Month: March 2014

Case Notes- A Step Toward A Uniform Civil Code

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By Chritarth Palli

The landmark decision on the law of adoption by the Supreme Court in Shabnam Hashmi vs Union of India demonstrates changing attitudes in India in the area of personal law. The effect of the decision is that the personal religious laws of individual litigants will no longer have primacy over the country’s uniform civil code as contained in legislative acts which flow from Article 25 of the Indian Constitution. The uniform civil code as contain in statutory law shall have equal footing with personal religious laws of litigants. In this case, the petitioner, Shabnam Hashmi, had adopted a daughter and wanted her recognized under the law as her natural daughter.

Prior to 2000, India did not have a law on adoption for non Hindus. The only enactment on the issue was the Hindu Adoption and Maintenance Act, 1956. With the enactment of the Juvenile Justice (Care and Protection of Children) Act 2000, as amended, the right to adopt children is recognized across the board irrespective of personal laws. This, in essence, enables Muslims to evade their orthodox personal laws which do not permit adoption. The Muslim personal law permits only guardianship and disallows inheritance of property for an adopted child. Intervenor the All India Muslim Personal Law Board had argued that Sharia law on guardianship is consistent with United Nations conventions and, therefore, not in conflict with the meaning and intent of the Juvenile Justice Act and that Sharia law should, therefore, prevail.

The court, however, declared that under the Juvenile Justice Act a Muslim may adopt a child regardless of his personal law. In order to avoid an apparent clash between personal laws and the Juvenile Justice Act the court calls the Act an optional legislation that does not impose any compulsory right over any community. The judgment falls shy of declaring the right to adopt a child the status of a Fundamental Right and leaves it for the legislature to
do so as and when it deems appropriate. The court did not rule that the right of adoption is a fundamental right under the constitution.

Significantly, under the decision, the Juvenile Justice Act does not preempt personal Islamic law, which is still valid and enforceable. The decision holds only that the courts must recognize an adoption under the statute should a litigant, regardless of his or her personal religious law, choose to seek enforcement of his or her rights in a civil court under that statute. In that sense, the decision is a step closer toward achieving a Uniform Civil Code as envisaged in Article 44 (also a directive principle of state policy) of the constitution (“The State shall endeavor to secure for the citizens a uniform civil code throughout the territory of India”).

Chritarth Palli is a fourth year student at Government Law College, Mumbai. Upon graduating in 2015, he plans to attend a Masters in Law program at a law school in the United States. He can be reached at chritarth04palli@gmail.com.

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Independent Directors Under The Companies Act 2013

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By Mukundan Bharathan

Finally, almost 57 years after the Companies Act of 1956, India’s Parliament passed a new Companies Act of 2013, which received the assent of the President on August 29, 2013. The old Companies Act of 1956 had already outlived its tenure by 1978. Previous governments had recognized the need for a major revision of the Companies Act to reflect changing corporate governance norms, but failed to get the legislation enacted. Governments made efforts to replace the old Act with a new one in 1993, 1997 and 2000, but each time the bill did not pass, perhaps because it had a large volume of sections.

Indeed, the 2013 Act is so comprehensive, at 29 chapters with 470 sections, that all of its provisions have yet to be brought into effect and the rules to enforce the statute are still being framed. Thus, like the U.K. Companies Act of 2006, which took three years to fully implement, India’s 2013 Act is taking effect in phases, and it may take many months before it is completely implemented. Despite this, the Ministry of Corporate Affairs (MCA) has notified (brought into effect) large portions of the Act. All of the notified sections of 2013 Act are made effective from April 1, 2014.

New Provisions For Increased Accountability, Transparency And Better Governance Of Companies

The 2013 Act has several new provisions relating to the roles, duties and liabilities of the independent directors. Out of India’s 1.3 million registered companies around 1.1 million are private limited companies and about 5,000 are listed on a stock exchange. Thus, most companies are held by directors who were their founding promoters. Under the new Act promoters/directors cannot serve as independent directors given their inherent self interest in all important company decisions.

