Geopolitical conflicts pose legal, regulatory compliance challenges to industries, says expert

Geopolitical conflicts pose mounting legal and regulatory compliance challenges for India-based multinational firms that operate in foreign jurisdictions, says Varun Singh, Founder and Managing Partner, Foresight Law Offices India.

In his responses to Fortune India, Singh said armed conflict, sanctions and embargoes, and interruptions in global trading routes may dramatically impact the procurement, cost, and delivery of goods and services in global supply chains. “Geopolitical risks have transitioned from being an operational risk to being considered a material compliance and governance risk, requiring formal disclosures and established processes for managing this risk, as well as oversight from the Board of Directors of the company”, he said.

Sebi's new rules at a glance

According to Singh, the Securities and Exchange Board of India's (Sebi's) new rules is meant to enhance business risk disclosure requirements through its regulatory framework. “The Sebi (Listing Obligations and Disclosure Requirements) Regulations 2015, specifically Regulation 30, require listed companies to disclose all information which their board of directors considers important for their business operations and financial results. The disclosure requirements become mandatory when geopolitical events create supply chain problems, force companies to stop operating in certain markets, and impose partial or complete sanctions. The Business Responsibility and Sustainability Report (BRSR) framework requires companies to identify and disclose all material risks which can impact their business operations and sustainability efforts he said adding that Indian companies now report geopolitical risk as an important business risk because they need to assess how this factor will affect their capacity to operate, ship products, and handle energy resources, which they use to run their businesses,” he said.

Commenting on the new requirements, he said it also call for a greater financial responsibility for the board of directors and Risk Management Committees. “Under Sebi’s governance framework, the role of the risk management committee is being expanded to allow for developing and monitoring an enterprise risk management system that can deal with newly emerging risks. Environmental, Social and Governance (ESG) frameworks are increasingly being associated with geopolitical risk. The BRSR guidelines from Sebi outline the process for reporting material business and operational risks, as well as providing adequate disclosures to the investing public concerning each of these risks and how these will be mitigated by management. As a result, businesses must now evaluate their exposure to political instability, fragmentation in regulations, and vulnerabilities in their supply chains with respect to political or military conflict in other countries or regions. Investors who are institutional players have also begun to integrate ESG assessment criteria into their investment evaluations and decision-making processes," he explained.

In addition to potential business risks, businesses that have engaged in international trade could be legally vulnerable due to worldwide military conflicts. “The inability of one party to perform under a contract could cause the other party to seek a judicial remedy by suing for breach of contract. Under the Indian Contract Act, 1872, the courts distinguish between force majeure and the doctrine of frustration. If the agreement specifically provides for events such as war or blockades, then the contractual provisions will generally be given effect over the common law doctrine of frustration and any applicable statute” he said.

Overall, boards of directors have started paying more attention to geopolitical volatility (fallout from international events) as they see it becoming increasingly important to their overall strategy, he added.