Third-Party Risk Management in India

Introduction

As Indian corporates expand their operations across borders and increase reliance on vendors, suppliers, contractors, and service providers, third-party risk management (TPRM) has become indispensable. What began as a compliance exercise is now a central component of corporate governance and operational resilience. The risks of non-compliance, cybersecurity breaches, and supply chain disruptions are amplified in India’s complex regulatory ecosystem, where sectoral regulators impose stringent due diligence obligations and global investors demand alignment with international best practices.

The Regulatory Landscape in India

The Reserve Bank of India (RBI) has issued clear guidelines requiring banks and NBFCs to conduct rigorous due diligence before outsourcing critical functions and to ensure continuity and accountability in cases of sub-contracting. Cybersecurity and operational resilience are mandatory considerations, reflecting the growing digitalization of India’s financial sector. The Insurance Regulatory and Development Authority of India (IRDAI) and the Securities and Exchange Board of India (SEBI) likewise require regulated entities to remain responsible for outsourced activities and ensure their vendors’ compliance with applicable laws.

The Digital Personal Data Protection Act, 2023 (DPDP) adds further obligations by holding data fiduciaries accountable for the actions of their processors. Any breach by a vendor could expose the principal company to significant penalties. Beyond domestic laws, Indian corporates must also account for exposure under global anti-bribery and corruption regimes such as the UK Bribery Act and the U.S. Foreign Corrupt Practices Act, particularly when dealing with international intermediaries.

Multi-Dimensional Risks in Third-Party Engagements

Engaging third parties exposes organizations to a wide spectrum of risks:

• Regulatory risk, where a vendor’s non-compliance results in liability for the contracting company.
• Operational risk, where supply chain failures disrupt business continuity.
• Cyber and data privacy risk, especially with cloud providers and IT vendors handling sensitive data.
• Financial risk, including vendor insolvency or poor financial health.
• Reputational and ESG risk, where unethical labor practices or environmental violations by suppliers damage brand credibility.

Each of these risks is heightened by globalization, where reputational fallout in one jurisdiction quickly resonates across multiple markets.

Principles of Effective TPRM in India

A strong TPRM program rests on five pillars:

1. Vendor Identification and Classification – Maintaining a complete inventory of all third parties, segmented by criticality and risk exposure.
2. Due Diligence and Risk Assessment – Evaluating compliance, financial stability, cybersecurity readiness, and ESG factors before onboarding.
3. Contractual Safeguards – Embedding audit rights, termination clauses, indemnities, and data protection requirements.
4. Ongoing Monitoring – Conducting regular audits, certifications, and performance reviews.
5. Incident Response and Business Continuity – Establishing pre-defined protocols for vendor failure or breach.

The integration of technology and automation ensures these principles are implemented in real time, with artificial intelligence tools screening vendors for sanctions, bribery exposure, or cyber threats.

Illustration 1: Fintech and Cloud Provider

Consider a Bengaluru-based fintech company that engages a third-party cloud service provider to store sensitive financial data. Given the RBI’s outsourcing regulations and the DPDP Act, the fintech must classify this vendor as high-risk, conduct detailed due diligence, and incorporate contractual safeguards such as localization clauses and breach accountability. Quarterly compliance reports and cyber-readiness tests help monitor performance, while a pre-agreed incident response plan ensures continuity in case of disruptions. This example underscores how TPRM can transform regulatory obligations into operational resilience.

Illustration 2: Indian Chemical Manufacturer with Global Exports

Now consider a leading Indian chemical manufacturer that exports extensively to the United States, Europe, and Japan. For such a company, third-party risk management is not only a domestic requirement but also a global necessity. International buyers impose stringent compliance standards, including U.S. Environmental Protection Agency (EPA) regulations, EU REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) requirements, and Japan’s chemical safety norms. Failure by an Indian supplier or logistics partner to comply with these standards could result in shipment rejections, trade sanctions, and reputational damage.

From an anti-corruption perspective, the use of local distributors or intermediaries in foreign markets creates exposure under the U.S. FCPA and UK Bribery Act. Likewise, ESG expectations are amplified: European and Japanese customers increasingly require evidence of sustainable sourcing, responsible labor practices, and reduced environmental footprint throughout the supply chain. For the Indian chemical company, TPRM means conducting enhanced due diligence on raw material suppliers, transporters, and overseas distributors, embedding compliance clauses in contracts, and implementing real-time monitoring of supply chain partners. Robust TPRM thus becomes the bridge that enables continued global market access and investor confidence.

International Perspective and Importance

The global nature of commerce today means that Indian companies are judged not only by Indian regulators but also by their compliance with international standards. A lapse in supply chain compliance in India can trigger regulatory scrutiny abroad, jeopardize contracts with multinational clients, and erode market share. Investors—particularly private equity and institutional funds—now expect portfolio companies to demonstrate active TPRM programs that cover domestic and cross-border risks. As sustainability disclosures and ESG ratings gain prominence, companies without credible TPRM risk being excluded from international capital markets.

Conclusion

Third-party risk management in India has matured from a back-office compliance activity into a boardroom priority. Regulators demand it, investors reward it, and customers—domestic and international—expect it. For sectors as varied as fintech and chemicals, robust TPRM is critical to navigating regulatory complexity, ensuring operational continuity, and securing long-term competitiveness. King Stubb & Kasiva advises corporates to embed TPRM into the heart of their governance frameworks, not only as a shield against liability but also as a strategic enabler of growth in both Indian and global markets.

Contributed by – Krishnan Sreekumar