Legal and Economic Fallout of Mumbai Attacks

The key question being posed in legal and financial circles relates to the extent of insurance coverage for loss caused by terror attacks, and also the related liability of various state and private actors involved. In a column in Rediff Money, Kumkum Sen highlights possible issues on liabilities, both civil and criminal. As the columnist notes, the chances of successfully bringing about any action for such an act of terrorism seem low:

Pondering on these lines, can a case of criminal liability be made out against the corporations? Apparently not. To lump these tragedies in the same class as Bhopal Gas and Uphar cases would be patently unfair particularly as the hotel personnel rallied, and many of them at the cost of their lives. But some questions will persist, as the storm abates.

How could the hotel management be ignorant of the hoarding of ammunition and arms — enough to sustain the attack against police and the armed forces; this could not happen overnight .

Where were they stored and who was the insider(s) conniving, and if such connivance can be established, which are the heads that will roll? Can the corporations be prosecuted, and the directors be charged as being vicariously liable?

In fact, the entire issue of criminal liability of the corporations has gained complexity with awareness about social responsibilities, environmental issues, quality issues and accountability of the company to its stakeholders and public at large, which is now integral to corporate governance.

Even with civil liability, such as for negligence, there are bound to be issues pertaining to what the duty of care owed in such circumstances would be. The question that remains is whether the Government is likely to initiate laws to bring about any changes to these aspects (both from a substantive law as well as procedural standpoints), apart from legislative changes that could emerge in relation to the overall manner in which terrorism is to be tackled in the country.

From a business and economic standpoint, the recent events in Mumbai will surely have an adverse impact. Reports indicate that business travel to India has already witnessed large-scale cancellations owing to the fear factor, as most of such travel tends to take place to Mumbai, with a large number of such business travelers usually availing of the hospitality of the Taj and Oberoi Trident hotels.

There are questions from an investment standpoint as well. Terrorism is a major risk factor for investors in securities markets. On the one hand, there are reports (see Economic Times) that the economic slowdown over the last few months has already seen investors withdrawing from emerging markets such as India, and hence the current attacks may not see much of an impact. But, others are not so sanguine (as the Financial Express reports) fearing that foreign investors will further pull out from the Indian markets until normalcy is restored. In the end, it all depends on the measures that the Government puts in place to improve the security situation, and whether the Indian citizens as well as the international community perceive that to be adequate.

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1 comment
  • The economic impact due to the terrorist attacks stems more from how the next budget shapes up and from an unrelated topic of what is done to encourage FDI in the country.

    In the last few months FIIs have pulled out not just from the Indian equity market but most emerging markets. This has primarily been due to extreme risk aversion and dire redemption pressures being faced by global investors. Post the Mumbai attacks a number of leading long only money managers, such as Mark Mobius of Tempelton, have commented that in their view these attacks do not by themselves increase the risk of investing in India. He is among a number of investors who will still invest in India as the market starts to improve.

    I however have the following thoughts –
    1. If the defense budget was to increase to the detriment of infrastructure and eductaion spend in 2009, then the Indian economy could see an adverse impact. These are the two major areas that the country needs to invest in, if we want to grow. The next is are energy and renewable energy as it is imperative for the country to become energy sufficient. To this extent FDI in renewable energy must be encouraged and acquisition of international carbon energy sources by Indian corporates should be supported by the government (especially to meet short term needs)

    2. If additional taxes are imposed in the name of increasing security, then the current environment would further penalise the nation as spending would reduce

    3. If the defense budget increases to have a negative impact on the deficits being run by the Indian government, then not only would there be an economic effect but the credit rating of the country could also be under threat. A probable credit downgrade would have the most far reaching consequences for the nation