This Article is written by Emima Thangapandi, B.B.A LL.B (Hons.), 4th year,
during her internship at LeDroit India.
List of topics covered:
- Introduction
- Basic Concepts
- Blockchain in Corporate Governance
- Smart Contracts in Corporate Governance
- Board Responsibilities in India
- Indian Courts on Blockchain Technology
- Conclusion
Abstract
The advancement of blockchain technology has revolutionized data management and redefined transparency, accountability, and efficiency across industries. This article examines the intersection of blockchain and corporate governance, focusing on how smart contracts are transforming traditional business and legal practices in India. Blockchain, as a decentralized and immutable ledger, offers innovative solutions for enhancing trust, reducing administrative inefficiencies, and strengthening shareholder participation through transparent record-keeping and automated compliance. Smart contracts, created with blockchains further streamline corporate functions by automating processes such as dividend distribution and stakeholder reporting while minimizing human intervention and fraud risk.
However, these technological advancements also raise significant legal, operational, and jurisdictional challenges, particularly regarding data privacy, contract amendability, and regulatory adaptation. The Article also discusses the implications of the Indian Contract Act, 1872, Information Technology Act, 2000, and the emerging Data Protection Act, 2023 on blockchain operations. It concludes that while blockchain promises a paradigm shift in corporate governance, its successful adoption in India demands robust legal frameworks, responsible board oversight, and technological preparedness to ensure secure and ethical implementation.
Keywords: Blockchain, Smart contracts, Artificial intelligence, Corporate Governance
Introduction:
Technology has transformed various aspects of human lives in the past decade. It has catalysed faster communication, faster travel and even business and governance. While it is often blamed for vanishing jobs, it has also created more technologically advanced jobs in today’s day and age. Among many other technological innovations, is Blockchain which has changed all the traditional ways of storing data. This innovation has connected the IT sector to different industries be it, art, finance, marketing and even law. Coding has thus transformed our lives in the form of blockchains. It has impacted and will further continue to impact or social, economical and even commercial aspects of our lives.
This article covers the concept of blockchain technology in corporate governance and its influence in the legal industry in detail.
Basic Concepts:
- Blockchain:
A blockchain is a decentralised, distributed ledger that records transactions across multiple computers so that the registered transactions cannot be altered retroactively. This technology ensures the integrity and security of data through cryptographic principles, making it highly resistant to tampering and fraud. Moreover, it ensures that once a transaction is recorded, it cannot be altered or deleted without the consensus of the network participants.
In simpler terms, blockchain is a digital, shared, and secure record of information that cannot be tampered with.
It can be classified to two major types, public and private. It also has two additional classifications i.e. permissioned and permissionless blockchains. Public blockchains are open to anyone who wants to participate in the network. They allow any individual to join, validate transactions, and access the entire transaction history. Bitcoin and Ethereum are significant examples of public blockchains, where transparency and decentralization are paramount. These networks operate under a consensus mechanism, such as proof of work, ensuring that all participants can trust the integrity of the data.
In contrast, private blockchains are restricted networks where access is limited to specific participants. Organizations use private blockchains for internal operations, allowing for greater control over the network. Private blockchains are often faster and more efficient than public blockchains, as they do not require extensive validation from numerous external participants. However, this comes at the cost of reduced decentralization and transparency.
On the other hand, permissioned blockchains require participants to obtain permission before joining the network, which can enhance security and control. They are typically used in enterprise settings where confidentiality and compliance are essential. Conversely, permissionless blockchains allow anyone to participate without prior approval, promoting openness and inclusivity.
It depends on the organisation to choose the right blockchain after considering its needs and level of privacy required in that particular sector. Nodes, Ledgers and Smart Contracts are key components of blockchain. Nodes are referred to as the particular devices that are used in blockchain, ledgers are distributed database that records all transactions and smart contracts are self-executing agreements written with the help of codes.
