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  • Stewardship: A new vision for businesses

    One of the newest terms in the corporate lexicon is ‘stewardship’. To understand what it exactly means, we have to dig a little deeper. Meaning of Stewardship The dictionary meaning of stewardship is “the conducting, supervising, or managing of something, especially the careful and responsible management of something entrusted to one's care” [] The origin of the term goes back to when a ‘steward’ was a household servant and his sole duty was to bring food and drink to his master's dining hall. In course of time the responsibilities of a steward were extended to include other domestic services and household management needs. Further down the line, commercial stewardship evolved and providing service to passengers on ships, trains, flights or luxury buses and to guests in hotels or restaurants were brought within the ambit of the meaning of stewardship. Today the concept of stewardship has also been embraced by other fields (it may seem completely unrelated though) like economics, environment, health, property, information & technology, theology and so on. Stewardship vs Sustainability Both the words are often used interchangeably, but they are not identical concepts. There is a thin line of difference between the two. #Sustainability means ‘meeting current needs without sacrificing the ability of future generations to meet their own needs by balancing environmental, economic and social concerns’ while #stewardship means ‘the careful and responsible management of something entrusted to one's care’. So, while the former authorizes corporations to ‘use’ the resources and at the same time to ensure that the right of the future generations to use the same resources is not jeopardized, the latter essentially makes corporations ‘caretakers’ of the valuable resources. They are not only required to manage them but also to ensure that the same are passed on to the future generations in the same form if not better. Stewardship in business And that brings us to our topic for discussion. Today, stewardship is one of the terms in the ever-expanding corporate lexicon. Stewardship would ideally mean an ethical approach to responsible planning and management of resources. It is generally considered to be the acceptance of responsibility to safeguard the valuables of others. In terms of corporate stewardship, it would ideally mean accepting the responsibility of taking care of the organization or property by those who are entrusted with the duty. Going deeper into it to find the implication, it would mean that those who are entrusted with the wealth or valuables of any kind by others have an obligation to hand those assets down in a shape better than they themselves inherited them. That would imply being responsible beyond one’s own interest (selfless), and such responsibility extending beyond one's lifetime (long-lasting). Thus, in today’s corporate scenario, stewardship would refer to taking responsibility for the business of the company and the effects it has on the world around and on the generations to come. It is taking a humane view and adopting a sustainable approach to business. The traditional concept of ‘shareholder wealth maximization’ has been at the root of many corporate scams, resulting in the creation of a ‘credibility and trust crisis’ for corporations generally. The effect of these have been a paradigm shift towards ‘better corporate governance’, increased compliances, enhanced transparency and wider stakeholder participation. The concept of stewardship is the newest entrant to the list of models being researched upon by champions of corporate sustainability in pursuit of responsible business behaviour. For small and medium-sized businesses, the concept of corporate stewardship may seem not to be helpful in their day-to-day struggle to survive. But as corporations grow bigger, stewardship concept needs to be intertwined with their business ideology for them to thrive. Examples of stewardship The following are some examples of application of the corporate stewardship approach: i. using renewable resources and biodegradable materials, ii. producing products that are not harmful to the environment, iii. using email communication to reduce paper consumption, iv. reducing and recycling of waste, v. ordering items in bulk to cut down on the need for repetitive shipping, vi. considering environmental effects of new inventions and innovations, vii. holding all kinds of meetings in hybrid mode to cut down the necessity of unnecessary travel by participants located at different locations (who can join via video conferencing), viii. encouraging pool car facilities for employees to promote the twin objective of intra- organisation social cost and reducing carbon footprint, ix. having captive power generation unit using renewable energy sources x. promoting the conservation of energy like fuel, electricity etc. Breaking down the concept To understand the concept of business stewardship better, we can break it down to a few sub-concepts as follows: Corporate Stewardship Corporations around the world are increasingly beginning to realise the negative impacts of their businesses (like climate change, deforestation, water shortage, contamination of water, increased pollution, unequal distribution of wealth and so on) and are showing active interest on working to alter the same and being more responsible for their actions not only in the interest of their current and future stakeholders but also in the interest of the society. This approach is called corporate stewardship. Environmental Stewardship In the wake of the increased concerns about the environment, many businesses around the globe have realised that it is important for corporations to be environmentally sustainable. This has prompted them to realign their businesses in a more sustainable way. This approach is called environmental stewardship. Service-Oriented Stewardship The human factor is very important in the success of businesses. Managing the human factor, and the various stakeholders amongst them is vital for long term sustainability. This includes employees, customers, suppliers, partners and local community, and managing the interactions with them and in between them is an important part of business stewardship. Proper codes of conduct and communication manuals must be developed in the interest of business. This is service-oriented stewardship. It may be noted that in India, this concept of corporate stewardship and environmental stewardship forms the basis of the mandatory provisions of Corporate Social Responsibility (#CSR) u/s 135 of the Companies Act, 2013. There are also various laws that have been enacted to make environmental and service-oriented stewardship mandatory, like the environment protection laws, labour laws, consumer protection laws, and so on. However, when we talk of ‘stewardship’, we are implying compliance beyond what is mandatory. Costs of stewardship Taking up a corporate stewardship approach definitely comes at a cost. But this should not be a deterrent to taking up stewardship. In certain cases, the company can offset the same from tax-credits, if any. A company can also benefit of saving when using renewable energy as part of stewardship. In jurisdictions where carbon tax is applicable, stewardship may also help a company save on the same. Conclusion It wouldn’t be wrong to say that all types of businesses engage in some activities that have negative environmental consequences, but not all of them take up stewardship. Adopting the stewardship model can definitely help them find more sustainable practices, while at the same time improve its goodwill and reputation in the society in general and among the c onsumers in particular as also save money in certain cases. As per the stewardship model a business leader should be like a responsible steward contributing to the wellbeing of his customers, suppliers, employees as well as community members. Corporations must act ethically and responsibly for the common good of all stakeholders, the present as well as the future and the planet. Those organisations, that haven’t yet implemented the Stewardship Model, must consider doing it now.

