Facets of Corporate Governance and Corporate Social Responsibility in India

Shareholders’ engagement in companies is a prerequisite for good corporate governance. Accordingly, company laws across all jurisdictions contain provisions to ensure such fundamental requirement and take measures for improving shareholders’ engagement with the companies in which they are shareholders. The Council for European Union felt the need to review the Shareholders’ Rights Directive (2007/36/EC) after the financial crisis due to deficient standards of corporate governance observed in companies. The Council is of the opinion that to ensure long term sustainability of companies, shareholder engagement needs to be strengthened. The present chapter discusses five major issues reviewed by the Council and provides Indian position on such issues. The chapter has been converted from the key note speech that was delivered in 9th International Conference on Corporate Governance, Fraud, Ethics and Social Responsibility.

One has witnessed a rise in corporate governance failures over the past few years with cases of Vijay Mallaya, Nirav Modi and likes. Recent addition to the typology of corporate frauds are the insolvency related frauds, for e.g. the recent issue of Jaypee’s mortgage is alleged to be done fraudulently. Everyone in the corporate circle received a shock on hearing the Chanda Kochhar’s case of alleged non-compliance of corporate governance norms. While this paper was being written, we saw another major corporate governance failure leading to the IL&FS crisis, requiring the government to step in like Satyam. Corporate Governance norms have been formalised in India through specific provisions in the Companies Act, 2013 incorporating provisions relating to corporate frauds. The clause 49 of the Listing Agreement is now given a statutory by way of Listing Regulations of SEBI (LODR). At times, the corporations have not liked this tight scrutiny by the regulator and accordingly some compliances were relaxed for private companies in the Companies Act, 2013. One of the major factors which played a significant role in controlling corporate frauds was having a robust internal control mechanism and its regular testing. However, a survey by Grand Thornton in 2014 indicated that fraud risk assessment and compliance controls review was seen as a one-time exercise by most corporates and not taken that seriously subsequently. The present paper would explore whether the efforts taken under the Companies Act, 2013 and SEBI Regulations have served its purpose in decreasing the corporate frauds in India. Recently, the Government has notified the constitution of National Financial Reporting Authority (NFRA); this paper would also examine as to how NFRA would contribute in regulating the corporate frauds. Through some examples it would be explored whether the corporate governance failures are the cause for increasing corporate frauds in India.

In wake of increasingly globalised markets, competition and advancement in technologies, businesses are becoming more prone to frauds in the nature of white-collar crimes as occupational frauds due to avarice of those involved in the value chain of governance. The term ‘fraud’ has different connotations and ranges from deception to dishonesty and includes corruption and conspiracy to embezzle money forcing the Sovereigns to have adequate AML risk assessment framework in addition to existing legislative and regulatory framework to mitigate business risks of fraud. A 2018 global study by Association of Certified Fraud Examiners on occupational frauds evidences $7 billion losses with 89% through asset misappropriation schemes resulting in a median loss of $114,000 and financial fraud scheme though accounting for 10%, evidenced $800,000 as the median loss. This remains the tip of the iceberg with many of the victims tending to underplay existence of the fraud to curb the reputational risk. A typical risk mitigation strategy towards fraud prevention revolves around building up framework to assess the vulnerability of systems, processes and people to raise red flags for fraud detection, prevention, cessation and response system and building up adequate internal and external controls as part of enhanced governance ecosystem. The global jurisprudence around the white-collar crimes is evolving. The developed countries have brought in suite of legislations; the regulators of securities and financial markets along with accounting/auditing profession domestically and internationally is developing standards and guidelines for compliance and related capacity building. In India, the Companies Act, 2013 has provided more teeth for fraud prevention and control for an enhanced governance ecosystem. While there being no best fit approach, global developments around regulatory enforcement for fraud deterrence and control provide a scalable benchmark for Indian context.

