their insurers need to understand the country's regulatory landscape and the potential claims that may arise against Indian directors or those foreign directors sitting on the boards of Indian headquartered companies.

Although India has long been proud of its status as the world's largest democracy, critics have commented that it is also the world's largest bureaucracy. One of the main issues facing Indian boards of directors is the sheer volume of laws and regulations relating to the oversight of Indian companies. Another matter for directors to consider is the potentially overbearing personal liabilities they face when becoming a member of an Indian company's board. A better understanding of the main players in the Indian regulatory landscape will help directors and their insurers to understand the risks that Indian companies face.

Ministry of Corporate Affairs ("the Ministry")
The Ministry is concerned with the administration of a wide range of statutes for the regulation of the corporate sector of India, including the Companies Act 1956 ("the Companies Act") and the Competition Act 2002 ("the Competition Act"). The Ministry comprises various Indian regulatory bodies (such as the Serious Fraud Investigation Office and the Company Law Board), which have been set up by and/or accept appointments from the Ministry.

The Company Law Board ("CLB")
The CLB is a quasi-judicial body, which, despite having been set up by the Ministry, is not subject to the control of the Central Government and has the power to regulate its own procedures and act in its own discretion. The CLB considers various petitions against companies and their directors relating to the Companies Act , such as insolvency and disqualification matters. It also has various powers under the Companies Act, including as was most recently shown with Satyam Computer Services Ltd ("Satyam"), the power to completely reconstitute a board of directors with government-appointed individuals.

The current draft of the Companies Bill (which is expected to be enacted within the next year) proposes that the CLB will be replaced by the National Company Law Tribunal, which will be set up for the winding up of and rehabilitation of "sick" companies.

The Serious Fraud Investigation Office ("SFIO")
The SFIO is a multi-disciplinary organization with experts from several sectors, including finance, law, accountancy, customs and tax. It has been appointed by the Central Government, under the Companies Act, to investigate serious cases of fraud, which are characterized by:

  • The need for inter-departmental and multi-disciplinary functions given the complexity of the case;
  • Substantial involvement of public interest; and
  • The possibility of investigation leading to or contributing towards a clear improvement in systems, laws or procedures.

Teams are headed by an Investigating Officer who has the final say in the matter and who submits an Investigation Report to the Ministry at the conclusion of an investigation. These reports can be very lengthy and detailed. Indeed, the press reported that the SFIO report submitted to the Ministry in the Satyam case was over 14,000 pages long.

Under Section 239 of the Companies Act, the SFIO has the power to investigate the affairs of a company, its subsidiaries and holding companies, as well as other corporate bodies which are, or have been, managed by the company's managing director or members of the board of directors, including nominee directors. This power is very wide and allows the SFIO to investigate companies which are completely unrelated to the subject company if a director serves on both boards.

Section 240 of the Companies Act gives the SFIO power to order a company, and its directors and officers to preserve and produce all books and papers of, or relating to, the company. This power is extended in section 240A to seize books and papers if there are reasonable grounds to believe they may be destroyed, mutilated, altered, falsified or secreted.

Since the SFIO's inception until the end of 2007 (when the latest statistics were available), 48 cases had been referred to the SFIO for investigation. These investigations have resulted in 737 prosecutions against various companies, directors and officers, which evidences the SFIO's extensive range of investigation and enforcement powers1.

Securities and Exchange Board of India ("SEBI")
If a company is publicly listed on one of India's stock exchanges, it will also be subject to SEBI's oversight. SEBI is similar to the Financial Services Authority in the United Kingdom and the Securities Exchange Commission in the United States. It has three statutory objectives:

  • Protection of the interests of investors in securities;
  • Development of the securities market; and
  • Regulation of the securities market.

SEBI enforces various securities-related regulations through inspections, enquiries, exchange surveillance, and investigations. The stock exchanges in India are the first-level regulators and are charged with the primary responsibility of safe-guarding the integrity of the market and ensuring that the market is performing in accordance with the stipulated norms and practice. The Integrated Surveillance Department of SEBI is in charge of overall market surveillance and the scope of its activities includes monitoring market movements and detecting potential breaches of regulations, analyzing the trading pattern of shares and indices and initiation of appropriate action whenever warranted.

Since its inception, SEBI has undertaken 1,212 investigations into alleged/suspected violations of price manipulations, creation of artificial markets, insider trading, primary issue related irregularities, takeover violations, non-compliance of disclosure requirements and other misconduct. In its 2007-2008 Annual Report, SEBI states that the experience gained during these investigations has "contributed significantly to evolution of policies and procedures in strengthening regulatory and enforcement environment". During 2007-2008, 25 new cases were taken up, about half pertaining to market manipulation and price rigging. Other cases related to insider trading, takeover violations, irregularities in capital issues and other miscellaneous issues. Also during 2007-2008, 169 pending investigations were completed and subsequent regulatory action was taken against 629 related entities, including prosecutions resulting in 56 individual convictions.

Competition Commission of India ("CCI")
Under the Competition Act 2002, the CCI was recently set up (and became fully functional as of May 21, 2009) with the following purposes:

  • To prevent practices having adverse effect on competition
  • To promote and sustain competition in markets
  • To protect the interests of consumers, and
  • To ensure freedom of trade.

