Personal risks facing board members in India



FW moderates a discussion looking at the personal risks facing board members in India between Ranji Dua at Dua Associates, Mahesh Chainani at Howden Insurance Brokers and Sushant Sarin at Tata AIG General Insurance Company.

FW: To what extent have you seen an increase in the personal liability risk facing directors and officers in India?

Sarin: There has been a remarkable increase in the personal liability risk facing directors and officers in India, especially over the last 24 months. Many factors are driving this. For business managers, good economic growth now means heightened impact of business decisions: a 1 percent fall in market capitalisation translates into huge erosion of investor wealth. Greater complexity of business requires maintaining an increasingly precarious balance between competing stakeholder interests. Global integration exposes company managements not only to multiplicity of ever changing laws and regulations, but also to statutes with extra-territorial jurisdiction. In addition to greater individual scrutiny from regulators, an increasing emphasis on transparency means wider public spotlight on all managerial actions. The result is Indian D&Os face much more personal liability today.

Dua: Of late the personal liability risk facing directors and officers has increasingly become a matter of concern, especially after the Satyam case. D&Os find themselves in a complex world where they must tread carefully. Perceptions have changed. Company directorship is no longer a sinecure for retired persons. Prospective directors, before they take-up positions in a company, take great care to satisfy themselves of the reputation of the company and its promoters; they check for financial probity, duly certified by the external auditors of the company; they also check that there is requisite coverage and indemnity for D&Os. The importance given to corporate governance is apparent from the fact that the Department of Company Affairs in the Ministry of Law, Justice and Company Affairs, Government of India has now been made into a standalone Ministry of Corporate Affairs. Overall, there is much more awareness and greater emphasis on enforcement of laws, regulations and standards.

Chainani: There has been, in the past, a perception that the Indian market is a very low risk market, especially with regard to D&Os being held personally responsible, as compared to other countries. However, there has been a change on the ground recently, for different reasons. As Indian companies have started looking outwards for their business prospects, both in terms of new markets outside India, as well as physically establishing a presence outside the country, they have to deal with more challenges than those they may be used to. Another reason is that there has also been an increase in foreign investment into Indian companies and this brings into play investors who have different ways of looking at performance and who may not think twice before holding the directors and officers responsible for unsatisfactory performance.

FW: Has there been a rise in related litigation? What types of claims are being brought against D&Os?

Dua: D&O related litigation has increased. The courts of company magistrates in every jurisdiction are flooded with thousands of company related prosecutions. Special courts for economic offences have been set up. The Serious Fraud Investigation Office, set up in 2003, has investigated 42 companies and filed 835 prosecutions. Litigation also arises under industry specific statutes and laws governing operations such as labour and employment laws. Claims against D&Os can be for their vicarious liability or their personal or direct liability. Under civil law D&Os can be held vicariously liable for acts of the company. A typical example of this would be where widespread damage to the public at large has been caused by gross acts of negligence of the company. In criminal law it is usual for the company to be made a defendant along with its directors and some officers. The trial process is slow and this causes immense harassment. Many statutes carry their own definition of who would be the “deemed person in default” in case of an offence by a company, and this frequently includes the directors. The courts have however held that where there is no direct allegation against a director being entrusted with a particular duty, then that director cannot be held personally responsible for the negligent performance of the duty by another.

Chainani: There does seem to be an increase in claim notifications that are being made under D&O policies compared to the past. Typically the larger number of claims are more a result of EPL related violations arising out of the increased acquisitions by Indian companies overseas and perhaps being a bit naïve of how to handle integration issues arising from that. The other area is regulatory related claims from various departments of government as they try to bring more discipline into the marketplace to protect various stakeholders’ interests and ensure proper adherence to the rules and regulations.

Sarin: There has been a clear rise in litigation. Actions against D&Os are being brought for a notably wide range of wrongful acts. Claims include allegations of insider trading, self dealing, misstatement of accounts, misleading customers, bribery, failure to honour employment contracts, discrimination and harassment, false statements to government authorities, and more. We are also seeing class actions against D&Os. There are claims for tax violations and breach of duty to minority shareholders, and claims arising from mergers and acquisitions. 

Stakeholders claiming against D&Os include shareholders, government, customers, distributors and employees. Charges being brought are both civil and criminal. D&Os are being sued in Indian courts as well as abroad. Accompanying the increase in litigation is also an increase in the quantum of damages claimed. In a recent composite action against D&Os and the Indian company, the damages claimed are in excess of US$5bn.

FW: Have there been any recent legal and regulatory changes in India which affect the personal risks of D&Os?

Chainani: There has been some recent activity in the past few years as far as regulations for public listed companies are concerned. There is also a draft regulation waiting to be finalised with regard to proposed changes to the current Companies Act, which will also lead to some more regulatory pressures on companies with regard to greater scrutiny and compliance. However it is important to also note that regulations outside India, such as the FCPA, UK Bribery Act, EEOC regulations, and so on, also impact D&Os of Indian companies. This is an important fact that a lot of Indian companies have not yet begun to realise.

