The Indian Supreme Court has expanded the definition of public servant in a decision that has implications for not only the banking system but potentially the country’s broader struggle against corruption.
The case, stemming from a financial scandal more than 15 years ago, potentially implicates other executives in heavily regulated industries in otherwise private enterprises. The case also suggests that the country’s highest court won’t wait for stranded legislation to expand the scope of the India’s anti-corruption laws.
The case involves legacy charges of embezzlement by former executives of the private sector Global Trust Bank. The original scandal involved stock market fraud and manipulation of private sector banks that were the product of India’s early attempts to liberalize a banking sector dominated by public banks..
Although the original crimes produced few significant prosecutions despite heavy investigations, authorities eventually attempted to apply the provisions of the Prevention of Corruption Act, 1988 to two private-sector bank executives. The Prevention of Corruption Act contains a narrow definition of public servant and focuses primarily on demand-side corruption.
While a provision in the legislation enabling private banks deemed their executives public servants under the Indian Penal Code, the legislation did not include application of the Prevention of Corruption Act. However, the court determined that the anti-corruption law should apply, essentially unifying the definition of “public servant.”
The reasoning is more than a little aggressive and potentially reflects judicial impatience with legislative progress. Like many developing economies, India’s banking system is shot through with bad loans that often involve influential political figures or shady deals. Even obtaining an ordinary commercial loan in India can often involve a kick-back to the loan officer. The country’s attempts to propose a modern bankruptcy system to deal with part of these loans has hamstrung clearing many of these loans from the books, and lack of political will has largely discouraged exploring potential corruption in such loans.
The court also may be anticipating implementation of stalled revisions to the Prevention of Corruption Act which would expand the scope of the law to include “private bribery” and bring greater focus on bribe givers.
Whether this decision will have an additional impact on other sectors of economic life in India — where many sectors remain heavily regulated — isn’t clear. However, anyone involved with the Indian banking sector — whether private or public — has a new level of compliance risk to contemplate. And it has teeth.
Russell Stamets is a Contributing Editor of the FCPA Blog. He was the first non-Indian general counsel of a publicly traded Indian company and was general counsel for a satellite broadcasting joint venture of a large Indian business house. Russ can be contacted here.