"The EU Directive imposes stringent compliance requirements on Indian businesses, leading to increased costs, operational changes, and potential liabilities."
Indian companies doing business with EU companies would be expected to meet EU' Standard according to the directive.
On May 24, 2024, the Council of the European Union adopted the Corporate Sustainability Due Diligence Directive – a long-arm EU legislation aimed at ensuring responsible business conduct globally. The Directive is published in the EU's Official Journal on 5 July 2024. Member states now have two years to enact suitable national laws, while the obligations must be given effect within three to five years i.e. from 2027 onwards.
Impact on Indian Companies
Considering the EU's position as India's largest trading partner with a
total trade volume of US$ 132 billion in 2023, the Directive's
adoption is particularly significant for India. Indian companies
are key business partners to EU companies in several sectors such
as energy, textiles, chemicals, consumer products, plastics and
automotives. They also operate within
the EU through group companies. Several Indian companies are
already contending with the EU's Carbon Border Adjustment
Mechanism and the Deforestation Regulation, both of which will
affect exports to the EU in critical sectors. The Directive may
further compound the woes faced by these companies.
Sweeping Scope of Obligations
The Directive applies to large EU companies (with more than 1000 employees and a worldwide turnover exceeding EUR 450 million), non-EU companies (with net turnover exceeding EUR 450 million in the EU) and parent companies of corporate groups meeting these thresholds.
They must incorporate human rights and environmental due diligence into their policies and risk management systems, identify and assess actual and potential adverse human rights and environmental impacts in their global supply chains and take suitable measures to prevent, mitigate, neutralise or remediate such impacts. Moreover, they must adopt and implement a climate transition plan aligning their business models and strategies with the Paris Agreement and the EU's climate neutrality goals.
Non-compliant companies will face financial penalties (up to 5% of net worldwide turnover), civil liability for damage caused to affected persons and potentially reputational damage where they fail to pay the penalty.
Increased Compliance and Cost Burden
Once the Directive is in force, Indian businesses deriving substantial income from the EU or doing business with EU companies would be subject to international and EU standards. These are often stricter than Indian law requirements, especially regarding the environment.
As a result, Indian companies directly under the Directive's purview should be prepared to comply with its extensive due diligence requirements. This includes establishing due diligence policies for themselves, subsidiaries and business partners as well as periodic monitoring of risks and reporting requirements. They will also need to obtain contractual assurances from business partners regarding compliance with the Directive's due diligence obligations.
Increased compliance could mean higher business costs – more so as companies are expected to ensure compliance by subsidiaries and business partners also. If any current practices are non-compliant, they must opt for alternate trading, procurement, pricing and employment practices. While well-established companies might still manage the higher burden, companies just beginning to find their feet in the EU will be hit hard by these strict norms.
Indian companies that are business partners of EU companies
would be expected to assist in compliance (including through
back-to-back contractual assurances from their own business
partners) and agree to contractual provisions intended to pass
through obligations imposed by the Directive. They may have to
subject themselves to measures to verify compliance.
Undoubtedly, this could lower the competitive advantage of Indian
companies reliant on weak domestic regulation and ineffective
enforcement.
Indian business partners of EU companies could also be asked to offer greater indemnity cover to protect against risks arising from obligations under the Directive. Again, this will inflate the cost of doing business with EU companies.
Most importantly, they could expect renegotiations of existing business relationships and, potentially, even business losses, since EU companies will modify their purchase, design and distribution practices to comply with the Directive. If business partners fail to comply, suspension or even termination of their business relationships could follow.
Radical Changes to Business Model and Operations
Indian companies may have to potentially alter their business model, strategy and operations, and
make significant financial and non-financial investments to upgrade
and modify facilities and operational processes to comply with the
Directive where adverse impacts are identified. When coupled with
the obligation to implement a climate transition plan, these
measures
could force a radical transformation to how Indian companies
conduct business with the EU, especially ones in carbon-intensive
sectors such as energy and materials (construction, metals
etc).
Liability for Compensation
Indian companies would be required to implement corrective
action plans or provide remediation, irrespective of where the
actual adverse impact has occurred and whether they caused it alone
or jointly. To make matters worse, they could face liability for
compensation in the EU for actions of their subsidiaries and
business partners too, besides any liability they
could face in India.
Moreover, Indian business partners of EU companies may face claims for damages if EU companies can trace back their liability to a breach by an Indian business partner.
Evidently, as EU member-states implement national legislation to comply with the Directive, there will be several changes to the way Indian businesses transact with the EU. Indian businesses with global operations would be well advised to keep themselves abreast of regulatory changes arising from the Directive and take timely action to prevent business disruptions.
Originally published by Financial Express.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