For this reason independent directors must be independent of the promoters and management of the company. They cannot be majority shareholders and cannot have any conflict of interest with the Company. Independent Directors are, nevertheless, entitled to compensation. They are eligible to receive sitting fees as well as a percentage of commissions on sales as approved by the board of directors. However, they can no longer be offered Employee Stock Options (ESOP).

An independent director needs to be impartial and must act in the interest of the company, its shareholders, society and the community at large. He or she should be selected for special skills that are considered to be in the interest of the Company, and must play the role of a watchdog/whistle blower and moderate all conflicts within the company.

The role of the independent director is more proactive now and being a whistle blower means not keeping quiet if there is anything suspicious in any of the dealings that come to one’s knowledge. To act as whistle blower, the independent director should have independent communication with the Key Managerial Personnel including CEO, CFO, Company Secretary, Functional Heads such as finance, legal, human resources and supply chain. In fact, internal audit firms and employees should also be encouraged to have an open discussion with the independent directors. Independent directors are expected to raise red flags and ask questions and act diligently. The independent director is no longer a rubber stamp and must cast a dissenting vote to any resolution he or she feels is prejudicial to the interests of all stakeholders.

The role of an independent director is so crucial that the 2013 Act has emphasized that an independent director should be included in key committees for certain types of companies. The company’s committee on Corporate Social Responsibility (CSR) must have one independent director. The Audit Committee must have a majority of independent directors, and half of the Nomination and Remuneration Committee be also be independent directors. The requirement of one independent director on the CSR committee applies only to companies with annual profits of more than ₹50 million or where turnover exceeds ₹10 billion or net worth is over ₹5 billion (at the time of writing the exchange rate was ₹60 to U.S. $1).

Corporate Social Responsibility (CSR) provisions are also applicable to foreign companies. Every foreign company which has a place of business in India and conducts business activities in India and which has a branch office or project office in India, is required to engage in CSR activities as provided under the Act. A company may carry out CSR activities either by itself or through a registered trust, registered society or a company established by its holding, subsidiary or associate company.

The new Act requires at least one-third of the total board members to be independent directors. The one-third requirement under the old Act applied only to listed companies. The new Act applies to public listed companies as well as public companies having a paid up share capital of over ₹1 billion and over ₹2 billion in loans, borrowings and deposits.

The 1956 Act did not fasten any liability on independent directors as does the new Act. Only the managing director was held responsible as he was in charge of and responsible for the day to day affairs of the Company at the time of the commission of an offence. Under the new Act, liability has also been extended to independent directors even though they have no day to day operational responsibilities. While courts were often lenient in applying liability to the actions of independent directors, they were held responsible for a default or the commission of an offence if they had the knowledge or if the offence was committed under their direction or control. To avoid liability, an independent director must now prove that he had no knowledge of the offence that was being committed, that he had raised red flags at time, and had asked relevant questions about the particular transaction that was ostensibly detrimental to the interests of stakeholders. An independent director will not be held liable if he or she can demonstrate that he or she acted diligently and cast a dissenting vote against the particular apparently irregular act.

Many companies in India provide for long terms for their independent directors. In the case of Reliance Industries Limited, one of the independent directors was on the board for over 30 years. Mahindra and Mahindra, another well-known company in India, had its independent director on the board for over 31 years. So is the case with another multi-national company, Colgate Palmolive, which has had the same independent directors since 1983. Infosys co-founder Mr. Narayan Murthy had suggested that independent directors serve for no more than three terms of three years each. Now under the new Act the term of the independent director has been capped at two consecutive terms of five years each and then a cooling off period of three years, at the end of which that independent director could serve again.

The issue that corporations now face is getting good quality independent directors especially when their term is limited followed by a cooling off period. Some people are optimistic that many good people will come forward to fill the pool to be created by the Central Government from where companies can choose their independent directors.

