The case against Satyam Computer Services Limited in 2009 demonstrates the contradictions present in India’s corporate criminal justice system. The company’s founder, B. Ramalinga Raju, was imprisoned for committing fraud; at the same time, however, after its dissolution, shareholders were left without compensation for their losses, resulting in incomplete corporate accountability. Likewise, in 2019 SEBI imposed a ₹1,310 crore fine on the National Stock Exchange as a result of the NSE Co-Location Scam, although no former Chief Executive Officers were charged with any wrongdoing due to lack of evidence. These examples represent a consistent trend whereby corporations bear the financial consequences of their behaviours, while those who make decisions on behalf of the corporation generally escape criminal prosecution. The framework for corporate criminal liability in India is found in the Bharathiya Nyaya Sanhitha and the Companies Act 2013, which classify corporations as being “persons” under the law and therefore liable for criminal offences. This framework is, however, impeded by two main structural flaws. The first flaw is the identification doctrine or directing mind test as established by the decision in Iridium India Telecom Ltd. v Motorola Inc. (2011). This test limits corporate liability to actions taken by senior management personnel and does not address middle management or corporate culture and structure failures. The second flaw is that there are no statutory mechanisms in India through which corporations could be held criminally liable for failing to prevent wrongful acts conducted by their employees, which have been utilized successfully to achieve corporate accountability in both the UK and the US, allowing for the continuation of the corporate entity while also holding leadership accountable for their actions. This paper will investigate whether the Indian legal system applies its criminal liability principles primarily to punish corporate entities while allowing responsible individuals to avoid any criminal sanctions.
Corporate Criminal Liability in India: Statutory Framework and Doctrine
The Indian Corporate Criminal Law (CCL) regulatory framework appears to support the prosecution of entities (juristic) under section 447 of the Companies Act 2013; but, there continue to be extreme imbalances in the application and enforcement of those provisions. The Iridium India Telecom Ltd v. Motorola Inc. (2011) decision from the Supreme Court established the principle of “identification” (that the mens rea of the directing mind and will of the corporation is also imputed to the corporation); however, that development of the law has created paradoxically little if any circumstances for holding individuals accountable. Evidence of the separation/sufficient divide between the regulation and the prosecution of individuals is demonstrated by this: although SEBI, Enforcement Directorates and others are issuing significant civil monetary sanctions for violations of laws through financial corporations, the percentage of convicting individuals associated with that conduct (directors, officers) is extremely low which is 81% of the major corporate frauds resulted in no criminal charges against any person. Furthermore, the disparity between the punishment and culpability of entities and the punishment/culpability of individuals is compounded by the limitation of the sentencing authority of the courts and by the overall structure of the Indian procedural rules. In Standard Chartered Bank v. Director of Enforcement (2005), the court relieved the corporation from mandatory imprisonment by permitting the addition of monetary penalties instead; however, the courts are still struggling to pierce the corporate veil to hold individuals (i.e., executives) accountable. The CCL of India does not offer the types of compliance structures or statutory conditions for mandated probation or mandated monitoring as found in the UK and US. Therefore, the current reliance on compounding agreements and the administrative ease of settling corporate actions have established a system whereby the corporations are not subject to custody.
Comparative Analysis: UK and US Approaches
Both the United Kingdom (UK) and United States (US) provide regulatory options to enhance the development and use of “identification doctrine” and limit the possibility of regulatory stagnation within India. In 1972, Tesco Supermarkets Ltd v. Nattrass, an early case in British case law, established that “directing minds” had to meet India’s challenging standard of forming sufficient evidence. However, since that time, there has been a movement in the UK Parliament toward adopting a proactive form of legislation, for example the Bribery Act 2010 and Criminal Finances Act 2017 have created specifically stricter corporate liability (including a shift in the burden of proof) for that organisation’s failure to take measures to ensure compliance with statutory requirements. The Senior Managers and Certification Regime (SMCR) addresses the accountability gap between corporations and individuals by placing liability directly on the corporate executive for systemic failures within that organisation. The consequences of this are magnified through the use of Deferred Prosecution Agreements (DPAs) that encourage corporations to cooperate with prosecutors by providing evidence against individuals who have acted unlawfully.
Compared to the UK, the US agency has established a broader reach of respondent superior liability in which a corporation may be held liable for any acts of an agent performed within the scope of employment of that agent. A guiding principle of this is the Department of Justice’s (DOJ) policy of generous credit to corporations that cooperate with DOJ in cases against corporations if they also cooperate in cases against individuals as required by the Yates Memo. Additionally, the “Responsible Corporate Officer” (RCO) (Park) doctrine holds corporate executives personally liable for violations of the law related to public welfare, even if they did not have direct involvement in such violations. As opposed to India, which has limited options for sentencing, the UK and the US provide broad latitude for judges to impose fines and impose civil monetary penalties.