  • GHG Gases as in BRSR Report – explained for professionals

    The Securities and Exchange Board of India (SEBI), in its Guidance Note to the Business Responsibility and Sustainability Reporting (BRSR) format as in Annexure II, clearly indicates in point 6 under Principle 6 [Businesses should respect and make efforts to protect and restore the environment] the Details of Scope 1 and Scope 2 greenhouse gas (GHG) emissions and GHG intensity. It mentions the following gases as included in the term ‘green-house gas’: Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O) Hydrofluorocarbons (HFCs) Perfluorocarbons (PFCs) Sulphur hexafluoride (SF6) Nitrogen trifluoride (NF3) Important Note: Any trade in the #GHG cannot be considered in these scopes. In other words, buying or selling of GHG from any #Carbon Exchange etc. or under any international protocol cannot be considered within the scope 1 and scope 2 above. The #GuidanceNote further mentions the following points which are more or less self-explanatory: 2. Scope 1 emissions are direct GHG emissions from sources that are owned or controlled by the entity. Source refers to any physical unit or process that releases GHG into the atmosphere. Further, any emissions that are not physically controlled but result from intentional or unintentional releases of GHGs, such as equipment leakages, methane emissions (eg: from coal mines), shall also be included in the calculations. 3. Scope 2 emissions are energy indirect emissions that result from the generation of purchased or acquired electricity, heating, cooling, and steam consumed by the entity 4. Entities may, on a voluntary basis, provide a breakup of the Scope 1 and Scope 2 emissions into CO2, CH4, N2O, HFCs, PFCs, SF6, NF3. 5. The entity shall exclude any GHG trades (purchase, sale or transfer of GHG emissions) from the calculation of Scope 1 and Scope 2 GHG emissions. 6. The unit for the disclosures shall be metric tonnes of CO2 equivalent. Further, entities should disclose the standards, methodologies, assumptions and/or calculation tools used, including sources of the global warming potential (GWP) rates and emission factors used. 7. Scope 1 and Scope 2 emission intensity per rupee of turnover shall be calculated as the total Scope 1 and Scope 2 emissions generated divided by the total turnover in rupees. 8. Apart from turnover, entities may on a voluntary basis, provide Scope 1 and Scope 2 GHG emission intensity ratio, based on other metrics, such as: • units of product; • production volume (such as metric tons, litres, or MWh); • size (such as m2 floor space); • number of full-time employees The listed entities, while preparing their BRSR Report, must keep the above points in mind. It is very important for them to collect accurate data of GHG emissions in respect of the entity’s operations for proper GHG accounting. GHG Emissions Management System In order to properly manage the GHG emissions by an entity it is important to understand the meaning and types of GHG gases. Definition of Greenhouse Gases Greenhouse gases (GHGs) are some gases in the earth's atmosphere that absorb heat and emit radiant energy. When the sun shines during the day, it warms up the earth's surface, but after sunset, the surface cools down, and releases heat back into the air. During this process some of the heat gets trapped by the greenhouse gases in the atmosphere. It may be noted that GHGs are stronger and last a shorter time in the atmosphere than others, which are less potent but last longer. Types of Greenhouse Gases There are numerous forms of GHG emissions that cause climate change; the 26th UN Climate Change Conference (COP 26) held in Glasgow in October – November 2021 lists seven main types of GHGs. It requires that using the national GHG inventories, each country will report on its progress towards the COP26 targets. The following are the seven types of GHGs explained: Carbon dioxide (CO2): Carbon dioxide is a gas that is released into the atmosphere as a by- product of burning fossil fuels like coal, natural gas, and oil as well as other solid waste, trees, and other biological materials (e.g., manufacture of cement). When carbon dioxide is absorbed by plants as part of the biological carbon cycle, it is taken out of the atmosphere (sequestrated). Methane (CH4): When coal, natural gas, and oil are produced and transported, methane is released into the atmosphere. Land usage, livestock, various agricultural practises, and the decomposition of organic material in municipal solid waste landfills all contribute to methane emissions. Nitrous oxide (N2O): It is a gas that is released during the processing of wastewater, the burning of solid waste, and industrial, agricultural, and forestry operations. Fluorinated gases HFCs, PFCs, SF6 and NF3: These are manmade, potent greenhouse gases that are released through a range of domestic, commercial, and industrial applications and processes. These gases include hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF6), and nitrogen trifluoride (NF3). Compared to other greenhouse gases, fluorinated gases are normally emitted in smaller amounts, yet they are powerful greenhouse gases. They are sometimes referred to as high-GWP gases because, for a given amount of mass, they trap far more heat than CO2, with GWPs that typically vary from thousands to tens of thousands. The global warming potential (GWP) of each GHGs must be stated in tonnes of carbon dioxide equivalents according to reporting guidelines in order to make it easier for organisations and governments around the world to record emissions in tonne of CO2 equivalent (tCO2e). Global Warming Potential (GWP) Multiplying the tonnes of each gas emitted in a given year by its GWP value yields the reporting entity's overall tonne of CO2 equivalent (tCO2e) emissions. For instance, reduction of one tonne of carbon dioxide would result in a decrease of 1 tCO2e, whereas reduction of one tonne of methane would result in a reduction of 25 tCO2e. The following table lays down the potential GWP of the Green House Gases and lists their sources: [Opinions expressed are author’s personal] Author Profile: Dr. Paritosh Nandi holds a Ph.D. degree in Solar Energy Engineering. He is also a Certified Energy Manager and Certified Energy Auditor by Ministry of Power, Government of India. He has been instrumental in developing Clean Development Mechanism (CDM) projects in organisations for the last eleven years and has hands on expertise in ESG. For more detailed profile visit Author can be reached at

  • Various types of Board of companies

    The board of directors of a company is the highest governing authority within its management structure. Chosen by shareholders, the directors are considered as the trustees of the company's property and money, and they act as the agents in transactions that are entered into by them on behalf of the company. Their primary responsibility is to look out for the interests of the shareholders. The role of the board is supervisory in nature. It sets strategies, oversees the company’s activities and assesses its performance. The members of the board typically meets at regular intervals. Away from the legal meaning or implication of the term ‘Board of Directors’, the BOD may be classified into different types based on the way of its working. Every board or committee works a little differently from another. Sometimes the difference is minimal, but sometimes it may be more obvious. Because of this there are no tailor-made solutions applicable to similar problems of different Boards. In order to decide on the best approach to corporate governance, it is first important to identify what kind of Board a company has. In the following paragraphs is a quick overview of the different types of Board based on the ways they function. 1. Governing Board - A Board where the Promoter of the company is not a part, is said to be a Governing board. The board members consist of persons other than the promoters and the intention of the Board is to provide direction to the owners w.r.t. the best way of running the organisation. The BOD is concerned mainly with the bigger picture and delegate managerial task to people employed in the organisation. 2. Working Board - As opposed to a governing board, a Working board not only deals with the big picture but also simultaneously implements the policies and strategies. This type of board is generally found in smaller or new organisations. 3. Managing or Executive Board - This type of board has its members as Executive Directors and together they runs everything in the organisation on a day-to-day monitoring basis. Such Board will have necessary subcommittees for quick addressing of specific situations within the organisation. 4. Advisory Board - Advisory boards are similar to governing boards and they provide advice and direction to those who are actually running the organisation; the difference is that in case of governing boards the directions are given to employees, in case of Advisory Board, the advice is given to the Board of Director which is essentially in the form of an Executive or Working board. The role of Advisory Board is important in critical matters and delicate situations. 5. Policy Board - This board is similar to the Advisory board, except that in the Policy board instead of advising, the stress is on formulation of organisational policies, practices and directions to guide employees. The CEO or promoter of the company, or other employees implement the work of the policy board. 6. Cooperation Board - As the name suggests, the Cooperation board is one where all members work and vote equally on all points of business. All members are people elected to represent the members of a co-operative or other non-profit organisation. All board members have a singular goal and work to achieve the same. 7. Cortex Board - The Cortex model emphasizes on the value that an organisation creates in the community. The performance of the organisation is measured on the basis of parameters like community standards, giving back, societal expectations etc. 8. Competency board: This type of board has members with specific expertise that brings distinct advantages to the company. For instance, a board may consist of a member with experience in product design, another in advertising, another in finance and another in law. 9. One-tier & two-tier board - One-tier board of directors or Unitary board of directors) is a system in which a company has a single body of directors that performs all the functions of the board. The board comprises of both executive directors and non-executive directors and it performs both managerial and supervisory duties. As compared to this the two-tier board of directors has two distinct boards of directors, a Management Board and a Supervisory Board and their roles are distinct too. The management board is the lower tier and is accountable to the supervisory board. It makes decisions related to operational aspects of the company while the supervisory board makes strategic decisions.

