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THE NEED FOR SYNCHRONIZATION OF NEW COMPANIES ACT WITH OTHER CORPORATE LAWS APPLYING TO CORPORATE GOVERNANCE AND CSR ISSUESbyDr Dharuv Pal Singh, Associate Professor,Department of Commerce,Government Post Graduate College,Hamirpur (HP) 177001dharuvpal@yahoo.in

2AGENDA INTRODUCTION The ambit of corporate legal environmentImplications of new actPurposeObjectives of the studyCORPORATE GOVERNANCE UNDER THE COMPANIES ACT, 2013Overlap issues concerning corporate governance ANALYSIS OF CSR PROVISIONS IN NEW ACT Conflicting issues concerning CSR WRAPPING UP & FINDINGS The provisions which need alignment Rules of CSR which need clarification RecommendationsTHE AMBIT OF CORPORATE LEGAL ENVIRONMENT3The corporate form is emerging as the preferred vehicle for economic and commercial activity, with mobilization of public resources.

The number of companies has expanded from about 30,000 in 1956 to nearly 9 lakhs as on date.

There is a need to sustain this growth by enabling a legal framework that would enable the Indian Corporate sector to operate in an environment of the best international practices in a globally competitive manner, while fostering a positive environment for investment and growth. REGULATORS AND STATUTES WHICH GOVERN OUR COMPANIES4The Companies Act,1956The competition act,2002The LLP Act 2008The chartered accountants Act, 1949The Cost and works accountant act 1959The company secretaries of India act 1980The partnership act, 1932The societies registration act, 1860The companies ( Donation to National Funds) Act,1951.The harmonization of Indian accounting standards with IFRS with the intention of achieving convergence with IFRS by 2011Income tax act, 1961 The Companies Act2013-Highlights

The financial sector is regulated by the Reserve Bank of India The banking Regulation Act 1949 The insurance sector is regulated by Insurance Regulatory Development Authority ( IRDA ) Act 1999 Pension Fund Regulatory and Development Authority (PFRDA) established on 23rd August, 2003 The Securities and Exchange Board of India (SEBI) which was established in 1992 PURPOSE OF STUDY5The focus of the paper is on analysis of vexing issues in relation to corporate Governance and (CSR) provisions laid down under the Companies Act 2013OBJECTIVES OF THE STUDYTo find out the provisions of new companies act which overlap with other financial sector regulations.To find out the scope of CSR activitiesTo analyze CSR provisions as laid down in new act CORPORATE GOVERNANCE UNDER NEW ACT6Requirement to constitute Remuneration and Nomination Committee and stakeholders relationship committeeGranting of More powers to Audit CommitteeSpecific section pertaining to duties of directorsMode of appointment of Independent Directors and their tenure Code of Conduct for Independent Directors Rotation of Auditors and restriction on Auditors for providing non-audit services Enhancement of liability of AuditorsDisclosure and approval of Related Party TransactionsMandatory Auditing StandardsEnabling Shareholders Associations/ Group of Shareholders for taking class action suits and reimbursement of the expenses out of Investor Education and Protection Fund Constitution of National Financial Reporting Authority, an independent body to take action against the Auditors in case of professional misconduct Requirement to spend on Corporate Social Responsibility (CSR) activitiesOVERLAP ISSUES CONCERNING CORPORATE GOVERNANCE7One of the areas of overlap with Securities Exchange Board of India (SEBI) is the issue of preferential shares. The new act has provided that preferential issues now require a registered valuer to value the shares. Issue of preferential shares has got several dimensions, the key being that pricing considerations are commercially driven. In any case, you have SEBI guidelines for listed companies,RBIguidelines for cross-border share issues, and several deeming fictions (and litigation) in tax legislation. In this context, clearly, a regulatory overkill, not to speak of confidentiality concerns where external parties are involved in share valuation. Another area where SEBI regulations will come into play is the insider trading provisions. While the 1956 Act was silent on the provisions relating to insider trading, the 2013 Act on the other hand, lays down provisions relating to prohibition of insider trading with respect to all companies. SEBI already has insider trading provisions for listed companies, now this will also cover unlisted companies. Moreover, the new Act has included several key functionaries in the definition of the insider. SEBI regulations need to be amended accordingly.OVERLAP ISSUES CONCERNING CORPORATE GOVERNANCE8As against the term relative defined under the 1956 Act, the 2013 Act defines the term related party for the first time with stringent provisions. Hence, the earlier Act did not provide for any definition of related-party. But the new Act has provided for the widest possible definition of the related-party transactions. Another issue bothering many tax experts while considering any related-party transactions is that the threshold of ownership is different between I-T Act and the companies Act.

Transfer pricing refers to prices of transaction between associated enterprises which may take place under conditions different from those taking place between independent enterprises. Transfer pricing regulations look at 20 per cent or more ownership of voting power, whereas the companys law looks at control of 20 per cent or more of total share capital (including preference share capital).ANALYSIS OF CSR PROVISIONS IN NEW ACT9Requirements pertaining CSR are found in Sec 135 and Schedule VII .The government has put out the draft rules pertaining to CSR in the public domain inviting comments and suggestions thereon. Once the rules are accepted and notified it will come into effect from the date so notified. It is expected that the entire scheme of things pertaining to CSR is likely to get implemented with effect from the financial Year 2014-15.The following categories of companies registered under the Companies Act would be covered by the provisions relating to CSR:

Though the threshold limit of net worth and turnover are high the profit criteria is relatively low which would bring in number of companies under the CSR ambit. Schedule VII gives a list of activities which can be undertaken by the company who is mandated to spend on CSR.