Today, it is conceptually accepted that blockchain stands out as a disruptive technology with the potential to transform the foundations of our societal and economic systems. Using terms like “new internet”, “internet of trust” or “internet of value”, some authors claim that blockchain technology is the most transformative technology since the creation of the World Wide Web. This technology, however, is not well understood by many.
A survey by HSBC in 2017 found that 80% of those who have heard of ‘blockchain’ do not have a clear understanding of what it means. The street is crowded by “only cryptocurrency enthusiasts” and governments by “sworn technology sceptics.” Therefore, it is important to develop a clear and well-informed perspective of the technology and its probable foundational implications.
- Corporate Governance:
Corporate Governance is the governing of the company. It also defines an organisation’s power structure, accountability structure, and decision-making process. It is the link between the stakeholders and the company whose votes decide how the company is run. These chains usually include shareholders, the board of directors, executive management, and employees. It can also stretch to include other stakeholders like consumers and communities around where the business operates.
In simpler terms, corporate governance is the structure of policies and processes that steer a company’s direction, management, and compliance efforts. The core principles of corporate governance are accountability, transparency, fairness, responsibility, and risk management. Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behaviour. A board of directors is pivotal in governance, while proxy advisors and shareholders are important stakeholders who can affect governance. Communicating a company’s corporate governance is a key component of community and investor relations.
Thus, corporate governance requires constant managing of all the stakeholders of the firm. It gets tougher when the size of the firm keeps on increasing or there are a lot of components to manage at once.
- Smart Contracts:
With developing technology, contracts have also been upgraded from being handwritten to drafted and now coded and are thus called as ‘Smart Contracts’. They are self-executing contracts with the terms of the agreement directly written into code. They operate on blockchain platforms, ensuring that once deployed, they function in an automated manner without the need for intermediaries. The functionality of smart contracts is rooted in their ability to facilitate, verify, and enforce the negotiation or performance of a contract, which is particularly valuable in the context of corporate governance.
Blockchain in Corporate Governance:
The difficult task of corporate governance has now been simplified with the help of blockchain in today’s era. It has resulted to be a very vital tool in the enriching of transparency and accountability in corporate governance. It specifically helps with financial data of the company. In any organisation, for shareholders, blockchains could offer lower costs of trading and more transparent ownership records, while permitting visible real-time observation of transfers of shares from one owner to another.
For activists, the technology could allow for quicker, cheaper acquisitions of shares, but with possibly far less secrecy than under the current system. Activists could also liquidate their positions more easily and more transparently, which might make the “exit” channel of corporate governance increasingly attractive at the expense of the “voice” or intervention channel.
Managerial ownership could become much more transparent, with insider buying and selling detected by the market in real time, and manipulations such as the backdating of stock compensation becoming much more difficult, if not impossible, since participants in certain blockchains are unable to “rewrite history” by changing their entries retroactively. Corporate voting could become more accurate, and strategies such as “empty voting” that are designed to separate voting rights from other aspects of share ownership could become more difficult to execute secretly.
Any and all of these changes could dramatically affect the balance of power between directors, managers, and shareholders. However, their impact will depend importantly on the type of blockchain used, whether public and freely open to anyone, as is the case with bitcoin and other digital currencies, or restricted and “permissioned,” the model currently being tested by a number of established financial institutions and consortiums.
To sum up, blockchain has resulted in transparent voting systems, real-time financial reporting and supply chain transparency during corporate governance.
Smart Contracts in Corporate Governance:
- Validity according to the Indian Contract Act, 1872
Companies in India have to abide by the Indian Contract Act, 1872 while enforcing any agreement. Thus, the question of whether smart contracts meet the criteria of a valid contract needs to be discussed. Sec. 10A of the Information Technology Act, 2000 makes smart contracts valid under the category of ‘contracts made through electronic means.’ A smart contract fulfils all the criteria of offer, acceptance and consideration as per the Indian Contract Act, 1872 and hence is valid under the Indian law.
