Businesses behaving badly

With a rise in corporate misdeeds, India’s courts and parliament are rethinking the definition and treatment of executive liability, writes Vikramaditya Khanna

India’s economic rise has been accompanied by greater revelations of corporate wrongdoing. Whether we look at the Satyam scandal, the 2G or coal controversies, or the alleged behaviour of Vijay Mallya and Nirav Modi, corporate wrongdoing needs to be addressed. The law has responded – in the past decade or so the Supreme Court and the parliament have taken steps to police and sanction corporate wrongdoing. This article examines these changes, how they compare to global developments and what might be on the horizon.

Before discussing the changes in Indian law, it is important to remind ourselves that corporations are legal fictions that don’t act on their own. It is their employees who act, but they are often under-deterred because they don’t have sufficient assets to pay for the harm caused, they may be difficult to identify and sanction, or they may be unaware that their behaviour is a violation of the law.

This leads to one of the key objectives of corporate liability – providing further incentives to corporations to monitor their employees’ behaviour to reduce wrongdoing. Other parties may also be good monitors, such as the supervisors of those employees, and imposing liability on them can further incentivize monitoring of employee wrongdoing. Liability for corporate employers and supervisors has witnessed substantial growth in India in the past 20 years and this article will focus on them.

The Supreme Court had held, in Assistant Commissioner v Valuable Textiles Limited (2003), that a company cannot be criminally prosecuted for offences that carry a mandatory prison term, as a corporate entity cannot be put in jail. However, that holding was reversed two years later, by a five-judge bench in the Supreme Court’s decision in Standard Chartered Bank v Directorate of Enforcement (2005), creating the base for a broader application of the concept of corporate criminal liability in India.

Vikramaditya Khanna is the William W Cook professor of law and faculty co-director of the Joint Centre for Global Corporate and Financial Law and Policy, a collaboration between the University of Michigan and Jindal Global Law School.