Global Sanctions Framework and Indian Commercial Context
International sanctions have emerged as a critical tool of foreign policy, creating complex challenges for multinational corporations (MNCs) operating across jurisdictions. For Indian businesses and international corporations operating in India, these sanctions present unique challenges due to India’s distinctive position in global trade and its historical policy of strategic autonomy.
Legal Framework Interface
Indian Legal Position
India’s legal framework regarding international sanctions primarily operates through the Foreign Exchange Management Act (FEMA) 1999 and the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. However, India typically enforces only UN Security Council sanctions, not unilateral sanctions imposed by other nations.
- Compliance Complexities
Indian companies and MNCs face a complex web of compliance requirements: The RBI framework requires Indian banks to exercise enhanced due diligence when dealing with transactions involving sanctioned jurisdictions. This affects both Indian companies with international operations and foreign companies operating in India.
The Prevention of Money Laundering Act (PMLA) mandates additional scrutiny for transactions with entities from sanctioned jurisdictions, creating operational overhead for compliance departments.
Operational Challenges
- Banking and Financial Operations
Indian corporations face significant challenges in international banking operations. Major international banks often over-comply with sanctions regimes, affecting transactions even when they are technically legal under Indian law. For instance, payments for legitimate trade with Russia post-2022 faced delays despite India not participating in Western sanctions.
- Supply Chain Disruptions
MNCs operating in India must navigate complex supply chain restructuring: The semiconductor industry exemplifies these challenges. Indian automotive and electronics manufacturers have had to restructure their supply chains due to restrictions on technology transfers and component sourcing from certain jurisdictions.
- Technology Transfer and IP Rights
Companies face restrictions in technology transfers and intellectual property rights management. Indian IT service providers working with international clients must ensure compliance with export control regulations, particularly in dual-use technologies.
Strategic Adaptations
- Alternative Trade Mechanisms
Indian businesses have developed alternative mechanisms to maintain international trade: The Rupee-Rouble trade arrangement demonstrates how companies adapt to sanctions through alternative payment mechanisms. Similar arrangements are being explored with other trading partners affected by international sanctions.
- Corporate Restructuring
MNCs have undertaken significant restructuring to maintain operations: Some international companies have created separate legal entities for their Russian operations to isolate them from sanctions exposure while maintaining their Indian operations independently.
Impact on Different Sectors
- Energy Sector
Indian oil companies and international energy corporations operating in India have faced unique challenges: The need to balance energy security with sanctions compliance has led to innovative payment mechanisms and insurance arrangements for oil imports from sanctioned countries.
- Technology Sector
Technology companies face particular challenges: Export controls on advanced technologies have forced Indian tech companies and MNCs to reorganize their research and development activities and client servicing models.
Financial Services
- Banks and financial institutions face the most direct impact: Indian banks have had to enhance their compliance frameworks, affecting their ability to service international clients and maintain correspondent banking relationships.
Risk Mitigation Strategies
- Legal Compliance Framework
Companies operating in India have developed robust compliance frameworks: Implementation of sophisticated screening systems for transactions and business partners. Regular updates to compliance policies based on changing sanctions landscapes. Enhanced due diligence procedures for high-risk transactions
- Business Model Adaptation
Companies have adapted their business models through:
- Diversification of supply chains to reduce dependence on sanctioned jurisdictions.
- Development of alternative payment mechanisms.
- Creation of separate legal entities for high-risk operations.
Future Outlook
- Emerging Trends
Several trends are shaping the future of sanctions compliance:
- Growing importance of digital payment systems and cryptocurrencies in circumventing traditional banking channels
- Increased focus on supply chain resilience and diversification
- Evolution of compliance technology to manage complex sanctions requirements
- Policy Recommendations
For sustainable operations in the current environment:
- Development of robust compliance frameworks that balance Indian legal requirements with international sanctions
- Investment in technology for better sanctions screening and compliance monitoring
- Regular training and updating of staff on sanctions-related developments
Conclusion The impact of international sanctions on MNCs operating in India presents unique challenges requiring careful navigation of legal, operational, and compliance issues. Success in this environment demands a balanced approach that respects both international sanctions regimes and Indian commercial interests while maintaining operational viability. Companies must develop sophisticated compliance frameworks while remaining adaptable to changing geopolitical dynamics.
Credit: Advocate Rani Gupta