Pursuant to these objectives and the relevant statutes, the CCI has the power to scrutinize deals, such as the proposed Bharti Airtel/MTN acquisition, and issue orders prohibiting the deal from going forward if it is determined it will have an appreciable effect on competition. The CCI also can direct companies to discontinue anti-competitive practices and has the power to impose a penalty of up to the higher of 10% of the turnover or three times the profit for each year of cartel activity.

Directorate of Enforcement
The main functions of the Directorate of Enforcement are to enforce foreign exchange and money laundering statutes and regulations. The regulator has the power to collect and develop intelligence, conduct searches of suspected persons, conveyances and premises, seize incriminating materials, adjudicate cases and confiscate amounts involved in violations. The Directorate can also impose penalties and arrest/prosecute suspected individuals involved with money laundering or other illegal foreign exchange activities.

How does this affect Indian companies, directors and their insurers?

Personal Liability

Even this brief glance at the powers and functions of some of India's regulators is enough to show that directors of Indian companies must navigate a regulatory minefield in performing their duties. It is important for directors of Indian companies as well as their insurers to be aware that under Indian law, directors owe a fiduciary duty to, and must always act in the best interests of the company. They are viewed as agents and trustees of the company and consequently, owe a duty of care to act in the company's best interests. If they fail to do so, they may be held personally liable, either in legal or regulatory proceedings. In the face of these potentially overwhelming duties, directors & officers insurance can provide some comfort to individual directors in relation to any personal liability they may incur as a result of their appointment to the board.


That said, there are several issues that companies, directors and insurers must consider in relation to the extent of insurance coverage that is available in the Indian market. Usually a D&O policy will exclude cover for fraudulent, criminal or intentional misconduct. These exclusions typically do not apply until there has been an "adjudication in fact". To the extent that misconduct has occurred by some directors, but not all, a policy's "severability of exclusions" provision may apply. Under English law, severability clauses usually apply so that even if cover is denied to some of the directors for the above reasons, the exclusion would not apply to others who were uninvolved in the bad conduct. Usually, this requires proof of the extent of the other directors' knowledge. However, the position is not as clear-cut under Indian law, which may regard the insurer as entering into a single severable contract with multiple beneficiaries (as opposed to a severable contract with each beneficiary). This means that the severability clause may not necessarily protect uninvolved directors in cases where there has been an adjudication in fact or admission by the "guilty" director and insurers may avoid the policy in relation to any of the directors, despite the existence of the severability clause.

Defence Costs

In addition, directors and their insurers should be particularly mindful of section 201 of the Companies Act 1956, which states,

"Save as provided in this section, any provision, whether contained in the articles of a company or in an agreement with a company or in any other instrument, for exempting any officer of the company or any person employed by the company as auditor from, or indemnifying him against, any liability which, by virtue of any rule of law, would otherwise attach to him in respect of any negligence, default, misfeasance, breach of duty or breach of trust of which he may be guilty in relation to the company, shall be void:

"Provided that a company may, in pursuance of any such provision as aforesaid, indemnify any such officer or auditor against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or discharged…"

This provision was clarified by the Department of Company Affairs in Vide Circular: No. 8/72(12/42/71 Cl-V, dated 8 May 1972):

"…it is not permitted to a company to make its funds available to the managing directors, etc, in connection with any civil or criminal case instituted against them unless they are found by a competent court to be innocent and the question of reimbursement will arise only after the termination of the proceeding in favour of the officers of the company concerned".

As is evident from these provisions, whereas several jurisdictions provide for the advance payment of defence costs in defending directors in civil, criminal or regulatory proceedings, Indian law does not. Any payment to a director or officer before there has been a finding in the directors' favour is in violation of section 201 of the Companies Act and will be void. This prevents a company (and insurers) from indemnifying directors for defence costs if there are allegations of negligence, default, misfeasance, breach of duty or breach of trust, which is often the case when proceedings are brought by one of the above regulators. Therefore, directors and their insurers should be advised that the costs incurred in defending these proceedings cannot be indemnified until there is a finding in the director's favour.

Insurance Regulatory and Development Authority ("IRDA")

Directors of Indian companies and their insurers must also be mindful of the influence of the regulator of Indian insurance activities, IRDA. IRDA's chairman and other members are appointed by the government of India, which some consider may undermine its independence. Indeed, IRDA has been known to use its influence to pressurise insurers to act in accordance with public opinion despite the insurers' legal arguments to the contrary.

Indian Courts

Court proceedings in India are also notoriously drawn out and complicated. It is not uncommon for cases to take ten to fifteen years to be determined, which may affect directors and their insurers whose only options are to wait and see what happens. This also may be particularly burdensome for individual directors, given the prohibition on defence costs reimbursement under section 201 Companies Act. That said, the Indian legal system is currently undergoing a renaissance, and there is hope that foreign firms may soon be able to participate in the Indian legal market, which will hopefully give impetus to the Indian judicial system to become more efficient.


The risk of regulatory proceedings against directors is only likely to increase as investment in India's economy grows and more stakeholders become involved. The outcome of the Satyam scandal, and the several insider trading cases determined recently, is also likely to shape the landscape of Indian corporate governance regulation in the near future. In the face of these hazards, D&O insurance can be a useful option for companies and their directors, but it is important that the parties understand the risks and extent of coverage actually available under Indian Law.

If you require further advice on Corporate Governance, D&O, or Financial Lines Insurance/Reinsurance issues in India, please contact either Nilam Sharma or Kirsten Addison-Smith.

1Ministry of Corporate Affairs, Annual Report, 2007-2008.

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