PCAOB (Public Company Accounting Oversight Board), based on the Sarbanes Oxley Act which was enacted following the Enron Scandal, was founded in 2002 to ensure the public oversight of independent audit enterprises. PCAOB, a private non-profit organization audited by SEC (U.S. Securities and Exchange Commission), has the authority to set standards and register aside from supervising and enforcing audit entreprises that undertake the independent audit of publicly held companies. Its powers were expanded to include overseeing the independent audit of brokers and exchange brokers upon the enactment of Dodd Frank Wall Street and Consumer Protection Act in 2010. U.S Department of Treasury founded ACAP (Advisory Committee on the Auditing Profession) in 2007, in order to research on concentration in audit industry, financial strength, audit quality and other similar topics and suggested the negotiated development of audit quality indicators by PCAOB with all interested parties. After that time, between the years of 2008–2015, within PCAOB, work groups were assembled, open discussions were organized, market-dominating practitioners and academicians were consulted, letters of recommendation were perused and existing studies on this subject were examined with the aim of establishing audit quality indicators. In 2015, as a result of a long and exhausting study, 28 audit quality indicators were presented to the public opinion following the completion of the initial stage. Indicators fall into three groups and have complementary quality. The fact that independent audit entreprises sincerely disclose the numeric ratios (audit quality indicators) regarding their audits on electronic environment will not only provide small companies struggling against the competition with a new tool but also provide investors with information regarding the audit quality. In Turkey, analysis of these indicators by KGK (The Public Oversight, Accounting and Auditing Standards Authority) through formation of databases will help drawing of inspection charts by determining risky enterprises and easier identification of the defective sections of the current standards. In this study, publicly disclosed guidelines of PCAOB were utilized and numerical examples of explanatory ratio calculations were given by us through creative brainstorming. In addition to this, a literature review was also conducted regarding audit quality. Aim of this study is to bring forward suggestions on introduction, inspection on electronic environment and public disclosure of audit quality indicators.

Corporate governance principles were incorporated after the financial impropriety of the owners/managers increased at a rampant stage whereby innocent stakeholders were left without a remedy. The governance structure and distribution of rights of different participants in the corporation and their equally accountable duties were necessary in the modern corporation to prevent siphoning of funds or oppression and mismanagement. Post Ketan Parekh and Satyam Scams, India has come to more intricate questions of Cyrus Mistry where the law is unable to demystify the complex board structures and lack of transparency and accountability in such corporate structures. The exploitation comes to the forefront when the company is in financial distress and is being led towards insolvency. The Promoters/Board members generally try to maximize profits and bonus payments even in the eventualities of distress. At the time of scrutiny before adjudicatory authority in process of declaration of insolvency the problems come to the forefront and increase manifold. Group structures, shareholder responsibilities, payment of dividends and director duties are some of the key problems that have taken the shape of big corporate issues. This leads to corporate governance issues, which the business world is tackling for long. OECD in 2014 has laid down G20 principles to promote best practices in the world. The authors in this paper will analyze these key principles and issues in corporate governance as enunciated by OECD and IOSCO. The authors also propose to scrutinize various cases of insolvency passed in the Indian jurisdiction which entrench on corporate governance practice. The paper will also argue the role of directors and promoters bidding during resolution process and its impact on insolvency proceedings. It is proposed to suggest various measures to improve the status quo to make corporate governance and insolvency as stable as possible to increase the investor sentiment and economic development of the country.

Developing urbanization in India has supported the nation’s economy as well as displayed complex administration challenges that should be set out to saddle monetary open doors related with urbanization. One of such difficulties is decentralized urban administration where residents need to have a stake in settling on how urban areas ought to be overseen. Encounters ensnare that in the perspective of developing urbanization in the nation, the structures of subject cooperation gave under the 74th Amendment Act, 1992 of the Constitution are bombing in protecting compelling resident investment. The paper accordingly requires a reexamining in such manner, and talks about encounters of effective resident interest in urban administration and learning of such encounters. A state’s responsibility to its natives for open administration conveyance constitutes a focal segment of the democratic political entity. Yet, how to guarantee this responsibility? The appropriate response lies in the linkage amongst residents and some blend of chose political leaders and those they direct to give the administrations. This paper going to find out some answer such as why a few governments are steadier, proficient, imaginative also, all around oversaw than others. It finds the appropriate response in the move of worldview from an administration demonstrate in which natives were for the most part uninvolved to one in which they are given power and roads to impact open issues that influence their individual and their life. Citizen organization, as the new approach is famously known, depends on the possibility of dynamic citizenship and the way it influences the association and control of open administrations in our networks. it expands on the current social capital in networks to make residents refined shoppers of legislative issues, ones who connect with the administration in light of their identity and what their requirements are and not founded in transit government is composed. The interaction between social capital, exemplified in numerous grassroots and additionally corporate associations, and it holds colossal potential for upgrading citizens’ participatory part in administration.

