German corporations and German medium-sized businesses are increasingly represented in India - not only through direct export activities or with the help of sales representatives, but also with their own subsidiaries or in joint venture (JV) companies. But India is not an easy market, but a real challenge and always good for unexpected situations and nasty surprises. This applies not only to “newcomers to India”, but also to companies that have already been operating in India for many years.

These imponderables and experiences from a large number of projects have helped Dr. Wamser + Batra GmbH to develop further service products that are tailored to German parent companies in order to support them in the management and control of their Indian subsidiary or joint venture company. One of these is the implementation of a comprehensive “Corporate Compliance Audit“at German subsidiaries in India.

Requirements & Personal Liability Risks for Directors of Indian Companies

Non-compliance with corporate compliance requirements has often been tolerated by the authorities in India in recent decades. From our own experience, we can report that just a few years ago hardly any Indian companies actually adhered to all the requirements. Instead, “things like this” were preferred to be regulated in an “unofficial” or “informal” way. Of course there are also positive exceptions! As a result, many Indian managers still have little understanding of the urgency of the issue of “corporate compliance” and the corresponding requirements are only given very low priority in everyday business. This is especially true if your Indian management has previously worked for purely Indian companies.

This is primarily about rights and obligations, since the parent company or employees of the parent company often also have functions in the bodies of the Indian subsidiary (e.g. a “Private Limited Company” / “Pvt. Ltd.”, comparable to a German GmbH). , as a “shareholder” or as a “director”. However, only very few people are aware of the associated requirements, obligations and personal liability risks consciously.

There is therefore often a lack of information for German board members about the rights and obligations of the board functions. “You cannot simply “delegate” the duties and tasks that arise from your role as a board member of an Indian company to the local management. For example, you have to be able to prove that you have taken “due care” to monitor compliance with corporate compliance, says Mike D. Batra, Managing Director of Dr. Wamser + Batra GmbH. In most cases, fulfilling all duties and tasks is not really possible from far away Germany or is simply lost in the day-to-day business of the German parent company, with the support of a large number of foreign markets.

Negative consequences for companies and directors of non-compliance

This can result in significant problems in practice, as numerous foreign companies have already experienced. These include, among others:

  1. Lack of documentation of the legal requirements of Indian corporate law, such as a lack of resolutions to provide evidence of board meetings with the participation of German directors, etc. leads to Delays in approval processes.
  2. In case of dispute with your own Indian management or joint venture partner, past rule violations are sometimes used to put you under pressure, for example Payment of excessive severance pay to reach you or to “blacken” you to the authorities. The problem here is that often the very people who actually caused the violations (e.g. your local management) could later use them against you due to their liability as a “shareholder” / “director”. There is a risk of a “deliberate violation of the rules” in order to be able to put you under pressure at some point later.
  3. Compliance violations are not trivial offenses in India either, but are increasingly becoming a problem criminal or tax criminal proceedings. In the meantime, it is also being checked whether there are any failures, breaches of duty, negligence or omissions on the part of directors or shareholders based in Germany and appropriate proceedings are being initiated.
  4. This also applies to any proper taxation of Indian income. There are also some German employees here, provided they take on functions in the organs of the Indian company personally liable.

“These problems often exist due to past failures and foreign companies are also increasingly confronted with them, as Indian authorities have increasingly scrutinized these in recent years.”says Mike D. Batra. As the Indian authorities become increasingly professional and network better with each other, the risk of discovery also increases and the topic of “corporate compliance” is becoming more and more important for local German companies. A comprehensive consideration and assessment of the status quo as part of a corporate compliance audit is of great importance in this regard.

More information about the topic auditing can be found on our website. We are also happy to provide you with an individual consultation at any time.