An interview with Umesh Pratapa: “Companies with a global footprint need to have strong risk management systems in place”

I recently spoke to Umesh Pratapa whose book on Directors and Officers Liability (D&O) is expected shortly. Given his four-plus decades of first-hand experience in the Indian insurance industry, he shares insights on how a corporate/commercial market – predominantly property class – began embracing the liability class. More importantly, what lies in store for boards and independent directors – with a climate breakdown staring us in the face?

Over these years Umesh has worn several hats – lecturer, insurer, broker, lawyer, and author. He is currently an independent consultant in liability insurance. Umesh is a recipient of the IKON (International Knowledge and Opportunities Network) Dronacharya of the Year award in June 2018. He is a member of the Institute of Directors (IOD). He chaired the Working Group constituted by the Insurance Regulatory and Development Authority of India (IRDAI) to Study Cyber Liability Insurance.

Praveen Gupta: What steered a predominant property class-driven corporate/commercial market that India was – during the 1980s – towards the ESG zone? 

P. Umesh: The Satyam story is certainly one of the main triggers for an intense discussion and renewed interest in corporate governance in India. Interestingly this fraud at Satyam was not discovered by an external agency. But it was the admission followed by the resignation of B. Ramalinga Raju, founder, and CEO of Satyam Computers that brought out the fraud. Immediate investigation by the Government of India and action by the regulators from the USA, since shares of Satyam were also listed there, brought an increased focus on corporate governance and the need for stricter rules and better compliance.

This subject has also acquired attention thanks to one corporate scam after another getting unearthed in various parts of the world. The discovery and reporting of these scams were accelerated because of legislative and regulatory activism, coupled with the fact that the Indian economy was opening, inviting closer scrutiny from the global fraternity. D&O policy gained traction once Indian companies started getting listed abroad.

As regards Environmental Society and Governance (ESG), as we understand it today, it was the Bhopal Gas Tragedy, which sparked a furious debate for stricter regulations and better safety standards for environment protection. It also led to the enactment of The Environment Protection Act, of 1986. In terms of specifics, it was in the year 2012, SEBI made it mandatory for the top 100 listed firms to have a business responsibility report and in the year 2023 introduced new norms for ESG disclosures by the top 1,000 listed entities by market capitalization.

PG: Do you see PIL as a precursor to class action? We are yet to see one.

PU: To begin with – Public Interest Litigation (PIL) is not defined by any law in India. It is not filed by the affected person but by another person for the greater good of society. I do not see PIL as a tool or facilitator for class action, the goals of both instruments being different. PIL is used for public good whereas class action is for the relief of the affected parties. While it was possible to file a representative suit under the CPC (Order I, Rule 8), nothing significant has happened so far. Only after specific provisions were incorporated under other statutes like The Companies Act of 2013, and the Consumer Protection Act of 2019, talk of a class action has gained momentum.

I feel third-party funding may prove catalytic in this area. The advent of “third-party funding” in India is likely to provide an infrastructural platform for classes to come together and receive funding to pursue legitimate actions of enforcement of rights. Contrary to what happened in some jurisdictions class actions may follow, instead of preceding, the development of third-party funding. It would be no surprise if third-party funding contributes significantly to the evolution of a sophisticated class action regime.

PG: Despite the onerous liability of independent directors – D&O solution remains commoditised?

PU: Yes. Perhaps unavoidable in big markets like India, till claims start surfacing posing unexpected challenges and resulting in unpleasant surprises to all insurance supply chains. It is imperative for the insurance providers to underscore the intricacies at play, while it is equally important for purchasers to grasp and acknowledge these complexities. Informed buying is as important as informed selling.

Coming to the question of Independent Directors – the Guidelines on the Appointment of Independent Directors and Process of Board Evaluation issued by CII on 5th February 2024 are very timely. While in a few cases, independent directors did not act the way they were expected to act, resulting in questioning the very relevance of that institution, independent directors do play a major role in ensuring compliance with all relevant norms for better corporate governance.

The Companies Act, 2013 – Sec IV Code for independent directors – Manner of appointments makes a reference to D&O policy as under: (d) provision for Directors and Officers (D and O) insurance, if any. The appointment of independent directors shall be formalised through a letter of appointment, which shall set out, besides other things, provision for D&O insurance, if any.

Recognising the importance of protection afforded by D&O insurance for independent directors, SEBI has mandated this policy for the top 1000 entities by market capitalization. If independent directors evince interest to read and understand the D&O policy and demand appropriate coverage, it will ‘decommoditise’ the policy, if I can use that expression. There was a case where a director insisted on having a D&O policy of certain features in place before joining the board. It is necessary for all directors, not only independent directors, to at least have a primary understanding of the D&O policy.

PG: While the U.S. SEC continues to dilly-dally, significant progress has been made in the EU. The Corporate Sustainability Reporting Directive came into force at the start of 2024. This calls for Indian boards with global footprints to be more robust in risk management.

PU: The EU has always been ahead in these matters like ESG or data protection. As per the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD), certain companies are required to exercise due diligence in their supply chains in accordance with human rights and environmental due diligence obligations. There are significant fines for failures. While in India, corporates are yet to see regulatory interventions, companies with a global footprint need to have strong risk management systems in place lest they face adverse consequences. Any greenwashing will prove to be very costly in terms of financial implications and reputational damage.

