Navigating Corporate Misconduct: A Legal and Strategic Framework for Internal Investigations in India

Posted On - 16 May, 2025 • By - Nivedita Bhardwaj

As corporate environments grow more complex and scrutiny from regulators and stakeholders intensifies, internal investigations have become a cornerstone of responsible governance. The increasing incidence of financial misstatements, regulatory breaches, and employee misconduct has made it imperative for Indian companies to institutionalise robust internal inquiry mechanisms. 

India’s corporate regulatory landscape has evolved to impose direct obligations on companies and their leadership to prevent, detect, and report fraud and non-compliance. Statutes such as the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations place affirmative duties on boards and management to ensure transparency, protect shareholder interests, and uphold ethical standards.

Under the Companies Act, companies must establish a formal mechanism to report concerns, which includes safeguards for whistleblowers and the right to report directly to audit committees. Moreover, auditors are required to disclose any fraud discovered during their review. SEBI regulations, in parallel, require timely public disclosure of significant events, including findings of forensic audits or fraud investigations, thereby increasing the visibility and consequences of internal wrongdoing.

Beyond these, sector-specific regulators such as the Reserve Bank of India, the Enforcement Directorate, and the Serious Fraud Investigation Office also possess statutory powers to initiate inquiries, making early internal responses even more essential.

Why Companies Must Act Proactively

Internal investigations are not merely remedial—they are preemptive instruments that help contain reputational damage, limit legal exposure, and demonstrate institutional accountability. Whether triggered by whistleblower complaints, audit anomalies, or anonymous disclosures, such inquiries are essential to clarify facts, assign responsibility, and initiate corrective action before the matter escalates.

When conducted timely and with integrity, internal investigations also help avert regulatory penalties, enable negotiated settlements, and in some cases, qualify the organisation for leniency under cooperative compliance frameworks. Furthermore, they strengthen stakeholder confidence and employee morale by showing that misconduct is neither tolerated nor ignored.

Structuring the Investigation Team

A fundamental consideration at the outset is selecting the right personnel to lead and execute the investigation. While internal teams may offer contextual familiarity, the need for objectivity and legal protection often justifies the engagement of external legal counsel.

External lawyers bring the dual benefit of independence and legal privilege, ensuring that sensitive findings and communications remain confidential and protected from discovery, particularly in adversarial proceedings. Where required, forensic accountants, IT specialists, or subject matter experts may be engaged under the direction of legal counsel to assist in evidence recovery, financial reconstruction, or technical analysis.

In India, communications with external lawyers licensed under the Advocates Act are afforded statutory privilege under the Indian Evidence Act. This protection does not typically extend to in-house legal teams. Therefore, to maintain confidentiality—especially where the investigation might result in regulatory scrutiny or litigation—it is advisable to route all findings, communications, and reports through external counsel.

Employees who are interviewed during the process must be informed of the nature of this privilege through advance disclaimers, often referred to as legal warnings. These make it clear that the lawyer represents the company and not the individual, and that any disclosures made during interviews may be used by the company as it deems fit.

Conducting the Investigation: Principles and Procedures

Although Indian law does not prescribe a universal procedure (with the exception of sexual harassment cases under the POSH Act), best practices for internal investigations have emerged based on legal obligations and risk management standards.

1. Preservation of Evidence: At the start of an investigation, the company should take steps to preserve potentially relevant records. This may involve issuing legal hold notices, securing email trails, and capturing digital data from devices. Care must be taken to comply with Indian data protection laws when accessing or processing personal or sensitive employee information.

2. Fact Verification and Assessment: Before commencing interviews, available facts must be independently verified through internal documentation, correspondence, or system logs. Careful scrutiny at this stage helps eliminate false positives and identify key individuals involved.

3. Interviews and Witness Management: Interviews should be scheduled in a neutral setting and conducted respectfully. Employees should be informed about the purpose, process, and confidentiality expectations. Their consent should be obtained for any audio or video recordings. The interview format must be non-coercive and fact-finding, not accusatory. Interview notes should be maintained diligently and objectively.

4. Confidentiality Safeguards: Throughout the investigation, all parties involved—including internal staff, legal advisors, and external consultants—must be reminded of the confidentiality obligations surrounding the matter. Disclosure of findings should be on a strict “need-to-know” basis, and records should be securely maintained.

Conclusion and Outcomes

On completing the investigation, the company must decide whether a formal report is required. If prepared, the report should cover the scope of the investigation, methodology, evidence reviewed, interviews conducted, and key findings. Legal conclusions and recommended actions—disciplinary, contractual, or regulatory—may also be included, subject to review by the board or relevant governance committee.

Where wrongdoing is established, responses may range from issuing warnings and implementing internal controls to terminating employment or initiating criminal complaints. In regulated sectors or for listed companies, there may be an obligation to disclose material developments to stock exchanges or regulators.

In certain cases, self-reporting to authorities may also be appropriate or advisable, particularly in scenarios involving fraud, corruption, or money laundering. Voluntary disclosures can be a mitigating factor in regulatory or enforcement actions.

Considerations in Cross-Border Investigations

 Multinational companies operating in India must also consider cross-border legal sensitivities. Laws in the US or UK regarding privilege, data sharing, and document production may differ significantly from Indian norms. Careful coordination with foreign counsel and strict documentation protocols are essential to avoid privilege waiver or inadvertent disclosure.

 Where evidence must be transferred overseas, attention must be paid to Indian data export restrictions and consent requirements. In cross-border enforcement, cooperation frameworks such as mutual legal assistance treaties or letters rogatory may be engaged.

Final Thoughts

In the current regulatory climate, internal investigations are an essential governance tool—not only to detect and remediate misconduct but to uphold corporate values and stakeholder trust. The success of any such process hinges on confidentiality, credibility, and consistency.

A professionally conducted investigation, anchored in legal principles and organisational transparency, not only mitigates short-term risks but also reinforces a company’s long-term commitment to integrity and compliance.

Contributed By – Rohitaashv Sinha

King Stubb & Kasiva,
Advocates & Attorneys

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