German Supply Chain Law: Monitoring employment practices and environmental issues in India

last updated on 5 May 2022 | reading time approx. 5 minutes

• Which risks occur along supply chains in India? »

• Which industries appear particularly vulnerable to adverse impacts of human/labor rights or environmental issues in India? »

• Is there any legislation in India which addresses these risks? To what extent is it enforced in practice? »

• Can you provide a case example (e.g. taken from local media coverage) in which a foreign or local company had to deal with such adverse impacts? »

Which risks occur along supply chains in India?

In India the highest risks can be seen in non-compliance with the existing labour and environmental laws. Topics that often are being named with respect to supply chain risks are child labour or unequal treatment of employees. It should be noted, that those risks are not really risks if the companies adhere to the Indian laws, which prescribe thorough measures to ensure aforesaid risks do not occur.

The risk of child labour, which was a problem, has been addressed 2016 with the enactment of the Child Labour (Prohibition & Regulation) Amendment Act 2016.

A major risk lies in the fragmentation of the respective labour laws. The same are being passed from the central government as well as from the respective states. Even though the state laws are being drafted partly in accordance with the central government laws, still there can be differences. This can be challenging, especially for companies which are situated not only in one, but in multiple states.

In general it can be said, that foreign companies should assess and evaluate the implemented compliance structure with respect to the observance of working hours, granting overtime salary when applicable, implementation and active engaging of commissions when prescribed by the law. The “Key” Law in this regard is the Factories Act. For the manufacturing sector this Act is the most important source when it comes to labour related supply chain risks, as it addresses multiple rights and regulations in favor of the employees, ensuring fair and safe labour conditions for the same.

Environmental Law

With respect to the Indian environment India still faces immense problems in regard to water- and air pollution as well as deforestation. About 80 per cent of surface water in India is polluted due to dump sewage and garbage, and an alarming percentage of ground water is contaminated by various organic and inorganic sources. When it comes to Air Pollution, as per the 2020 World Air Report 22 out of 30 cities with the worst air quality are in India, which counted 1.67 million deaths due to air pollution ^[1].

It should be noted, that India is taking more of an holistic approach where economic development must go hand in hand with environmental protection. The understanding that the current approach by many countries, to go on in the same way as before is not the right approach.

A good news is that risk management systems, which are being prescribed by the Supply Chain Act to be implemented, do exist in India. The Task for German companies is therefore not to implement a system, which is unknown to India, but to implement the new requirements and needs in the existing system.

Overall it can be noticed that many companies only focus on potential fines, but underestimate the fact of creating relevant criminal offences by being non-compliant with the respective law.

Last but not least is crucial, that the foreign companies work hand in hand with the local government and illustrate to the management and to the employees the standards that need to be adhered to and why.

Which industries appear particularly vulnerable to adverse impacts of human/labor rights or environmental issues in India?

Making sure being compliant with human rights and environmental sustainability are topics which need to be addressed by every sector, no industry should see themselves “in a safe harbor”. However, especially industries which typically are being brought in connection with harsh working conditions, e.g. the constructions industry or textile industry, as well as industries which deal in hazardous environments like the chemical industry, should be alert and take the necessary actions to avoid being non-compliant with the respective laws.

With regards to the key industries for German companies a risk assessment should be done especially in the pharma industry, the automotive industry and connected supplier industries as well as in the sectors of automation.

Is there any legislation in India which addresses these risks? To what extent is it enforced in practice?

Although a law similar to the German Supply Chain Act does not exist, India has implemented already a thorough legislation, when it comes to labour conditions and environmental protection.

As mentioned The Factories Act, 1948, can definitely be seen as the “Key” law in India when it comes to factory related supply chain risks. With regard to labour laws the down side of the same until now was the fragmentation of the respective laws in round about 29 different laws, which resulted in a very complex and confusing situation for companies who tried to take into account the same in order to be compliant.

This issue has been addressed recently. The Indian government has restructured the different laws into 4 new labour codes which are not into force yet, as the respective State Governments have not yet implemented the rules & regulations for the new codes. The codes are: the Code on Wages, the Code on Social Security, the Industrial Relations Code and the Occupational, Safety, Health and Working Condition Code. It is expected, that once the new regulations are in force it will ease the hurdles for companies to be compliant with the law. One major approach to achieve the aforesaid goal is the focus of the Indian government to digitalise the processes needed by the companies in order to fulfill their obligations and duties with respect to compliance measures.

Although India is experiencing an upward momentum in regulatory enforcement, the submission of supplier approvals should not be the only and decisive criterion for German companies. They can often be obtained in India in a way that is not comprehensible. Therefore, it is even more important to observe and monitor the actual compliance with legal regulations ^[2].

With respect to environmental laws it can be said, that India has a thorough and extensive jurisdiction regarding environmental protection, for example the Water (Prevention and Control of Pollution) Act, 1974 and Air (Prevention and Control of Pollution) Act, 1981. Those Acts are being generally thoroughly enforced by the respective State Pollution Control Boards. In case of the manufacturing industry, which is of high importance to German companies, multiple permits and licenses need to be obtained in order to be able do business, and therefore are essential steps for the companies.

Can you provide a case example (e.g. taken from local media coverage) in which a foreign or local company had to deal with such adverse impacts?

In general India is facing several industrial related accidents. Approximately 116 industrial accidents in the chemical and mining industries across the country between May 2020 to June 2021, believing to have killed 235 workers ^[3].

One example, which led to a big response by the public was the fire in a factory in Delhi in 2019. The factory was involved in the production of shoes and bags. Not exactly knowing what the cause was at that time, believing a short cut was the reason, the fire killed 40 out of 100 workers who were sleeping in the factory, which according to earlier reports did not have a Factory license ^[4].

A crucial incident, which changed India’s perspective on industry related accidents, labour and environmental safety laws happened at the Union Carbide pesticide plant in Bhopal, India. 30 tons of a highly toxic gas called methyl isocyanate, as well as a number of other poisonous gases had been released, exposing more than 600,000 people to a toxic gas cloud. Over the time an estimate number of 15,000 people died due to the exposure ^[5].

However, this accident did not only lead to an increase in awareness, but also to a change in liability regulations and the implementation of a liability framework. As a general rule, there is no personal liability of directors in India. On the contrary especially the aforementioned areas of labour law and environmental law provide regulations for the personal liability of directors.