  • Social Stock Exchange: The Regulatory Framework

    Though Social enterprises (SEs) comprise a very large part of the ecosystem in the country, being unlisted entities they are unable to tap the capital market. There are investors interested in contributing towards social causes in such entities, but due to information about these entities being in the oblivion, such noble intentions often do not see the light of the day. The novel concept of Social Stock Exchange (SSE) is intended to benefit the private and non-profit sectors by directing more capital to them. Timeline The following is a timeline of development of the concept of SSE in India and the relevant regulatory framework so far: July 2019: In her Budget speech for the fiscal year 2019–20, Finance Minister Smt. Nirmala Sitharaman proposed the setting up of SSE in India. September 2019: SEBI constituted a working group on Social Stock Exchanges to review and recommend the possible structures and mechanisms to facilitate the raising of funds by social enterprises and the associated regulatory framework. May 2020: The Working Group on SSE came up with its detailed report and recommendations. September 2020: Technical Group on Social Stock Exchanges was formed by SEBI based on the recommendation of the Working Group May 2021: The Technical Group on SSE submitted its report September 2021: SEBI took a major decision by approving the creation of Social Stock Exchange under its regulatory ambit. July 16, 2022: A Govt. notification introduced a new instrument called ‘zero coupon zero principal instrument’ under the definition of securities under the Securities Contracts (Regulation) Act, 1956. July 25, 2022: SEBI notified Social Stock Exchange (SSE) Rules providing social entities with an additional avenue of raising funds. SEBI notification made amendments to the SEBI (LODR) Regulations 2015 providing for eligibility of entities in order to be classified as ‘Not for Profit organisation’ and ‘For profit Social Enterprise’. Certain amendments were also made by the SEBI (Issue of Capital And Disclosure Requirements) (Third Amendment) Regulations, 2022 to the provisions of the SEBI (Issue of Capital And Disclosure Requirements) Regulations, 2018. September 19, 2022: SEBI came out with a detailed framework for Social Stock Exchange. SEBI’s framework for SSEs was made based on the suggestions of a working group and technical group formed earlier by the regulator. Among other things the framework specified the minimum pre-requirements for a Not-for-Profit Organisation (NPO) in order to be registered as an SSE with the social stock exchange. October 2022: The Bombay Stock Exchange (BSE) received an in-principle approval from the Securities Exchange Board of India (SEBI) to set-up a Social Stock Exchange (SSE) as a separate segment. December 19, 2022: The National Stock Exchange (NSE) received an in-principle approval from SEBI to set-up a Social Stock Exchange as a separate segment. December 27, 2022: SEBI granted its final approval for setting up of an SSE by BSE. What is a Social Stock Exchange (SSE)? Though Social enterprises (SE) comprise a very large part of the ecosystem in the country, being unlisted entities they are unable to tap the capital market. There are investors interested in contributing towards social causes in such entities, but due to information about these entities being in the oblivion, such noble intentions often do not see the light of the day. To fill this gap, SEBI has come up with the concept of Social Stock Exchanges (SSE). The #SSEs will operate like other stock exchanges and SEs will be allowed to list their securities in this exchange. These securities can then be traded by the public and investors interested in investing in social entities will have the information and clarity about them. SSE Framework SEBI has, vide its notification dated 25th July, 2022, made amendments in the SEBI (LODR) Regulations, 2015 that come into effect immediately. These amendments are called the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022. These amendments lay down the framework for SSEs and mainly provide for the eligibility of organizations to raise funds and the eligibility of entities to be classified as ‘Not for Profit Organization’ and as ‘For Profit Social Enterprise’. Under the new framework released by SEBI, an SSE will function as a separate division of the existing stock exchanges. The framework specifies the following: i. pre-requirements to be met by an NPO for registration with a Social Stock Exchange, ii. disclosure requirements for NPOs raising funds through the issuance of zero-coupon zero principal instruments iii. annual disclosure requirements on social stock exchanges for NPOs. In addition to the above, SEBI has mandated the listed NPO to submit a statement of utilisation of funds to the SSE within 45 days from the end of quarter. Further, the social enterprises raising funds using SSE also has to disclose an Annual Impact Report (AIR) within 90 days from the end of financial year, capturing the qualitative and quantitative aspects of the social impact generated by the entity and where applicable, the impact that is generated by the project or solution for which funds have been raised through the Social Stock Exchange. Chapter IX-A of SEBI LODR Regulations The amendments have inserted ‘Zero Coupon Zero Principal Instruments’ in the definition of Securities and notified a new chapter IX-A which deals with obligations of social enterprises. Chapter IX-A of SEBI (LODR) contains the new regulations 91B, 91C, 91D, 91E and 91F and these new regulations provide as under: Zero Coupon Zero Principal (ZCZP) A subscription to the new instrument ZCZP is like a philanthropic donation. ZCZP can be publicly or privately issued by a Not-for Profit Organisation (NPO) upon registering with the Social Stock Exchange to raise funds, subject to the fulfilment of eligibility criteria. Currently, the proposed minimum issue size of ZCZP is at Rs 1 crore and the minimum subscription application size is at Rs 2 lakhs. Eligible SEs The following two types of entities are eligible for raising funds through Social Stock Exchange (SSE) A For Profit Social Enterprise whose designated securities are listed on the applicable segment of the Stock Exchange. A Not-for-Profit Organization that is registered on the Social Stock Exchange. A For Profit Social Enterprise is a company or body corporate operating for profit but having social intent and impact as their primary goal and indulging in at least one of the following activities: (i). Eradicating hunger, poverty, malnutrition and inequality; (ii). Promoting health care including mental healthcare, sanitation and making available safe drinking water; (iii). Promoting education, employability and livelihoods; (iv). Promoting gender equality, empowerment of women and LGBTQIA+ communities; (v). Ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation; (vi). Protection of national heritage, art and culture; (vii). Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports; (viii). Supporting incubators of Social Enterprises; (ix). Supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building; (x). Promoting livelihoods for rural and urban poor including enhancing income of small and marginal farmers and workers in the non-farm sector; (xi). Slum area development, affordable housing and other interventions to build sustainable and resilient cities; (xii). Disaster management, including relief, rehabilitation and reconstruction activities; (xiii). Promotion of financial inclusion; (xiv). Facilitating access to land and property assets for disadvantaged communities; (xv). Bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection. (xvi). Promoting welfare of migrants and displaced persons; (xvii).Any other area as identified by the Board or Government of India from time to time A Not-for-Profit Organization is a social enterprise covered within any of the following: a charitable trust registered under the Indian Trusts Act, 1882; a charitable trust registered under the public trust statute of the relevant state; a charitable society registered under the Societies Registration Act, 1860; a company incorporated under section 8 of the Companies Act, 2013; any other entity as may be specified by the Board Which entities are not eligible as SE? It may be noted that corporate foundations, political or religious organisations or activities, professional or trade associations, infrastructure and housing companies, except affordable housing, will not be eligible to be identified as a social enterprise. Which SEs are not eligible to raise fund through SSE? The following social enterprises are not eligible to get registered or raise funds through a Social Stock Exchange – a) if any of its promoters, promoter group or directors or selling shareholders (in case of for profit social enterprise) or trustees are debarred from accessing the securities market by SEBI b) if any of the promoters or directors or trustees of the Social Enterprise is a promoter or director of any other company or Social Enterprise which has been debarred from accessing the securities market by SEBI; c) if the Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower; d) If Social Enterprise or any of its promoters or directors or trustees is a willful defaulter or a fraudulent borrower. e) If any of its promoters or directors or trustees is a fugitive economic offender f) if the Social Enterprise or any of its promoters or directors or trustees has been debarred from carrying out its activities or raising funds by the Ministry of Home Affairs or any other ministry of the Central Government or State Government or Charitable Commissioner or any other statutory body Types of social enterprise w.r.t an SSE The Social Stock Exchange framework identifies the two forms of social enterprises that engage in the activity of creating positive social impact: a. Not-for-profit organisation b. For-profit social enterprise In this connection it may be noted that in order to be eligible for being identified as a Social Enterprise under any of the categories above an entity must establish the primacy of its social intent and in order to do so, such Social Enterprise shall meet the following eligibility criteria:- (a) the Social Enterprise shall be indulged in at least one of the activities [(i) to (xvii)] mentioned above under the definition of For Profit Social Enterprises (b) the Social Enterprise shall target underserved or less privileged population segments or regions recording lower performance in the development priorities of central or state governments; (c) the Social Enterprise shall have at least 67% of its activities, qualifying as eligible activities to the target population, to be established through one or more of the following: (i) at least 67% of the immediately preceding 3-year average of revenues comes from providing eligible activities to members of the target population; (ii) at least 67% of the immediately preceding 3-year average of expenditure has been incurred for providing eligible activities to members of the target population; (iii) members of the target population to whom the eligible activities have been provided constitute at least 67% of the immediately preceding 3-year average of the total customer base and/or total number of beneficiaries. Requirements for NPO Registration In order to be eligible as a Social enterprise, a Not-for-Profit Organisation needs to be in operations for 3 years before registering on the Social Stock Exchange. Further, registration of the NPO on the NGO Darpan portal is mandatorily required for registering it on Social Stock Exchange. Once registered on the SSE, an NPO will have to follow all the compliances under the SEBI (LODR) Regulations, 2015 and the circulars thereof even if it does not list any instruments on the SSE. It may be noted that only Indian entities can register in Social Stock Exchange. In order to raise funds through an SSE, an NPO must register with the Social Stock Exchange, but it may continue to raise funds through any other means permissible under the law, whether or not it is registered with the Social Stock Exchange. SEBI, in its circular dated September 19, 2022, has prescribed certain minimum requirements for NPOs willing to register on the Social Stock Exchange. The following are the mandatory requirements: i) The NPO should be in existence for a minimum period of 3 years ii) It has a valid certificate u/s 12A/12AA/12AB of the Income Tax Act, iii) It has a valid 80G registration, iv) It has a minimum of INR 50 lakhs in annual spending and v) It had a minimum of INR 10 lakhs in fund in the past year vi) Any other criteria mentioned by the particular Social stock exchange in order to register on them. Investment by investors Under the SSE framework, only institutional investors and non-institutional investors can invest in securities issued by social enterprises. Retail investors can invest only in securities offered by for-profit social enterprises under the Main Board. A lesson from global SSE experience The concept of Social Stock Exchanges is not even two decades old. Globally, SSEs are still at a nascent stage, and there is a lack of detailed research and analysis on the same. Hence, as India gears up to embrace its SSE framework, it has a lot to learn from the global experience. Seven SSEs (Brazil, Portugal, South Africa, Jamaica, the UK, Singapore, and Canada) were set up around the world, of which only three are still operational (Canada, Singapore and Jamaica). One of the ways in which the Indian SSE differs majorly from the other SSEs is that here the initiative came from the government. So while most SSEs around the world failed due to lack of financial resources, in India public funds can be leveraged to fund it in addition to philanthropic contributions, government funding and listing charges.