Gaps in Indian Law
When compared to the mature law enforcement regimes in the UK and the US, the current framework for corporate criminal liability in India has several structural weaknesses. At a basic level, there is currently no statute in India that establishes a failure to prevent an employee from committing a crime (under the authority of their job description) on behalf of the corporation. Instead, liability continues to rely primarily upon an identification doctrine which requires proof that the employee who committed the crime did so with “the directing mind and will” of the corporation. This highly technical and inflexible evidentiary standard has virtually eliminated corporate liability for financial crime-related issues due to the increasingly common occurrence of individuals below a certain rank committing systemic compliance failures without being explicitly authorised to do so. Compounding this issue, the Companies Act 2013 and the Bharathiya Nyaya Sanhitha (BNS) do not contain any provisions that would impose a reverse-burden compliance obligation on corporations for mitigating culpability by establishing an adequate system of internal controls, board-level oversight, whistleblower protection, and self-reporting. Such provisions are expressly incentivised under UK and US law for purposes of mitigating potential sentences. Similarly, due to the technical requirements for proving individual culpability as established by UK and US laws, the ability to hold directors and senior officers criminally responsible for their decisions is weakened significantly; unless there is direct evidence of their participation in the commission of the crime.
Proposed Statutory Reforms
A new set of statutory and other institutional reforms linked together and relating to corporate criminal liability of corporations in India must be introduced in order to more effectively address not only the corporate criminal misconduct and liability of organizations but also that of individuals associated with those organizations as well. A principal reform will be enacting a statutory corporate crime offense of ‘failure to prevent corporate misconduct’, for which corporations may be held strictly liable for all acts of fraud, bribery, and other financial crimes committed by employees acting within the apparent scope of their authority unless a corporation can affirmatively show that it had established and implemented proper and adequate measures to prevent such conduct. The establishment of such an offense, patterned after section 7 of the UK Bribery Act 2010, will shift the focus away from the probable insurmountability of proving a corporate senior management’s criminal intent to the systemic effectiveness of the corporation’s compliance. Additionally, the Corporations Act of India and all Indian State Sector laws relating to corporations should provide for a reverse burden of proof for corporations that demonstrate robust and effective compliance programs, including but not limited to:
- audit committees;
2) independent and effective whistle-blower mechanisms;
3) independent third-party compliance audits;
4) adequate and documented board level oversight regarding compliance risks; and
5) timely self-reporting of compliance violations.
Equally, the creation of a director accountability statute must also exist whereby a director or senior officer will be held personally liable (criminally) for reckless of grossly negligent actions whereby they fail in exercising adequate compliance oversight, willfully disregard known compliance risks or willfully obstruct compliance auditing.
CONCLUSION
Within India’s corporate crime laws, one can clearly see the conflicting demands of attempting to criminalize organisations that are comprised of ‘natural persons’. There is a basis for prosecution of corporations provided by the Doctrine regarding how (and whether) organisations should be prosecuted (the ‘directing mind’ test or theory of vicarious liability), but on the ground, actual enforcement indicates an inherent flaw: when corporations are penalised with monetary fines, the directors do not face the potential consequences of imprisonment. Thus, there is no ‘specific deterrent’ effect regarding executive (or director) accountability for their actions and, more broadly, when one corporation views its criminal fines simply as another cost of doing business, other corporations do likewise. In the UK and the US, this gap has been addressed through new statutes and new prosecution policies. The UK has created ‘failure to prevent’ offences that negate the requirement of establishing a link between the directing mind of an organisation; the UK creates an independent obligation for senior managers to take reasonable steps to prevent negligence from occurring; and the UK makes full use of the pressure on companies, through a deferred prosecution agreement, to unmask the responsible individuals. In the US, the Yates Memo institutionalises a new guideline for Federal prosecutors: that individual responsibility/culpability must always be a condition of corporate cooperation, and no immunity or settlement protection for corporate executives can be obtained through corporate cooperation. India’s future will depend upon legislative reform in multiple areas. A ‘failure-to-prevent’ statute would provide for the prosecution of systemically-complicit organisations that do not require establishing the involvement of a directing mind. Also, a ‘reverse burden of proof for compliance would provide incentives for companies to invest in compliance and ethics plans. Additionally, creating an expanded Director Responsibility Statute would criminalise negligent behaviour on the part of directors.
Author: Vishnu Vardhan
Juris Centre 