Sarin: Talk of legal and regulatory changes should not be confined to just new legislation, but should include implementation of existing laws and regulation also. In this respect, the writing is on the wall: stricter implementation of laws by government and regulators is evident almost every week. Whether it is the recent blacklisting of 150,000 companies by the Ministry of Corporate Affairs, or the Securities & Exchange Board of India (SEBI) wanting mutual funds to adopt the role of conscience-keepers of listed firms by actively raising their voice on the listed companies’ corporate governance practices, there is visible and impactful broad brush action. In terms of legislation, the Companies Bill 2009 provides statutory footing to ‘class’ action in India and provides for the establishment of special courts for speedy trial of offences under the Companies Act. Each one of the changes in this illustrative list is increasing the personal risk faced by D&Os.

Dua: Recently, enacted statutes that contain provisions deeming D&Os to be persons in default are many. In the last two decades laws governing almost every industry have been enacted or strengthened. Risks have also increased because of greater focus on the environment and forests, and other laws affecting the operations of any company. The corporate veil has steadily become easier to pierce. Further, a number of industry regulators have also been given statutory powers. The right to information can now be utilised to obtain information that is not in the public domain from certain companies, mainly those in which government has a stake. The role of the audit committee of the board of directors of a company has become increasingly important and the members of audit committees more demanding. The inability of companies to find appropriate persons to be independent directors on their boards has led to the Government of India recently issuing circulars calling upon the registrars of companies not to automatically prosecute all the directors without differentiating between inside directors and non-executive directors.

FW: What kinds of prosecutions, settlements and penalties have you seen imposed upon D&Os in India? Are there any particular cases worth highlighting?

Sarin: SEBI alone has filed hundreds of criminal complaints before courts for violation of securities laws by persons as well as entities, which may lead to imprisonment or fines. Civil enforcement actions include issuing directions such as orders barring persons from acting as directors, barring companies from accessing markets, suspension or cancellation of certificate of registration, imposition of monetary penalty, pursuing suits and appeals in courts. Settlements include consent orders. The consent order mechanism is an out-of-court settlement of administrative or civil proceedings between the regulator and violators of securities laws. SEBI has passed more than 1000 consent orders since April 2007 when this settlement system was introduced. Amounts have been as high as INR 500m. A review of the consent order mechanism is currently underway to ensure uniformity in settlement of cases between the regulator and violators of securities laws. One of the objectives of the exercise is to ensure that the action taken is in keeping with the magnitude of the alleged violation. 

Dua: Criminal prosecutions under various laws result in penalties that range from imprisonment to imposition of fines. Since composition of offences is quite usual, it is frequently resorted to wherever possible and the matter is closed upon payment of a fine. Certain matters can also be settled between the complainant and the defendants and while settlements in civil cases are known these are by no means routine. Two cases worth highlighting are those of Union Carbide and the recent Satyam case. The first is the Bhopal gas leak case of 1984 where recently seven of the D&Os were convicted of causing death by negligence of thousands of people. The second concerns corporate fraud and is still ongoing where the D&Os of the company have had to face investigations by various agencies and regulators. Cases where D&Os have been imprisoned have risen sharply. Some corporate frauds have been considered so serious that D&Os have been denied bail for long periods.

Chainani: In the Indian market there have been a number of claim notifications that have been made in the past couple of years. As D&O claims are typically long tailed in nature, we have not yet reached the stage where there have been many settlements. A number of claims are still in the defence cost payment stage while there are some that have been settled. 

One of the big cases was of course relating to Satyam Computers and this case has had a lot of publicity in the local press in India. Not only did it lead to a lot of new policies being sold but it also resulted in a lot of companies looking at the language and coverage of their existing policies. Another case was relating to HP Computers, India, and its managing director being held responsible for the death of one of its staffers while being transported home in the company vehicle.

FW: Given the potential costs associated with defending claims against D&Os, are you seeing an increased take up in D&O liability insurance in India?

Dua: The expense associated with defending a claim has sharply increased especially with companies going global and being open to threats of potential litigation all over the world. Many of the prominent and professionally managed companies, including publically listed companies, do carry D&O policies. This was not the case a decade ago. 

Chainani: In the Indian judicial system, it is common for cases to drag on for years. This perception did make a lot of companies in India in the past not want to take a D&O policy as the feeling was that since the matter could take years to be resolved, a policy would not be of much help. However, as awareness of these policies has grown and as the realisation that defence costs are also covered by the policies has been realised, companies have started looking at the policy more favourably. Law firms in India are also now charging fees that are comparable to international law firms. Hence, any kind of legal activity is not necessarily cheap and the coverage of defence costs has made the D&O policy quite popular among Indian corporates.

Sarin: Clearly we are seeing more companies buying D&O insurance, and more companies buying more D&O insurance in terms of limits, than hitherto. More than half our existing customers are opting for higher limits. New age industries such as IT and pharmaceuticals almost invariably consider taking cover. Companies going for an initial listing are another category buying this cover. Alert businesses such as PE firms and asset management companies are driving the purchase of D&O insurance by companies they invest in. Companies with float abroad or those with business exposure to foreign markets show an increase in their take up.