  • ESG Audit – Turning theory into Action

    Although some natural resources like the sunrays are infinite, other major parts of the environment are not renewable and cannot be used recklessly without any negative consequences. Companies also fail on the social and governance aspects. So, for any kind of business, existence of environmental, social and governance (ESG) risks are inevitable. These cannot be avoided but the preparedness of a business to face them is what gives them an edge over the others. Hence the importance of collection, managing and reporting of ESG data. Businesses will therefore incur some cost in this regard. They must take all these risks into account while making business decisions. In addition, an ESG audit will help evaluate the environmental, social and governance risks of a company’s operations, as also its products or services. Such audit can identify the potential risks so that the same can be addressed adequately before they go out of control. What is ESG Audit? ESG audit is an assessment of the risks a business faces in environmental, social and governance areas. It has nothing to do with the financial, secretarial or cost audit and the process is also entirely different. In such audit an organisation takes up both the external stakeholders and the internal employees to evaluate their performance in management of environmental, social and governance risks. An ESG audit would ideally seeks to answer the following questions: What environmental, social and governance issues are relevant for the organisation? What are the specific risks associated with these issues? What is the organisation’s strategy to manage these risks? Does the company have an ESG policy and risk management system? Good quality ESG audit will help an organisation to track progress of its ESG initiatives, improve on weak areas and identify opportunities. Importance of ESG audit Investors are no longer looking only for good financial returns. A large number of socially motivated investors now want their money to fund companies that are committed to creating a better world through a more sustainable business. In this way they want to encourage companies to act responsibly in addition to delivering financial returns. So ESG audit is important for them as it provides insight into the company’s approach towards these risks and how prepared they are to manage risk. It is also important for the public and helps attract better employees. Such audit is definitely beneficial for the companies as it helps them look at their supply-chain risks and risk management capabilities. Also, the consumers look for products and services that have complied with environmental, social and governance practices and reject those that have not. It is important for banks and financial institutions as before funding a business they would like to assess the risks associated with such funding. To use an economics term, ESG Audit has a definite signalling strength. A company that conducts a regular ESG audit without being mandatorily required to do so gives the message to its stakeholders that it is concerned about the ESG risks and is prepared for any emerging risks. Examples of areas evaluated in an ESG audit Here are some examples: Environment – Environmental standards, environmental management systems, energy saving initiatives, compensation for environmental damage. Social issues – Organisation’s performance on social issues like human rights, employee compensation, their working conditions, employee satisfaction, diversity and labour laws Governance – Corporate transparency and compliances Buildings – Construction in an environmentally friendly way Carbon footprint – Plan for monitoring carbon emissions. Recycling – water management and chemical management Reporting – How promptly and completely organisations report on activities impacting the environment and society. Waste management – Efforts towards reducing waste during all stages of production and management of waste generated. Hazardous materials – Usage of such materials in products and treatment of any hazardous waste generated. ESG Audit vs. Sustainability Audit While ESG audit focuses on the environmental, social and governance risks associated with doing business, sustainability audit is aimed at evaluating how environmentally friendly and socially responsible a company is. The latter doesn’t have anything to do with risks. Mandatory ESG audit – the position in India A study conducted by the European Corporate Governance Institution (ECGI) identified 25 countries that introduced different mandates for disclosure of ESG information between 2000 and 2017. So as on date ESG Reporting is mandatory in many countries but ESG Audit seems more voluntary in nature. For example in the European Union (EU) it is mandated under Directive 2013/34/EU. The Non-Financial Reporting Directive of the EU that came into effect in all the member states in 2018 requires companies to reveal all material environmental, social, and employee-related problems, like bribery, corruption, and human rights issues and how the same were dealt with. In the United Kingdom under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, listed companies are required to provide a report on annual greenhouse gas emissions, diversity and human rights issues. ESG Reporting is also mandatory under FRC’s Stewardship Code. In Australia ESG Reporting is mandated under ASX Corporate Governance Council’s CG50 Guidelines, in Canada under the IIRC’s Corporate Governance Guideline-2.1, in New Zealand under NZX’s Corporate Governance Disclosure Guideline, in Norway it is required under SSM’s Guidance on environmental reporting and in the United States it is mandated under SEC Regulation. China has as many as seven regulations mandating sustainability disclosures. In Indonesia, since 2020 the Indonesia Financial Services Authority has mandated all listed companies to publish Sustainability Reporting. In Brazil ESR reporting is mandatory under CVM Instrução 569, in Chile under CNMC Resolution N#105, in South Africa under PAS 55 and in Mexico under CNBV’s Recommendation on Sustainable Development. In India under SEBI’s BRSR mandate, ESG reporting will be mandatory for the top 1000 listed companies based on #marketcapitalisation from FY 2023-24 onwards. With this India has joined the worldwide ESG bandwagon. However, ESG Audit hasn’t been mandated yet. But ESG Reporting in itself will involve additional costs, time and effort and it totally makes sense for companies to spend a little more of all of that to get a voluntary #ESGAudit done in order to ensure that the steps taken are in the right direction and to correct any mistakes before they go out of control. Concluding observation In view of certain factors like increased urbanisation, increasing population, extensive usage of natural resources, climate change and depletion of forest cover around the world as also as a natural consequence of increasing concerns towards social responsibility of corporate citizens, the recent mandate on ESG Reporting by SEBI is in the right direction. However, such a requirement without any mandatorily prescribed audit runs the risk of ending up being a compliance only in letter and not in spirit. While many companies would definitely go for voluntary ESG Audit, if made mandatory such audit would increase the effectiveness of the ESG Reporting manifolds.