The side effect of relentless industrialization has come up in the form of environmental degradation. Environment related issues have been steadily going up especially in the developing countries like India where the awareness about environmental sustainability and environmental governance is at its lowest. Thus, the state of environment is in a very pitiable condition. Though there are numerous environment related enactments which have endorsed the concept of sustainability and environmental protection, the preservation of the environment is in the state of a big question mark. Though the legal implications for non-compliance under the enactments namely, Wild Life (Protection) Act 1972, Water (Prevention and Control of Pollution) Act 1974 (Water Act), Forest (Conservation) Act 1980, Air (Prevention and Control of Pollution) Act 1981 (Air Act), Environment (Protection) Act 1986, Public Liability Insurance Act 1991, Biological Diversity Act 2002, National Green Tribunal Act 2010 (Jawaid et al. 2018) etc., are stringent still the environment related issues are increasing manifold. This paper analyses the legal implication for non-compliance under 8 specific environment related enactments and suggest measures in the form of environmental tax to be imposed on the pollutant industries to deter the environmental degradation.

When an outside investor exercises control differently than the manager of the firm that is when the corporate governance problem arises. The problem of conflicts between the stakeholders magnifies with dispersed ownership, it also creates collective action problem among investors. Some studies have identified five alternative mechanisms which can mitigate this problem: Shari’ah governance encourages honesty, integrity, transparency, accountability and responsibility among stakeholders in an organisation. Shari’ah board plays a very significant role in controlling and monitoring business transactions for the purpose of Shari’ah compliance. It follows ex-ante and ex-post criteria. AAOIFI and IFSB has set up guidelines for a sound corporate governance. In many ways Shari’ah governance can help the governance problems being faced by the corporations but there are some pros and cons as well regarding their implementation. Though the core Islamic laws cannot be followed in all the conventional countries but the principles or rules mentioned for a sound Shari’ah governance can be used so as to protect the economy from all kinds of frauds or losses. This paper will portray the benefits of Shari’ah governance. It will also be dealing with the corporate governance problems faced by the organisations and how these problems can be overcome by implementing Shari’ah Corporate Governance.

One of the most effective instruments at a government’s disposal in framing a corporate social responsibility (CSR) policy is the use of fiscal incentives such as taxes. Through the use of taxes, governments are in a position either to punish social irresponsibility, or to reward and incentivise socially responsible practices. Taxes are increasingly used as an instrument to deter practices that could be labelled as undesirable. Conversely, preferential tax treatment could also encourage businesses to engage in CSR through, for example, the deductibility of CSR expenditure. However, the South African Income Tax Act 58 of 1962 makes no reference to or special provision for CSR expenditure as deductible expenditure in terms of the Act. In order for expenditure to qualify as a deduction, section 23(g) of the Act requires an amount to be laid out or expended for the purposes of trade. Accordingly, in order for taxpayers to claim CSR expenditure as deductible expenditure, they have to demonstrate that the expenditure was trade related and actually incurred in the production of income. This poses certain challenges for CSR expenditure. The issue of deductible CSR expenditure came before the court for adjudication in Warner Lambert SA (Pty) Ltd v Commissioner, South African Revenue Service 2003 (5) SA 344 (SCA). This article will examine the mentioned judgement to assess whether this case is applicable for a possible future deductibility of CSR expenditure. The central issue at hand in the Warner case was business expenses incurred to retain a ‘license to operate’. This issue was recently dealt with in a SARS Binding Class Ruling (BCR). The ruling will be assessed to establish whether it provides insight into future SARS approaches to certain CSR expenditures. Furthermore, the article will elaborate on possible tax arrangements that provide businesses with a tax benefit when undertaking CSR expenditure. The focus will be on the possible use of Public Benefit Organisations (PBOs) to further CSR initiatives, and the tax treatment of donations made to these PBOs. The article will also discuss the current provisions in the Income Tax Act for charitable donations and its tax treatment.

Historically, corporate culture is focused on the maximisation of wealth with little emphasis on the means of achieving it. That culture has undergone a transformation with the advent of the corporations being encouraged to participate in allowing their profits to percolate to the other classes of society. Simply stated and understood, corporate social responsibility entails business and corporate houses, which generate and hold wealth, to be responsible and accountable for investing a part of their profits towards the larger good of the society. More recently, however, it has been interpreted as a continuous commitment and responsibility, where apart from spending a portion of profits, companies must attempt and concentrate on earning money in a more responsible way. This is now considered as a fundamental and essential requirement of corporate social responsibility and is much wider than the traditional notion of merely sharing a piece of the cake with the rest of the society. Including social issues into the corporate strategy and caring for them is now the hallmark for an innovative and dynamic CSR. With crony capitalism having been recognised to be as undesirable as communism, and the emphasis across the globe have moved to a more nuanced and mixed nature of economy and corporatisation, CSR has assumed centre-stage. This is more so in developing economies like ours, where no-one can afford to completely overlook the teeming millions. Although traditionally, the State was envisaged to be merely an entity for ensuring law and order and performing police functions, our Constitution envisages a much larger role for the State and mandates the State to engage in activities for the overall welfare of the people. Similarly, the State needs to ensure that the traditional corporate notion of maximisation of wealth is abandoned, and corporate entities indulge in participating with the rest of the society—to identify the social ills, to create awareness about them, and to take meaningful steps for removing these social problems. The present paper is an attempt at identifying and comparing the various ways of Governmental regulation on corporate behaviour for promoting corporate social responsibility. Following are some jurisprudential questions, which need to be pondered upon—Can business/corporate houses absolve from their social and environmental responsibilities by merely sharing or donating a part of their profits, when the cost of human and environmental resources, which they utilise is far heavier? Can there be some legal and regulatory mechanism imposed on a venture before it starts, which is anticipated to cause some environmental change or threaten some social displacements etc.? What can be the precise role of the government and its regulatory agencies to inculcate CSR in all business/corporate houses from the very inception, considering it as their basic obligation?