FW: What advice would you give to D&Os on selecting a policy that is appropriate for both the individual and the company? How important is it to properly assess the terms, coverage and pricing of available policies?

Chainani: In India it is still very common to see Indian companies make a decision to purchase a D&O policy primarily on a price basis. Price should be just one of the components of the decision coming after areas of coverage, exclusions, deductibles, and so on. There is still too little time spent on reviewing and understanding difference policy wordings and the implications of some of the items. At times a lot of attention may be placed on matters that are not very important while overlooking critical areas. It is also very common for clients to insist on extending the policy to cover the entity also without realising the implications of coverage for the D&Os at the time of an entity claim. There remains a gap in the understanding of the policy and what it is meant for among all the parties involved, be it customers, intermediaries and even insurance companies.

Sarin: As the primary purpose of D&O insurance is to protect directors and officers from personal liability, it is important that they rigorously evaluate the protection they are buying. While multiplicity of forms means choice, nuanced differences in wording mean that coverage and exclusion clauses, and provisions such as severability and non-rescindability must be closely examined. While most buyers get this right, equally important for effective protection is the claims handling ability of the underwriter. Four things must be checked: is the coverage offered by the insurer based on his own form or a ‘borrowed’ form? Is the limit offered his own capacity or a reinsurer’s? How much experience does the insurer have in handling and settling D&O claims, and do they have ability to do so in all jurisdictions where the client operates? From the perspective of both insured persons and insured entities, adequate limits must be taken. Pricing is undoubtedly a driver but, given the current low pricing levels, this is not of as much importance as coverage, ability and limits.

Dua: Price, coverage, and exclusions, though important, should not be the sole determinants in policy selection. The information regarding the claim handling experience of other insured companies and D&Os must be collected. As of now this can only be done by word of mouth.

FW: Looking ahead, do you see more Indian companies taking a proactive approach to risk management tailored specifically to protecting board members?

Sarin: One of the definitive developments in coming days will relate to stronger protection for board members. As businesses grow in scale, expand to new jurisdictions, create profits from innovative business models, they need wide talent in the boardroom. Eminent talent is available. But professionals lending their experience, knowledge or acumen to companies want to be secured against personal liabilities that may arise from managerial decisions and actions. After a corporate fraud case broke in early 2009, around 300 independent directors resigned from their positions worried about their personal liability and their reputation. This has brought into focus the need for protecting boards. India Inc. is concerned and has started taking steps toward this end. These include indemnity agreements, D&O insurance, and even wider discussions with lawmakers on codifying the types and extent of liability especially where directors and officers have acted bona fide and have not been remiss.

Dua: A proactive approach to risk management is already being seen. 

This includes designating the officer in-charge of operations wherever possible. Separate persons may be designated for separate functions. A compliance officer ensuring statutory and regulatory compliance is also put in place by more proactive companies. The compliance officer is required to provide a detailed compliance statement to the board of directors. The compliance officer or another designated officer, director or consultant receives whistleblower information. A proactive approach to risk management requires whistleblower policies to be put in place which is currently not mandatory. We do expect to see better risk management techniques emerging and we hope that in the next few years the role and responsibilities of D&Os will be better defined.

Chainani: I think this process has already started. A number of corporates now have a chief risk officer in place. With business today being done on a global basis, Indian executives are beginning to learn and understand best practices from across the world. Also, with the financial crisis of the past few years, the awareness that directors’ decisions are being intensely scrutinised and directors are being held personally responsible for their actions/inactions has made them seek ways to protect themselves. Even with regard to D&O policies, the number of clients who now want to discuss policy coverage in detail and who have questions regarding the wording or certain situations is rising steadily, and that is very positive for the market.


Ranji Dua is a partner and the founder of Dua Associates. Mr Dua has a vast breadth of experience in fields including corporate law, mergers and acquisitions, privatisations, project finance, public issues, foreign investment, corporate structuring/restructuring, and commercial aspects of doing business in India. He has been actively involved in the process of regulatory reforms in India consistent with India’s multilateral trade policy commitments. Mr Dua is a founder member of the American Chamber of Commerce in India and continues to be an invited member on their executive board. He can be contacted on +91 11 2371 4408 or by email:

Mahesh Chainani is a senior vice president and national head of Liability Lines at Howden Insurance Brokers, India. Mr Chainani has been with Howden India for over seven years in various functions. He has been heading the Liability Lines business for around four years. Mr Chainani can be contacted on +91 22 6655 8811 or by email:

Sushant Sarin is national head of Liabilities at Tata AIG General Insurance Company. Mr Sarin has put in over 20 years servicing the insurance requirements of companies, spanning the entire spectrum of property, profits, liability and personnel related risk exposures of business enterprises. He can be contacted on +91 22 6682 2433 or by email:

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Ranji Dua

Dua Associates


Mahesh Chainani

Howden Insurance Brokers


Sushant Sarin

Tata AIG General Insurance Company

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