  • Board Diversity and its impacts: Lessons from global experience

    Board Diversity The board of directors of a company plays the pivotal role in making strategic business decisions. To make their decisions more effective, boards need to be diverse and have a more egalitarian approach — one that encourages different voices and opinions, integrates contrasting insights into its decisions and respects diverse background w.r.t. age, gender, culture and profession. In order to be more effective, board discussions need a breadth of perspective which essentially comes from diversity of composition. In this article, I will take up the diversities one by one. Gender Diversity While apparently it might seem so, but worldwide gender parity is not at all recovering, the least of all in India. This is evidenced by the Global Gender Gap Report 2022 issued by the World Economic Forum. The Report states that it will take another 132 years for the world to close the extant global gender gap. In this context it needs to be mentioned that the Global Gender Gap Index benchmarks the current state and evolution of gender parity across four key dimensions: (i) Economic Participation and Opportunity, (ii) Educational Attainment, (iii) Health and Survival and (iv) Political Empowerment. The index has been tracking the progress of different countries of the world towards closing the gender gap in these dimensions since 2006. In the index that lists 146 countries providing a strong cross-country comparison, India occupies the very disappointing 135th position ahead of Afghanistan and Pakistan, but much behind our other neighbours like Nepal (96), Myanmar (106), Srilanka (110) and Bhutan (126), and way behind Bangladesh (71). The Index measures scores on a 0 to 100 scale, where the scores indicate how close a country has moved to closing the gender gap. The cross-country analysis helps identify the most effective policies to close gender gaps. Worldwide Gender Diversity While no country in the world has achieved 100% gender parity till date, the list in Global Gender Gap Report 2022 is topped by Iceland (90.8% parity), followed by Finland (86%), Norway (84.5%) and New Zealand (84.1%). As against these parity percentages, India has achieved only 62.9% gender parity in all those years. The silver lining is that this year India has closed the parity gap by 0.3% over last year. In the 2021 index India stood at the 140th position out of 156. But the more discouraging fact is that in 2006, when the gender gap index was first released, India ranked 98th among 115 countries and the best rank the country has held in the recent years with greater participation of countries was in 2012 when it was placed 105th out of 135 countries. Gender gaps in the workforce as well as leadership roles are driven by many factors. Some of these are societal expectations, gender-biased employer policies, social infrastructure, prioritizing family and caregiving, health, traditionally existent structural barriers, education gap and so on. In the 2022 Report it has been seen that the countries that have fallen behind in the list, the parameters in which they have lacked are essentially (i) and (iv) mentioned above, i.e. (i) Economic Participation and Opportunity and (iv) Political Empowerment. With more women in political and industry leadership, there is not only the benefit of a powerful role model effect but decisions taken also represent broader section of the population. Gender Diversity in India The principle of gender equality has been enshrined in the Constitution of India in its Preamble, the Fundamental Rights, Fundamental Duties and Directive Principles of State Policy. But despite such unambiguous equal rights given to men and women, the Indian society has remained largely male dominated. The workplace is one area where gender inequalities are easily noticed. These are manifested largely through share in workforce, difference in pays for equal work and difficulties of working condition. However, there are a series of new legislations that seek to improve this situation. Board Gender Diversity The gender diversity in boardroom has several benefits and implications. Studies conducted around the world and the resulting growing literature on this links the composition of the board of directors to business outcomes. Surveys have shown that boards and senior management with board diversity perform better and have higher Return on Equity and Return on Capital Employed. Further diversity in board brings diversity of thought patterns. Women are known to be more democratic in their leadership style, they are good listeners, they encourage participative decision-making, they are proactive in anticipating risks and hence, can help strengthen risk management, they are better inclined towards CSR, they are generally more compassionate and so on. Legal position Worldwide, in the recent years, the corporations have come under great public pressure to increase the gender diversity on their boards and as a consequence, countries like Belgium, Spain, France, Iceland, Norway and Italy have passed legislations mandating more female representation in the board. Laws for listed companies in Norway, Spain, France and Iceland require a minimum of 40% representation in the board. In the US, there is no such law in general, but in California, law was passed recently requiring all locally headquartered public listed companies to have at least one female director by 2020. In India the following companies are required to have at least one Woman Director: - Every listed company - Every other public company having (i) Paid-up share capital of INR 100 crore (1 billion) or more, or (ii) Turnover of INR 300 crore (3 billion) or more. [Paid-up share capital or turnover is as per the last date of the latest audited financial statements] On fulfilment of any of the above conditions the Board must appoint a woman director within six months of the date of fulfilment or criteria. This is a truly revolutionary step initiated by the legislature for ensuring gender neutral nature of Board in the corporate world and seeks to recognize the important role of women in promoting economic welfare of the country. However, in a majority of companies to which this rule applies, woman directorship has largely been reduced to a token position. This narrative must change if the benefits of board diversity is to be reaped in the greater sense. Expanding the view of Board Diversity What indisputably follows from the above discussion is that Board diversity is very important. But the above discussion was largely focused on gender diversity alone. But Board diversity as a term has much bigger connotation and includes many types of diversity. One of its components is gender diversity for sure, the others are age diversity, professional diversity and cultural diversity. The impact of a diverse board on business are far-reaching, but concentrating on only one form of diversity is not sufficient. All these types of diversities increase the diversity of perspectives represented at the board level. Achieving gender parity has been the top priority worldwide, although as per the recent indices mentioned above, the world has a long way to go even in that regard. But imagining that with all regulatory and social pressures, gender diversity is achieved faster; even then just achieving this will not help the board of a company reach its full potential. The other types of diversities must be introduced and maintained. And this, should ideally be, in spirit and not just in letter, i.e., not just for the sake of mandatory compliance. For this, the company managements must come out of the ‘checking the box’ approach and spend time and energy towards achieving ‘real’ board diversity. Introducing a member of the board to enhance its diversity (whether gender, age, culture or profession) should not reduce that new person to a ‘token’. Nobody likes to be a token. Also a board with diversity just in ‘token’ form is like a vehicle with square wheels, that is incapable of doing its job. Age, Cultural and Professional Diversity There are no two opinions about the importance of having the board composition in such a manner that people of different age groups are well represented. While the aged persons will have an edge on their experience and expertise, the younger ones will beam with enthusiasm, energy, positivity, better technological knowledge and risk-taking approach. While the younger board members would like to jump at every new opportunity, the older ones can help keep them level-headed. When it comes to cultural diversity, this again is very important as diversity in background here can increase the perspective of board decisions. As for professional diversity, there is hardly any doubt that a board needs to be professionally balanced so that all aspects of corporate governance are given equal weightage and due compliances are done as required by law.