Interplay Between The Companies Act 2013 And The Amended Equity Listing Agreement Of The Securities And Exchange Board Of India SEBI)

In addition to Sections 166, 134(5), 149 and Schedule IV of the new Act which set forth the qualifications of independent directors, Clause 49 of the Equity Listing Agreement of the Securities and Exchange Board of India (as amended in April 2013) sets out the code of conduct and the role, responsibilities and functions applicable to them. Independent directors are expected to use their skill and independence in implementing the best corporate governance for the company and in the interest of all stakeholders.

Some of the key provisions of both the new Act and their interplay with SEBI’s amended Clause 49 of the Equity Listing Agreement are highlighted below:

1. SEBI: Two-thirds of the members of a company’s Audit Committee and the Chairman shall be independent directors.

COMPANIES ACT, 2013: The Audit Committee must have majority Independent Directors

2. SEBI: An independent director who has already served on a company’s board for five years can serve only one more term of five years.

COMPANIES ACT, 2013: an independent director may serve up to two terms of five years each.

3. SEBI: Companies to disseminate Independent Director’s resignation letter to Stock Exchanges & on company website

COMPANIES ACT, 2013: Independent Directors must disclose reason for resignation to the Registrar

4. SEBI: A person shall not serve as independent director on more than ten listed company boards

COMPANIES ACT, 2013: A person shall not serve as director on more than then public company boards

5. SEBI: Every listed company must have a Risk Management Committee

COMPANIES ACT, 2013: Every company shall have a Risk Management Policy

Pecuniary And Criminal Penalties

There are other important requirements imposed by the 2013 Act. Each year independent directors must hold at least one meeting to review the performance of non-independent directors. Conversely, the Board must evaluate the independent directors.

The penalty for noncompliance of any provision applicable to independent directors may include a fine from ₹50,000 to ₹500,000 and up to ten years imprisonment. With current fast track courts, the National Company Law Tribunal and the teeth given to the Serious Fraud Investigating Office, directors guilty of having violated some of these provisions may find themselves being sent to jail sooner than under the slower judicial and tribunal procedures of the past

There are many good independent directors presently serving on several Boards. However, an apparent scarcity of reputable and well-qualified candidates with the necessary talent and impeccable integrity essential for the job may make it difficult to fill in the positions of independent directors in other companies which are now required by the new Act to appoint them. Nevertheless, the new Act is a long-needed step to ensure more accountability, transparency and better governance of companies.

Mukundan Bharathan is the Senior Legal Counsel at GlaxoSmithKline Pharmaceuticals Limited, India and the views expressed herein are solely those of the author. Mukundan can be reached at Advocatemukundan@gmail.com

Focus on Rural India: Law On Corporate Social Responsibility Boosts Action To Address Social Inequity

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By Jane Schukoske

Rural communities with unmet fundamental needs are clearly high priority among the key intended beneficiaries of thetwo percent provision for CSR in the Companies Act 2013. Schedule VII of the Act specifically includes rural development projects, and many other listed activities address the deprivation of basic human rights experienced by many rural villagers: eradicating hunger, poverty and malnutrition; promotion of preventive health care and sanitation and making available safe drinking water; promotion of education and employment, enhancing vocational skills; promotion of gender equality and empowerment of women; ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water.

For rural development interventions to be sustainable, the community must lead and “own” the efforts.  When the community helps design solutions and takes responsibility for behavior change within the village, the community will maintain infrastructure and the social commitment to the behavior over time.  Many companies will rely on NGOs that have built rapport with communities to engage the communities for a sustainable CSR effort.  Success of many of the listed CSR activities requires some community behavior change; this should be factored into the projects, programs and timelines proposed in CSR plans.

By drawing attention to neglected rural communities, the “2% CSR” provision will stimulate greater communication and collaboration between companies, NGOs and such communities. This joint effort will serve as a powerful tool for leveraging the funds and systems of the Government of India, which has capacity to scale rural development. The collaboration will cause more citizens to be attentive to policy gaps, such as in the Right to Education Act, 2009, which largely addresses school infrastructure rather than student learning. Corporate employees who engage in CSR activities will have the opportunity to traditional knowledge and meet talented and inspiring people, who, given a fair chance, could be contributing to greater wellbeing and prosperity in India.