PG: The carbon footprint of directors and officers is easy to monitor – thanks to technology. Most recently Elon Musk and Taylor Swift have been under vigorous scrutiny.

PU: These are viral news. Sometimes revival of economies is attributed to some of the celebrity personalities. Approaching the subject dispassionately, D&O policy would view it in terms of whether there was any wrongful act and whether it would attract any exclusion. Merely logging in more air miles and facing the allegations about carbon pollution may not result in denial of the claim unless these activities are prohibited by law or insurance companies choose not to underwrite them.

PG: Given the rise in environmental activism in many jurisdictions, aren’t Indian directors and officers increasingly more vulnerable when travelling there?

PU: That is a genuine concern. Given the rise in environmental activism, directors are certainly exposed to these risks. Criminal actions on these violations appear unlikely soon. One needs to watch out for how the new legal concept of ecocide develops. Wikipedia describes ecocide as “the mass destruction of nature by humans.[1] Ecocide threatens all human populations who are dependent on natural resources for maintaining ecosystems and ensuring their ability to support future generations”. Europe is at the forefront in this area also.

D&O risks being global in nature, it is necessary for the D&O policy to respond to these situations. One of the examples I can think of is coverage for extradition proceedings which assumed significance following the high-profile extradition of three British bankers to the USA to face fraud charges.

As regards kidnap and ransom risks, there is some coverage available under the D&O policy. This coverage provides for response costs in the event of a kidnap of an insured person. Coverage is for only response costs and not for settlements and that too when the kidnap takes place outside the country of the insured person’s normal and ordinary residence. This coverage, therefore, cannot be seen as a substitute for a kidnap & ransom insurance policy. One also needs to check the excluded territories for this coverage and other stipulations.

PG: Climate breakdown, biodiversity loss and pollution are transforming management liability triggers into a polycrisis. How should D&O evolve?

PU: These should worry all as individuals first. Climate risks are here before us and we need to address them now. Obviously, the first step is to get on board people who have a good understanding of climate risks in the wider sense of the word. It is necessary to be compliant on substantiality and on disclosures, more as a matter of conviction than just compliance.

As regards climate change risks, whether gradual or otherwise, directors could be exposed to liability if they fail to grasp the seriousness of the issues and comply with the relevant laws. Greenwashing may also lead to litigation. Greenwashing refers to erroneous, misleading, or unsubstantiated claims on ESG commitments or failure to deliver on them. D&O policy should respond when directors encounter claims in spite of all the care and caution they exercise.

Particularly with regard to climate risks, investigations by various regulators would be a concern. Regulations are getting more stringent and regulators are getting tougher. There are cases in India and abroad resulting from ESG noncompliance. The statement of Mr. Lester Brown “We have not inherited this earth from our forefathers; we have borrowed it from our children” should be a word of caution and source of inspiration and a stark reminder for all.

The world would be a safe place only when we deeply appreciate the definition of the environment as given in The Environment (Protection) Act, 1986, as “inter-relationship which exists among and between water, air and land, and human beings, other living creatures, plants, micro-organisms and property”. In the Indian context climate litigation at present is mainly focused on environmental pollution. But it is yet to reach a noticeable phase against the boards. In some cases, the National Green Tribunal (NGT) did issue directions for appropriate actions against the officials for violations of the acts.

PG: What would be your guidance in terms of adequacy of cover?

PU: Very important issue. A D&O policy should not be seen as another policy purchase. It is to be treated as an integral part of board risk management. While there is no set rule that determines the scope and limit of the policy, it helps to get the exposure study and policy health check done by professionals. Current and emerging exposures need to be factored in for this purpose.

The limit of indemnity to be chosen depends upon many factors like the company’s nature of operations, footprint, shareholding pattern, asset size and revenue generation territories, etc. For listed companies, market capitalisation would also be a factor. Peer group comparison also gives a good idea. It would be useful to seek benchmarking and data analytics reports, well in advance, from the insurance broker and insurer to evaluate various alternatives to choose the limit of indemnity.

PG: To what extent does your book de-mystify D&O/management liability?

PU: The primary purpose of the book is to demystify the D&O liability insurance concepts and coverage. Once the conceptual foundations are well laid, it becomes that much easier to build further on them. This book talks about the various exposures the directors have and the ways to mitigate them. It is not enough if a company buys a policy as a mere tick box exercise.

A well-considered and regularly reviewed approach is necessary to ensure that insurance serves its intended purpose. It needs to understand the coverage, exclusions, extensions and various terms and conditions including what it needs to comply with during the policy period and in the event of a claim.

There were cases when a company, despite having a D&O policy, was not aware of the existence of the policy, and had to forego a claim. The language used in a D&O policy is not really that complex. One only needs to realise the importance of the policy and read the document carefully.

My idea through the book is to facilitate understanding. It does not dispense with specialist advice though. The ideal way is to behave as if uninsured – that is to be professionally committed to the implementation of all stipulations and treat insurance as the last port of call.

PG: Many thanks Umesh for sharing an excellent perspective of several decades and where it is headed. My best wishes for your forthcoming book launch.

This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.