  • Greenwashing – the new Window Dressing

    To understand what ‘Greenwashing’ is, we must first know why at all we are talking about it today. Greenwashing is related to ESG disclosure. ESG is an acronym for Environmental, Social and Governance. It is a framework for understanding and measuring how sustainably an organization is operating. ESG takes the holistic view that sustainability extends beyond just environmental issues. Proper ESG disclosure helps stakeholders like investors, creditors, employees, prospective customers, etc. understand how a company is managing its ESG risks and opportunities. Wrong or misleading ESG disclosures would lead to #greenwashing. So what is Greenwashing? The term ‘Greenwashing’ means making outright false, vague, misleading or unsubstantiated claims about the sustainability of a product or service or even about the business operation of the organisation. Greenwashing is often done intentionally by an organisation to market its products or services. However, sometimes such greenwashing may also be unintentional or due to the management’s lack of knowledge or understanding about the same. In the heydeys of corporate sustainability as a buzzword, greenwashing would essentially mean false and misleading environmental claims or statements. Corporate Sustainability was often used by organisations only as a marketing tool to overstate or misrepresent its environmental initiatives and impacts. But now, with the advent of the new term ‘ESG’ in the corporate jargon, the expanded definition of greenwashing would essentially include false and unsubstantiated claims about the organisation’s social and governance factors as well. Greenwashing would take place when the management of an organisation would wish their disclosures to give the impression that they have engaged in proper ESG analysis and reporting but when in reality they have not. As stated earlier, this may be intentional or unintentional. So here lies the similarity between greenwashing and ‘window dressing’ of financial statement. In the latter, a much well known concept by now, the management of a company resorts to unfair means to improve the appearance of its financial statements before it is released to the public. It is an established menace, is illegal, and must be avoided at all costs. The same applies to greenwashing. Why would management tend to engage in Greenwashing? Today, there is a need of rigorous ESG analysis under the pressure of global business environment. Efforts towards greater sustainability have created the need for organisations worldwide to be more transparent about what initiatives they are taking to manage environmental, social and governance risks. Regulatory bodies and stock exchanges in most countries have mandated ESG reporting. In India also ESG reporting is going to be mandatory for the top 1000 listed companies by market capitalisation from FY 2023-24 onwards as per the SEBI’s newest BRSR framework. The management of these public listed companies are now required to disclose full information about the organisation’s environmental as well as social impact, and its corporate governance practices. Not making the ESG disclosure would not only result in loss of market reputation, but also result in non-compliance. Under this pressure, greenwashing may actually result from the reckless action of the management (that probably didn’t understand the difficulty level or seriousness level of the ESG disclosure). However, it is also highly probable that some organisations may intentionally include in their annual report false, vague or misleading claims about their initiatives towards sustainability in order to appear to be engaging in proper ESG analysis and disclosure. How to avoid greenwashing? Where the management wants to avoid the perception of greenwashing, it must present its ESG disclosures using a widely accepted global reporting framework like the Global Reporting Initiative (GRI), Principles for Responsible Investment (PRI), Carbon Disclosure Project (CDP) or Sustainability Accounting Standards Board (SASB). All these have a standardized system of presentation of ESG information and require organisations to include considerable data and metrics w.r.t. its E, S and G. The good news is that globally initiatives are also being taken to bring out a unified standard for disclosure of ESG. To understand how to avoid greenwashing better, let us take the individual elements one by one. (i) Environmental Sustainability – Under this parameter, one may undertake greenwashing by falsely making general claims about improvements in the organisation’s carbon footprint without any actual data to support the claim. (ii) Social Impact – A company may be charged of greenwashing if it falsely claims about employee training programmes, employee absenteeism, community support initiatives etc. (iii) Corporate Governance – Non-disclosure of any non-compliance may amount to intentional greenwashing. Examples of Greenwashing Some of the most talked about worldwide instances of greenwashing rep orted in the recent years are as follows: IKEA – In 2020 the Swedish giant that happens to be the largest wood consumer in the world was found to be using illegally procured wood from the forests of Ukraine that is home to endangered animals. The wood was certified by Forest Stewardship Council that is considered as Gold standard in forest accreditation. IKEA itself is known for its high sustainability standards. However, in this matter both had engaged in greenwashing. Ryanair – In 2020 this airlines company was charged of greenwashing when they falsely claimed themselves to be ‘lowest emissions airline’. McDonald’s – In 2019 McDonald’s introduced paper straws as a sustainability initiative. But the straws turned out to be non-recyclable. Not only that, the raw material for the paper for straws was procured by mass cutting down of trees. KLM Airlines – In 2021-22 a lawsuit was filed against this air carrier for their misleading ‘carbon emission free’ claims. Their slogans was ‘Be a hero, fly CO2 zero’. Volkswagen – In 2015 Volkswagen admitted to cheating emission tests by fitting its vehicles with a certain device that had a software to reduce emissions during tests. However in reality, the vehicles were emitting more than 40 times the allowable limit for pollutants. Nestlé – In 2018 this company was called out for greenwashing when it claimed its packaging material to be 100% recyclable and reusable by 2025. It was stated that this claim was ‘greenwashing baby steps to tackle a crisis it helped to create’.

  • Risk Management Committee: Now recommended under Company Law too

    Risk Management Committee is a committee formed to oversee the risk management policy and global risk management framework of a company. This committee helps the Board in identifying the risk exposure of the company and ensuring that proper framework relating to risk identification and its mitigation is in place. Under SEBI (LODR) As of now constitution of Risk Management Committee is mandatory for certain listed entities only. Regulation 21 of SEBI (LODR) provides for the constitution of a Risk Management Committee by a listed company. Clause (1) provides that the board of directors of such company shall constitute a Risk Management Committee. Applicability Clause (5) provides that constitution of such committee is mandatory for the following: Top 1000 listed entities on the basis of market capitalization as at the end of the immediate preceding financial year and a ‘high value debt listed entity’. It may be noted that initially the regulation was applicable to only the top 100 companies and later to the top 500 companies. Composition The Committee is required to have a minimum of 3 members, majority of them being directors including at least one independent director, and in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk Management Committee is required to comprise of independent directors. This implies that not all the members of the committee are required to be directors of the company and even senior executives of the listed entity may be members of the committee. However, the Chairperson of the committee has to be a director. Meeting of the committee While the earlier requirement was of a minimum of one meeting every year, at present, the risk management committee is required to meet at least twice a year. On a continuous basis not more than 180 days shall elapse between any two consecutive meetings of the committee. The quorum for the meeting is either two members or one third of the total members of the committee, whichever is higher, including at least one member of the board of directors in attendance. Role & responsibilities The board of directors of the listed entity is required to define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit such function shall specifically cover cyber security. Part D of Schedule II of SEBI (LODR) Regulations, 2015 requires the Risk Management Committee to formulate framework for identifying risks faced by entity, suggest measures for risk mitigation, overseeing implementation of scheme, evaluating adequacy of risk management systems. Under Companies Act, 2013 The Company Law Committee Report of 2022 has recommended many changes to the Companies Act, 2013 that are aimed at promoting greater ease of doing business in India. These include introducing many new concepts, structural changes, streamlining the process for audits, mergers etc., removal of ambiguities, improving the corporate processes as well as improving compliance procedures. Of the many recommendations of the Company Law Committee for Companies Act, 2013 one is for the constitution of Risk Management Committee by certain companies. One may note here that u/s 134(3)(n) of the Companies Act, 2013, the Board Report must contain a statement indicating the development and implementation of a Risk Management Policy for the company, including the identification of risks that may pose a threat to the existence of company. Further u/s 177(4)(vii) of the Companies Act, 2013 the Audit Committee has an obligation to evaluate the company’s internal financial controls and risk management systems. In addition to this, Part II of Schedule IV of the Companies Act, 2013 requires an Independent director of a company to bring an independent judgment to the board deliberations regarding the risk management systems of the company. So the CA, 2013 does not specifically contain any provisions with respect to constitution of a Risk Management Committee. In the light of the COVID-19 pandemic, it was felt that proper risk management allows a company to function efficiently and facilitates its development. Therefore, the Company Law Committee has recommended the inclusion of new provisions in the Companies Act, 2013 with respect to constitution of Risk Management Committee, as a separate committee of the board, for certain class of companies as may be prescribed by the Central Government. It will be interesting to follow further developments in this regard.