The paper “The Sreni-Drawing the Legacy of CSR in India” traces the origin of Corporate Social Responsibility (CSR) in India. It examines corporate forms that existed in Ancient India. Though there were number of entities involved in trade and craftmanship during that period but the Srenis remained the most predominant of all. This study examines the factors behind the establishment of Sreni as an economic, political, financial and legal entity. The Sreni could master over all these spheres because of its governance system. The internal governance mechanism made the Sreni consistent in its organizational system. A centralized management system, induction methods for new members, apprenticeship process for learning new crafts formed the basis of its prominence in the society. Such aspects of Sreni were crafted in such a manner that despite existence of other systems, it remained as the most significant entity. The Sreni with its centralized management also created space for democratic functioning. The backbone to all these lies in the Sreni dharma. Public trust and faith cannot be dissociated from the Srenis. Successful performance of their task, maintaining internal coherence, fairness, honest dealing and faithful discharge of their responsibilities and obligation had helped them to have trust over the public. Hence trust and faith of the public added value to Sreni CSR.

Paradigm shift was brought about in the dynamics of Corporate Social Responsibility (CSR) in India vide the Companies Act, 2013. The 2013 Act, mandated certain class of companies to spend 2% of their average net profits of the past three years on CSR activities as enumerated in the Seventh Schedule. The said shift from the voluntary to mandatory regime is marked by corporation’s choice to strict compliance. The Finance Act, 2014 prescribed that any expenditure incurred by a company assessee on the activities relating to Corporate Social Responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. This meant that such expenditure would not be allowed as expenditure under the Income Tax Act. Traditionally, the companies making voluntary donations and those involved in charity were allowed deductions of such contributions under Section 80 of the Income Tax Act, 1961. Much clarity is not accorded to the contributions made by the companies as CSR activity, as tax treatment of activities is varied to an extent. Moreover, the position becomes vexed post the advent of the Goods and Service Tax. Undoubtedly, clarity is sought in this front. The future course of mandatory CSR is dependent upon several implementation issues to be clarified; clarity in the taxation policy being the paramount. The paper has succinctly analysed the present status of CSR spending (relying upon the government data) to exhibit the possible linkages between corporate CSR initiatives and tax policy. The paper has chalked out suggestions for the way forward in untangling the present tax regime vis-à-vis CSR in India.

The mindless usage of resources in the name of industrialization has caused several imbalances in the ecology and the environment which has resulted in various natural hazards. This called for an equitable balance between industrialization and environmental protection. The rising environmental concerns and plethora of causes affecting the same has become a debate in the recent years. All the above made the industries to take up ‘Corporate Social Responsibility’ as a mandate and the same was appropriately brought in the Companies Act 2013 in India. Though the socially concern companies were following voluntary CSR practices, the new Companies Act 2013 made it mandatory so as to impose responsibility on the corporations to protect the environment through CSR practices. Meanwhile, the concept of ‘Social Responsibility Investment’ is taking strides across the globe as an avenue for deriving financial return as well as achieving ESG (Environmental, Social and Governance) objectives. Investors concerned about environment are presumed to be interested to invest more in a firm adopting CSR as it will serve both the purposes. By making about a ‘socially conscious’ investment, not only the shareholders but the entire stakeholder community can be benefited. The present paper focuses on significance, evolution of theory and research, social-responsibility screening, investor preference and the future prospects of SRI (Socially Responsible Investment) in India. The methodology adapted is descriptive in nature and data is collected from secondary sources. The study concludes that the significance of Green Investment strategy needs to be popularized to the maximum to bring about an overall positive change in the economy.