In the context of corporate governance, a smart contract could automate the distribution of dividends to shareholders. When the board of directors declares a dividend, the smart contract can automatically execute the payment to eligible shareholders based on the conditions defined in the contract, eliminating the need for manual processing and reducing administrative overhead.
- Features of Smart contracts
Firstly, smart contracts help in automation of compliance work. It basically does not need anyone to keep track of the contract’s execution manually. It does not need a lawyer as well. When the consideration is completed and all the conditions are fulfilled, due to its blockchain technology it will automatically comply with the due diligence.
Secondly, smart contracts cannot be tampered. Once it is coded, it is almost impossible to change the terms and conditions by humans. This establishes its reliability.
Thirdly, smart contract can enrich reporting processes. It can combat for the delays and potential inefficiencies in traditional reporting. It also enhances the engagement with stakeholders as it gives real-time reporting.
An example, IATA has developed the Blockchain for Air Cargo initiative, which aims to streamline the air cargo supply chain by enhancing data sharing and visibility among stakeholders. By leveraging blockchain technology, IATA facilitates secure, real-time access to shipment information, reducing delays and improving operational efficiency. Stakeholders, including airlines, freight forwarders, and customs authorities, can collaborate more effectively, leading to improved service levels and increased accountability in the air cargo process.
IATA has developed the Blockchain for Air Cargo initiative, which aims to streamline the air cargo supply chain by enhancing data sharing and visibility among stakeholders. By leveraging blockchain technology, IATA facilitates secure, real-time access to shipment information, reducing delays and improving operational efficiency. Stakeholders, including airlines, freight forwarders, and customs authorities, can collaborate more effectively, leading to improved service levels and increased accountability in the air cargo process.
Board Responsibilities in India:
There are various technological, operational and even legal challenges in enforcing blockchains and smart contracts. While it has some world changing features, it is also important to note that it works on data which is very crucial to every individual.
- Threat of data leak
Like any other newly advancing technology, blockchains also store and work on data of the organisations that use it. It puts on stake, the data of the stakeholders. The newly enacted Data Protection and Data Privacy Act, 2023 penalised unauthorised disclosure and protects the individual’s data. It is the Board’s responsibility to use the right type of blockchain to protect the data of its stakeholders while functioning with full efficiency.
- Non-amendable smart contracts
Traditional contracts are amendable on the arising of an unforeseen situation. This circumstance is not possible in smart contracts. Once coded, it is locked and is thus compulsorily and automatically enforceable. Thus, smart contracts should be codified with utmost care by the business organisations.
- Jurisdictional Challenges
Blockchain’s decentralized nature transcends geographical boundaries, making it difficult to determine which jurisdiction’s laws apply in case of a dispute. This poses a significant challenge for Indian courts, which are accustomed to dealing with contracts grounded in a specific legal jurisdiction. The lack of a central authority in blockchain networks further complicates the issue, as there is no clear entity against whom legal action can be taken.
- Operational Challenges
Another operational challenge is interoperability, or the ability of blockchain systems to integrate with existing corporate IT infrastructure and other blockchains. Many organizations already rely on legacy systems for financial reporting, auditing, and compliance, which may not be compatible with blockchain technology. For blockchain to be successfully implemented, organizations must develop or acquire middleware solutions that facilitate communication between blockchain platforms and traditional databases. This increases the complexity of the implementation process and may also introduce vulnerabilities if not properly managed.
Conclusion:
The innovation of blockchain has indeed revolutionised the corporate industry. It has helped in efficiency of various functions of the company. Smart contracts are one of these revolutionary works. Smart contracts are indeed a revolutionary innovation to both the corporate and legal industry. It can make the process of making contracts easier.
Smart contracts are thus applicable under the Indian law however; it lacks a specified law to regulate it and mitigate the risks and consequences. It thus, requires a codified law that addresses this evolution of smart contracts.