  • Issuing Restricted Stock Units and Stock Appreciation Rights to employees

    The latest Report of the Company Law Committee presented in 2022 has recommended numerous changes in the Companies Act, 2013. Apart from removing ambiguities, streamlining process for audit, mergers etc., tightening compliances and promoting further ease of doing business, the report has also introduced certain new concepts. Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs) are two such new concepts. These may be issued to employees of a company in addition to monetary remuneration. The report has recommended insertion of enabling provisions in the CA 2013 for issuance of RSUs and SARs. What are RSU and SRA? The committee was of the opinion that in addition to monetary remuneration, the employees a company may be paid compensation that is linked to its shares, thus granting the employees ownership rights in the company. These schemes allow employees to subscribe to the company’s equity capital. Restricted Stock Units (RSUs) have in the recent years become quite popular among venture companies as a hybrid of stock options and restricted stock. These, however, do not give the employee an option to purchase or subscribe to the company’s shares directly. Rather under this scheme there will be a vesting period and the employee will be entitled to the shares at the end of the vesting period, subject to the conditions related to the duration of employment and performance of the employee being met. In effect it is a promise by the employer to grant restricted stock to an employee at a specified point in the future in (delayed) recognition of the employee’s contribution. These are also known as restricted securities and are fully transferable from the issuing company to the receiving employee until certain conditions (or restrictions) have been met. Only upon satisfaction of those conditions, the restriction is removed, and the stock becomes transferable to the said employee. Stock Appreciation Rights (SARs), on the other hand, are incentive or deferred compensation tied to the performance of the company’s stock. This right provides the employees the monetary equivalent of the appreciation in the value of a specified number of shares over a specified period. It is like an award which provides the employee the opportunity to profit from the appreciation in share value of the company over a certain period of time. It may also be paid by way of shares of the company. It is like a bonus where the company performs well financially over period. Although SARs resembles employee stock options, unlike the latter an employee does not need to buy or hold shares of the company to benefit from an increase in the stock value. In many jurisdictions worldwide SARs is also referred to as phantom stock. But while phantom stock may pay dividends, SARs cannot. While SARs have been defined under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, there is no existing definition or regulation for RSUs as of now. The Committee’s recommendation is to recognize both the concepts under the Companies Act, 2013. How to issue RSA and SAR? In order to make RSUs and SARs a reality, the Company Law Committee in its report has proposed amendment to section 62(1) of the Companies Act, 2013. The committee has proposed that if a company proposed to use these schemes, it will require the issue of further securities by the company. Such issuance can only be done after the approval of the shareholders by a special resolution. The enabling framework in the Companies Act, 2013 should also contain provisions of an annual omnibus approval by the shareholders of the company to avoid fresh approvals each time such allotment is planned. Accounting and Tax Implications These plans are like deferred cash compensation and have a lot of accounting and tax implications. As for accounting, the companies will have to figure out how to pay for the shares that the employees want to cash in. Further, the issuing company should not only make the promise to pay, it should actually put aside the funds. Worldwide, restricted stock has an edge over employee stock options, because of favourable accounting rules and income tax treatment. If the recommendations of CLC sees the light of the day, a lot of necessary amendments will also have to be made in the Income Tax Act.

  • Revisiting the provisions of ‘Independent Director’ in the light of recent cases

