Legal Risk

In financial risk, legal risk is fully related with loss of finance. Legal risk can happen in the form of legal penalty or legal charges due to changes the laws, rules and regulation of government. This potential loss may happen due to not act upon  on the any notification which was given by law of respective country or any other reasons.

Legal Risk Vs Other Risk

Legal risk is more dangerous than any other risk like liquidity, solvency , interest  or equity risk because in legal risk your business may be stopped by court or it can be banned in specific country. If any company starts illegal works, at that time, company can face many problems and legal risk is one of them. the company
as well as the persons responsible for the conduct of its affairs are liable to be punished for any
offence committed by a company.


Types of Legal Risk


Generally a company is exposed to the following kinds of legal risk:

  • Product liability risk

      To repayment or remedy for providing bad quality products to customers.

  • Employee liability risk

       To provide compensation in case any accident happen in company’s factory

  • Compliance default risk

       To accept the legal responsibility

  • Tax compliance risk

      To accept tax and tax penalty

  • Environmental risk

      To accept loss of penalty due to affect environment.

Legal Risk Management

Legal risk management is technique to reduce legal risk. Company should appoint legal experts for managing the legal risk. He can suggest using different law like FEMA 2000, FTDR Act 1992, IT Act 2000, Competition Act 2002 , MRTP Act 1969  and many other laws according to new amendments by government of India, RBI, Indian high and Supreme Court. Company can control his risk by paying small amount of insurance premium. This system is called risk transfer. One more way to reduce the legal risk is only to do all work legally or etymologically. Company should never accept any risky propositions and should shun from all illegal works.

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