Lawyers, themselves responsive to the professional ethical requirement of provision of pro bono services, have important roles to play in supporting rural CSR activities.  In addition to advising clients on compliance with the Companies Act, lawyers should advise clients about government systems, such as the legal services authority system and its paralegals, who could work in rural areas to bring about women’s empowerment and to implement existing government programs designed to provide dignity and meet basic human needs.

Jane Schukoske is the CEO of S M Sehgal Foundation, Gurgaon, which works with rural communities on governance and policy advocacy, capacity building, water management and agriculture.  She can be reached at jschukoske@gmail.com.

Government’s Ambivalence Reflected – The Law On Corporate Social Responsibility Does Not Address Social Business Policy 

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By Ankita Srivastava

Rules to boost and encourage social business projects through CSR funding have not seen the light of the day in the CSR provisions of the Companies Act, 2013 that came into effectin April 2014. Thisomissionin the CSR Rules reflects both short-sightedness and lack ofunderstanding on the part of the governmentof the potentially positive impact that the convergence of CSR and social business could have created.

An attempt was initially made in the draft CSR Rules to provide a conducive atmosphere for corporates to develop and incubate new forms of business practices aimed at leveraging the far-reaching effects of the market to advance socio-economic development. “Social Business Projects” was one of the activities enumerated in Schedule VII under the draft CSR Rules.

The quality and quantity of investment that we are witnessing within the growing social business space is evident from the many social entrepreneurs and industry leaders in India who have adopted social business practices to bring about sustainable change. This model, developed byMohammed Yunus (famed Grameen Bank founder and microcredit pioneer) inspired many entrepreneurs to plunge into the impact-based model of funding to create new and innovative forms of social businesses. The draft CSR Rules gave fillip to such entrepreneurs as the market began to realize the positive policy implications of synchronization between government prescribed economic policies and market led investment opportunities.

With the introduction of “social venture funds” which invests primarily in securities or units of social ventures providing restricted returns and the recently approved “Alternative Investment Fund” regime in India(pooling of investment funds from Indian and foreign investors( subject to the various approvals), many corporate stakeholders were hoping that the CSR Rules would encourage convergence of market-led investment models built around social impact projects and investment opportunities based on CSR spending.

It was largely expected that companies would be allowed to invest their CSR-dedicated funds in social business projects based on the principle of muted return in order to allow greater visibility and sustainability of CSR programs. CSR spending through investment in social venture funds could have been useful in promoting innovation and new business solutions as well as providing seed funding and incubation of breakthrough ideas and social enterprises. The credit crunch faced by social businesses could have been comfortably addressed given that the estimated aggregate amount of CSR funding for one financial year is expected to be about $1 billion.  Companies could have efficiently met theirobligation to spend two percent of their revenue on CSR activities had the Rules permitted them to devote those resources to social venture funds which have already demonstrated success with market driven policies for the benefit of all stakeholders satisfying the social performance norms.

However, the removal of “social business” projects from Schedule VII casts doubt on policy-makers’ understanding of, or possibly commitment to, the goal of CSR. Government policy makers, for reasons that are not obvious, seem to have been trapped by a conventional and outdatedunderstanding of CSR asphilanthropy. Schedule VII of the recently enacted CSR Rulesreveals that government policy makers failed to appreciate that permitting CSR funds to be directed to social business purposes would have realized in the most efficient way the legislative purpose of the CSR.  That purpose is implementation of effective social policy by innovative and efficient use of capital.  By excluding social business from CSR activities, the government lost arare opportunity to address India’s widespread social problems and improve the lives of its citizens in an efficient, effective, stakeholder-driven and financially sustainableway.

Ankita Srivastava is a lawyer with Nishith Desai Associates in New Delhi.  She can be reached at ankita.srivastava@nishithdesai.com.