Mandatory CSR: India Inc bristles, but has little options

There is resentment brewing in Corporate India with regard to the mandatory CSR spending and tough guidelines about role and performance of independent directors in a company board, both of which are part of the New Companies Act. The new Act is expected to be tabled and passed in the Winter Session of Parliament.

[caption id=“attachment_83862” align=“alignleft” width=“380” caption=“The new Act is expected to be tabled and passed in the Winter Session of Parliament. Reuters”] [/caption]

The majority view at the 7th International Corporate Governance Summit of 2011 organised by the Confederation of Indian Industry was India does not need any further tightening of legal framework and guidelines as far as corporate governance is concerned. But the government seems to be in no mood to postpone the introduction of the New Companies Act though it is open to suggestions. Along with this, the new competition policy is also waiting for a push.

The existing Companies Act is the one formulated in 1956 which has gone through several modifications. But some 300 amendments necessitated the need for a new bill, which is now waiting for Cabinet approval. But the clause on corporate governance is something Corporate India is finding difficult to accept. The provision mandates for every company with a revenue flow of Rs 1,000 crore - net worth of Rs 500 crore or more - or a net profit of Rs 5 crore or more during a year that these will have to spend 2 percent of their net profit on corporate social responsibility (CSR).

The problem lies here: net profit is calculated by deducting taxes from the profit. This implies now the government is trying to tax profit after tax. As Omkar Goswami, founder and chairman, CERG Advisory, pointed out: “This is an extra constitutional authority and Indian corporates are getting ready for the grand compromise.”

SMC Global Securities had calculated that this could mean a spending of Rs 8,700 crore in the CSR space. This comes as a double whammy for mining companies which are already prescribed to share 26 percent of their profits with locals.

The point that experts are making is this: though spending in CSR is welcome and can perhaps be incentivised also, making it compulsory is stretching it too far. Rahul Bajaj, chairman, CII National Council on corporate governance and regulatory affairs, said: “We must trust our promoters. If you are mandating conscience and generosity, it is not generosity anymore.”

Moreover, the definition of CSR activity could now get blurred with every company trying to cut down their budget. Shobana Kamineni, executive director, Apollo Hospitals, explained that companies might introduce some schemes for employees and pass these off as CSR.

The other bone of contention is independent directors. Though they were already mandatory on company boards, the Act extends its reach to unlisted companies. An independent director requires to understand fundamentals of the business and needs to spend substantial time on his job to be effective. Unfortunately, most people are of the opinion that there is a genuine dearth of independent directors in India and it would be impossible for every company to find one for their boards.

Apart from that, the tenure of independent directors for a company has been sealed to two terms. There is no clarity whether each term means three years or five years. One fails to fathom why this limitation on tenure if the director is competent.

Lately, after several cooking up of books internationally by companies, concerns are growing over the role of auditors, and the Bill attempts to address that. Their solution: change your auditors regularly. How will that solve problems is beyond comprehension again because you choose just another auditor from a small list of names in India and you don’t know who to trust more.

Shardul Shroff, managing partner, Amarchand and Mangaldas, and Suresh A from Shroff and Co complain that the Bill should have ideally looked at aspects like risk assessment whereas the bill makes a risk committee optional. The other mandates falls under a regime of “comply or explain”. How would this compliance be monitored and the explanations sought is also being debated. But the annual reports are now expected to have a separate reporting section on corporate governance.

Better corporate governance is always welcome, but what is questionable is the move of micro management by the ministry of corporate affairs. Shailesh Haribhakti, chairman, BDO Consulting, said, “Governance can be improved by regular voluntary disclosures made by the companies which might help negate insider trading.” The companies should also plan successions transparently and in advance, have strong independent voices on their boards and contribute holistically to society.

The KPMG report also cites a research by Credit Lyonnais Securities Asia which talks of a strong correlation between corporate governance and stock performance. For every 10-point movement in corporate governance score, there was a 7.3 percent improvement in stock prices. But the new law might not be the best way to mend the trust deficit among the government, corporate and people. We already have laws in place and do not need more. What we need is implementation.