Professional Documents
Culture Documents
environment and keeps pace with our counterparts across the globe. The Act, being progressive
and forward looking, has ushered in numerous changes in the Indian corporate domain.
However, we have analyzed below only those changes that are likely to have ramifications from
a broader point of view that of a stakeholder and not a shareholder alone.
1. Whistleblower mechanism-the game changer
Whistle blowing2 means an act of calling the attention of the top management toward some
malpractice happening in an organization. Considering the large number of corporate frauds and
malpractices that have come to light in the recent past3, the Companies Act 1956 can be
considered to be ineffective in this regard. It contained no provisions that related to reporting of
information/evidence pertaining to frauds/malpractices/collusions 4. Such frauds and malpractices
were discovered pursuant only to an extensive internal audit review. However, as per the Act 5
read with the draft rules6, the following companies shall establish a vigil mechanism for their
directors and employees to report genuine concerns:
a) Every listed company
b) Companies which accept deposits from the public
c) Companies which have borrowed money from the banks and public financial institutions
in excess of Rs 50 crore.
The mechanism shall operate through audit committee 7. Two important safeguards have been
carved out in the draft rules
1
The term comes from the practice of British policemen who blew their whistles when they
witnessed commission of a crime.
2
Section 177(10) of the 2013 Act read with Draft Rule 12.5(3)
10
Ibid
11
12
13
fraud rather than internal audit review 14. Provision of adequate safeguard against harassment
and victimization is what stops the concept of vigil mechanism from becoming a toothless tiger.
However neither the Act nor the draft rules provide any clarity on the anonymity of the
whistleblower.
Very recently, the Securities Exchange Board of India (SEBI) has also decided to make it
mandatory for listed companies to have a whistleblower mechanism for their employees and
directors15.
An analysis of the provisions also brings forth certain shortcomings in the scheme. It is noticed
that the term genuine concerns has been defined neither in the Act nor the draft rules. This may
give rise to some confusion regarding the periphery within which such mechanism shall operate.
However, one may borrow an idea from one of the duties of an independent director - report
concerns about unethical behavior, actual or suspected fraud or violation of the companys code
of conduct or ethics policy 16. The exceptional cases referred to in section 177(10) have also not
been defined. Consequently, under what circumstances can a chairman of the audit committee be
approached becomes very subjective. One more grey area is that both the Act and draft rules fail
to take into consideration the situation where all the members of the audit committee are
conflicted.
Despite its various shortcomings, an effective working of this mechanism shall lead to timely
detection of fraud and will save the stakeholders (and not the company alone) from suffering
pecuniary injuries.
16
(i) Not less than 100 members/depositors or 10% of total members/depositors whichever is
less;
18
(ii) Any member/depositor singly or jointly holding 10% of value of shares/outstanding deposits.
In case of company not having share capital, not less than 1/5th of total members
19
20
21
It may be appreciated that inclusion of auditors and consultants of the company within the ambit
of class action suit22 has empowered the members and depositors. This step will ensure that the
company as a whole directors, auditors, consultants, experts, etc is diligent and careful before
acting on any matter. An essential feature is the advantage of economies of scale. Earlier,
individual shareholders avoided filing civil or criminal cases due to huge cost of litigation being
involved. In relation to the litigation costs involved in such class action suits, the Act has
incorporated two provisions which shall encourage the investors to file applications. The
Investor Education Protection Fund (established by the Central Government) shall be utilized for
reimbursement of legal expenses incurred in pursuing class action suits 23. Furthermore, the
NCLT shall ensure that cost related to application for class action suit is defrayed by the
company or any other person responsible24. Now investors are empowered to pool in their
resources and fight for their cause. The involvement of NCLT shall also ensure speedy disposal
of matters. It is pertinent to note that only members and deposit holders have been covered and
remaining stakeholders like creditors, bankers, debenture holders etc. are not eligible. This, in
our view, is a missed opportunity. An analysis of the seven instances provided would result in
one revolutionary finding a suit can be filed against any action by the directors, company,
auditors, etc that has not been taken yet 25. Earlier an application could be made only for current
or past actions and not future actions. Hence, the provision is truly preventive in nature and
serves the purpose for which it was put in place shareholder activism.
23
24
25
26
Definition for CSR as given by The World Business Council for Sustainable Development
deliberate inclusion of public interest into corporate decision making and honoring the Triple
Bottom Line27: People, Planet and Profit.
In India, CSR as an activity was primarily carried out by high profile cash rich corporate groups.
But with the introduction of the CSR Voluntary Guidelines, 2009, a recommendatory initiative
was introduced by the MCA. The main objective was to make CSR an integral part of the
overall business policy of the company28. Several big groups like Mahindra, Wipro, Infosys, etc.
started spending heavily on CSR activities 29. But much was left to the discretion of the company
and most of the expenses were superficial with no real impact on the society. Firms would
greenwash their profitable activities under the garb of CSR as a result of which the scheme
failed to achieve the desired objective. .
Banking on the recommendations of the 21st Report on the Companies Bill 30, the Act introduced
compulsory guidelines on CSR. From April 1, 2014 every company with a net worth of atleast
500 crore or annual revenues of 1000 crore or a net profit of more than 5 crores will have to
spend at least 2% of their average net profits for the past 3 years on CSR activities31.
This provision makes India the first country to make CSR a statutory requirement. A comply
or explain approach has been introduced whereby if a company fails to spend such an amount,
the Board shall specify the reasons for not spending the amount. Hence for the very first time,
there would be uniformity in CSR spending.
A study states that an increased spending on CSR is stated to have a multiplier effect in the
society. An additional 22,000 crore rupees is expected to flow into sectors such as education,
27
Six core elements like care for stakeholders, respect for environment and activities for social
inclusive development was introduced.
28
The Mahindra Group had been spending about 1% of its net profits on CSR activities since
2005. They spent 75 crores rupees in the last year and it is expected to increase to 175 crores
rupees this year. Tata Group was one of those companies who were following the 2% rule by and
large and spent over 1000 crores rupees over the last two years.
29
31
healthcare, women and child welfare.32 Companies can operate its CSR activities through trusts
and societies operating in India either established by the company themselves or independent
bodies33. In order to ensure organized and successful CSR initiatives, companies will have to
identify and hire an appropriate team of professionals: Tech Mahindra hired Loveleen Kacker, a
former senior IAS officer and a domain expert in children's education 34. Thus an estimated
100,000 jobs is likely to be created in the next 6 years35.
An analysis of the provisions brings forth certain shortcomings too. Significantly, there is no
penalty for non compliance and the provision is fairly non coercive in nature. However a duty is
cast on the board members to give an explanation, which they may not be able to get away from
easily and on the regulator to question their roles. There is also a question as to whether a
separate provision needs to be created with respect to the unspent amount or whether it is to be
accommodated the next year. Clarity in this matter would address all important transparency
issues. Further, finding the money equivalent return on investment (ROI) of the firms activities
(impact assessment) would also be a challenging proposition. Finally, the Act is a great step
forward in moving from ad hoc philanthropy to understanding the ground realities leading to an
amalgamation of stakeholder interests with the companys long term goals.
To conclude, we may say that the new Act brings corporate traditions of western countries in the
Indian setting. It aims to revolutionize the current corporate culture and thought through holistic
measures, aimed at long term sustainability rather than short term profitability.
Rule 4(2) read with 1st Proviso, Companies( Corporate Social Responsibility Policy) Rules
2014
33
35
See note 32