CONFLICTING ISSUES CONCERNING CSR10The Draft Rules state, "CSR projects/programmes of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value. Shared value creation focuses on identifying and expanding the connections between societal and economic progress. The concept rests on the premise that both economic and social progress must be addressed using value principles. Value is defined as benefits relative to costs, not just benefits alone. However, businesses have rarely approached societal issues from a value perspective but have treated them as nonessential matters. This has masked the connections between economic and social concerns.For example:

what happens when a firm invests in a wellness programme. Society benefits because employees and their families become healthier and the firm minimizes employees absence and increased productivity.CASE STUDIES- SHARED VALUE11An example of shared value in action is Adidas has partnered with Noble Laureate Muhammad Yunuss micro-finance organization, Grameen Bank to manufacture a low cost shoe for the poor in Bangladesh. The shoes will be cheap and affordable for the poor in Bangladesh, besides it will protect people from diseases, said Yunus. This is a example of the share value principle both for Adidas and for the Grameen Bank. Another example of shared value initiative is the 'Project Shakti' of Hindustan Unilever Limited (HUL).It enhances the direct rural reach of the company while empowering women. Can we classify 'Project Shakti' as a CSR project? Whether training expenses on Shakti entrepreneurs should be classified as CSR expenditure?The concept of 'shared value' blurs the boundary between pure business activities and CSR activities. 'Shared value' strategies definitely serve the CSR objectives, but they are closely intertwined with the business strategy. Clarification on this issue is essential, as companies and regulators should have a common understanding on which items should be included in calculating CSR spend SHARED VALUE CLARIFICATION12The Act (schedule VII) stipulates that 'social business projects' may be included in the CSR policy. By definition, surplus from those projects are ploughed back to improve the product or service or to provide subsidy. For example, the 'agarbatti' (incense sticks) business of ITCstarted to provide livelihood support to retired employees and then it was extended to other members of the community located around ITC's manufacturing facilities. If ITC designates it as a 'social business project', it shall not include surplus from this business in the net profit of the company.A clarification is required on whether a part of general overheads and the cost of service provided by employees, who are employed primarily to work for the core business of the company, but spend some time on those projects, should be considered as CSR spendThe Draft Rules state, "Only activities, which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity." Companies build and operate facilities (e.g. educational institutions and health care facilities) primarily for employees and their families. Members of the local community also use those facilities. A clarification is required on whether only proportionate expenditure that can be assigned to the use of those facilities by local community members should be considered as CSR spend. Allocation of expenditure will be an issue that should be addressed by cost accountantsCSR ACTIVITIES--CLARIFICATIONS13Activities related to 'environmental sustainability' are also classified as CSR activities. Companies undertake research projects to improve existing products or processes to make them environment friendly. A clarification is required on whether such research expenses will be considered as CSR spendThe Draft Rules state, "CSR Policy would specify that the corpus would include the following: 2% of the average net profits; any income arising there from; and surplus arising out of CSR activities.This implies that every year, companies should transfer two percent of average net profit before tax (calculated as per section 198) of the previous three years to the CSR corpus and then spend money for CSR activities from that corpus. A clarification is required on whether companies should transfer the amount to the corpus at the beginning of the financial year and invest the corpus fund outside the business to earn an income that will form a part of the corpusThe Act mandates that every company having a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 500 crore or more during any financial year shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director will be an independent director. A clarification is required on whether a company that is not otherwise required to appoint independent directors is required to appoint an independent director only to comply with the requirement under section 135 of the Act WRAPPING UP14Overall, companies Act 2013 is a positive and strong step towards corporate governance and will help in strengthening the corporate governance framework in the country. The new act has introduced the concept of CSR in the act itself and even though the act advocates it strongly but it has still prescribed a comply or explain approach only. This means as per the new norms, the two percent spending on CSR is not mandatory but reporting about is mandatorySome of the provisions of CSR draft require clarification to enable companies to formulate CSR policies and its effective implementation to bring and sustain a balance between economic and social arena. Some of the provisions of the new Companies act overlap certain key norms made by other financial sector regulators. They include regulations in SEBI Act, Income Tax act, Accounting Standards FINDINGS 15The provisions which need alignment areIssue of preferential shares Insider trading regulationsRelated party transactions Consolidated financial statementAccounting standardsRules of CSR which need clarification are The shared value strategies which serve the purpose of CSR objectives under "social businessprojects but blurs the boundary between pure business activity and CSR activity; General overheads and cost of service provided by employees primarily to work for core business but spend some time on CSR projects should be considered as CSR spend; Research expenses as CSR spend; Income from corpus fund raising by investing outside business will form a part of corpus fund; Appointment of Independent Director RECOMMENDATIONS

16The Ministry of Corporate affairs has to align these overlaps in the companies act 2013 which has left many corporate stake holders confused.The government should tweak this legislation pertaining to corporate governance and CSR confusing issues as early as possible to prevent companies from exploiting loopholes arising out of regulatory overlaps between this act and other financial sector regulations.THANKS FOR LENDING AN EAR !17