    An Independent Director, as the name suggests, is a third party individual who is supposed to be independent and not have any relations with the company, its holding, subsidiary or any associate company, either directly or through their relatives. The objective behind having the provisions of Independent Director in the Companies Act, 2013 is to ensure the independent decision making process by the #Board of Directors devoid of any undue influence of promoters or executive management in business transactions. The Board of directors of any company is the nucleus around which the entire company operates. It is therefore quite justified to expect the Board to exhibit integrity, responsibility, accountability, diversity and promptness. The directors of the company are the agents of the shareholder and are often described as the arms of the company through which decision is made and business is conducted. The various compliance requirements of the Board are laid out in the Companies Act, 2013. In order to ensure that the Board does not misuse its decision making power, the #CompaniesAct2013 mandates the need for independent directors in certain class of companies. Independent directors are required to exercise independent judgement during the deliberations of the board. Some of the important areas where independent directors must be vigilant are the financial reporting of the company, the transactions between related parties of the company being at arm’s length and so on. Requirement of Independent Directors (IDs) Every listed company shall have at least 1/3 of its total number of directors as IDs The following unlisted Public companies shall have at least 2 directors as IDs Paid up share capital equal to or more than INR 10 crore Turnover equal to or more than INR 100 crores Outstanding liabilities, debentures and deposits equal to or more than INR 50 crore; Since both listed and unlisted companies are required to have independent directors the Ministry of Corporate Affairs as well as Securities and Exchange Board of India (SEBI) have come up with detailed regulations governing the role and compliance requirement in respect of Independent directors. The Companies Act, 2013 lays down the definition, roles and responsibilities as also the liabilities of an Independent Director. Last year #SEBI overhauled certain provisions to strengthen the position of IDs in the Board. The appointment, reappointment and removal of an independent director can only be done through a special resolution passed be the shareholders (it requires 75% votes in favour as against ordinary resolution which requires only a simple majority). In addition to strengthening the working of independent directors, this rule also protects the interests of minority stakeholder. Other provisions include 2/3 majority of IDs in the Nomination and Remuneration Committee which selects IDs. These provisions came into effect from 1st January 2022. Definition of Independent Director: Independent director has been defined in section 2(47) and sub section (6) of section 149 of the Companies Act, 2013. The definition lays down that an Independent director is a director other than a managing director or a whole-time director or a nominee director who satisfies the following conditions: He/she is, according to the Board, a person of integrity and possesses the relevant expertise and experience; He/she is or was not a promoter of the company or any of its holding, subsidiary, or associate companies; He/she is not related to the promoters or directors of the company or its holding, subsidiary, or associate companies; He/she does not have any pecuniary relationship with the company, its holding, subsidiary or associates, directors or promoters for two preceding financial years preceding appointment and the current year; Does not have any relatives who have or have had pecuniary relationships with the company, directors or promoters for amounts exceeding rupees fifty lakhs or 2% of the paid up capital of the company; Does not have any relatives who have or have had pecuniary relationships with the company, its holding, subsidiary or associate company amounting to 2% or more of its gross turnover or total income; Does not have any relatives who is indebted to the company, its holding, subsidiary or associate company or has given guarantee for a third person’s indebtedness; He/she himself or any relative does not hold or has not held key managerial positions or have been an employee of the company, its subsidiaries, holdings, or associate companies during 3 immediately preceding financial years; He/she is not a member of the firm of auditors, company secretaries in practice, cost auditors or any legal consulting firm that has transactions with the company, and its subsidiaries, holdings and associate companies; He/she does not hold more than 2% voting power of the company; He/she is the CEO or director of an NGO that receives 25% or more of its receipts from the company, its directors, its holding subsidiary or associate company. Declaration of independence Independent directors must give a declaration of their independence in the following situations: First board meeting after induction into the Board First meeting of the board of directors in every financial year Arising of any situation that affects the independence of their role as director Duties of Independent directors With the level of expertise and experience that they come with the independent directors perform the role of a guide or mentor for the board. The duties of independent directors are many including the following: To act in interests of the company, shareholders and its employees. To review the performance of the non independent directors and of the Board as a whole. To determine the appropriate levels of remuneration of the executive directors, KMPs and the senior management. To be a moderator when there is a conflict between the interest of the management and that of the shareholders. To seek information or clarification and appropriate external professional advice and opinion at the expense of the company whenever situation demands so. To have active and constructive participation in the Board and committee meetings. To be vocal about their opinions and where they have concerns about the running of the company or a certain proposed action, to ensure that these are discussed by the Board and wherever the same is not resolved, to get their concerns are recorded in the minutes. To see that the related party transactions entered into by the company are at arm’s length and in the interest of the company and to ensure that sufficient deliberations are held before approving such transactions. To ensure that the company has adequate vigil mechanism to protect the interests of a person who uses such mechanism and to ensure that he/she is not prejudiced against for using it. To report concerns about unethical behaviour, fraud or violation of the company's code of conduct or ethics policy. Not to disclose confidential information, like technologies used, trade secrets, unpublished price sensitive information, sales promotion plans unless specifically pre approved by the Board or as required by law. Not to act like a rebel and obstruct the functioning of an otherwise proper Board or committee. In performing the above duties, the #IDs are expected to undergo appropriate induction training after joining the Board and regularly keep updating themselves and enhancing their skills and knowledge about the company and the industry in which it operates. They are also required to keep themselves well informed about the company and the legal and technological ecosystem in which it operates. They are also expected to have time for discharging their duties towards the company and strive to attend all meetings of the Board and the committees thereof of which they are a member. Liabilities of Independent directors The Companies Act, 2013 provides the situations in which an independent director can attract liability. It provides that an independent director can only be held liable if there is an act of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Even though this provision is crisp and clear, the topic of the liability of independent directors has been in the news time and again. Recent cases In a recent matter before the Bombay High Court, the liabilities of independent directors were once again evaluated. It related to the criminal proceedings that were initiated in a cheque bouncing case under the Negotiable Instruments Act, 1881 against the executive as well as the independent directors of #Tecpro Systems Limited in the #BombayHighCourt. #Elektromag Devices Private Ltd. had filed a complaint u/s 138 of the Negotiable Instruments Act, 1881 against all the directors of Tecpro Systems for the bouncing of a cheque worth Rs. 30 lakhs issued to them by the latter. While evaluating the day-to-day role of the independent non-executive directors, the Court observed that “Non-executive director not being a promoter of or key managerial persons shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.” The Court further observed that “Simply because a person is director of company does not make him liable under the NI Act. Only those persons who are incharge and responsible for the conduct of business of the company at the time of commission of the offence will be liable for criminal action. A director, who was not in charge of and was not responsible for the conduct of the business of the company, at the relevant time, will not be liable for offence by invoking Section 141 of NI Act”. In passing its judgement the Bombay High Court relied on the provisions of sub sections (6), (9) and (12) of section 149 of the Companies Act, 2013 and the decision of the Supreme Court of India in the case of Pooja Ravinder Devidasani v. State of Maharashtra. While quashing the criminal proceedings against the independent non-executive directors, the Bombay High Court has ordered an expedited trial against the rest of the executives of the company. Another major recent case that throws light on the role of independent directors in the board is that of e-commerce giant Amazon which alleged that independent directors of Future Retail had failed to exercise their statutory duties and that their ‘conduct and attitude’ were question able. In a very strongly-worded letter sent to the independent directors of Future Retail Limited, Amazon wrote that "You, the Independent Directors of FRL, have failed to exercise your statutory duties and functions independently in accordance with law. Moreover, you have failed to safeguard the interest of shareholders, and have in fact facilitated commission of fraud perpetuated by FRL …. Your conduct and attitude, as the Independent Directors of FRL, raises substantial questions on accountability, transparency and fairness regime for corporate governance in India". They further wrote “It is obvious that the letter from FRL’s independent directors was issued with the sole motive to obfuscate issues that the independent directors are obliged to answer.” The above letter came ahead of the #Tribunal’s order, which is expected anytime now, in a petition filed by the Bank of India seeking to start insolvency proceedings against Future Retail Limited. It may be noted in this regard that there has been a series of communications between the US based e-commerce giant and FRL's #independentdirectors prior to this letter and in one of those the former alleges that the IDs of Future Retail even ‘admitted’ to have entered into an illegal arrangement. The decision on this matter is awaited and once it is out this case will also probably shed some more light on the role and responsibilities of Independent directors.

  • Younger Boards and Start-ups: the role of professionals therein

    It was recently reported that nearly 30% of all the Director Identification Numbers (DIN) allotted by the Ministry of Corporate Affairs (MCA) in financial year 2021-22 was given to people aged less than 30 years. If we look at the total number of young applicants of DIN, about 73% of the total DINs were allotted to applicants less than 45 years of age.(1) Majority of these young directors have been registered from the states of Maharashtra (20,000), followed by Uttar Pradesh (13,000), Gujarat (7,050) and Karnataka (5,900). One may note that Maharashtra is a Fintech hub, Karnataka is the start-up hub and Gujarat is the manufacturing hub of India. The proximity to the national capital has probably led to the growth in Uttar Pradesh. It is interesting to see that the MCA has, for the first time, provided an age-wise data of registered directors.(2) While comparison of the above data with last year’s data is not possible as there is no such data as such, this definitely comes as a breath of fresh air. The data essentially shows two things – The increasing number of start-ups in the country; and The increasing number of younger professionals ready to take up the position of Independent Directors (ID) in the Boards of companies that have such requirement. Both go to prove that the boards of Indian companies are essentially getting younger. What is a DIN? DIN is an 8-digit Unique Identification Number that is allotted by the Central Government to any person willing to join the Board of Directors of a company. It is mandatory for a director to have a DIN number and a pre-requisite before joining the Board. So if a person opens a company of his own (and we all know the benefits of having a company over other forms of organization like partnership firms, sole proprietorship or LLPs), he needs a DIN. The concept of DIN was introduced for the first time when sections 266A to 266G were introduced in the erstwhile Companies Act, 1956 by the Companies (Amendment) Act, 2006. Section 153 of the present Companies Act, 2013 provide for the application for DIN and section 154 deals with the allotment of DIN. Rule 9 of the Companies (Appointment and Qualification of Directors) Rules, 2014 deals with the procedure for the same. Indian Start-up ecosystem In India the startup culture has, in the recent years, caught the fancy of the younger population. This has led to the increased number of new company incorporations. MCA data for FY 2021-22 shows that approximately 1,67,000 companies were incorporated in India during the financial year. This has raised the total number of registered companies in India to 23.18 lakhs. Today fresh graduates are seeing entrepreneurship as an attractive alternative to a regular job. In fact, the incubation centres in colleges and universities are seeing development of start-ups even before the students actually graduate. To a large extent certain Government schemes like the Start-up India, Digital India, Make in India and other schemes for the MSME sector has also provided the much needed fillip. Initiatives towards ‘Ease of Doing Business’ has also led to easier and faster incorporation of companies. Several regulatory requirements have also been relaxed for smaller companies [however as against this the regulatory burden of larger companies has been constantly on the rise]. Funding in start-ups has also become easier to get these days; in the last calendar year 2021 itself, Indian start-ups received US $11 billion in funding from private equity and venture capital firms. Role of Young professionals Increased number of companies incorporated implies increased compliance burden in the economy. The process of incorporation itself is a highly technical compliance work. Once incorporated, there are several regulatory requirements which have to be taken care of by companies in their day to day activities. Even though there are relaxation for smaller companies, but certain compliances are mandatory for all, big or small. This would mean increased engagement for professionals, and since most start-ups cannot pay a fat cheque, there will be more involvement of younger professionals in the compliance-related work of start-ups. Interestingly, many young professionals are also choosing the start-up path for their own innovative ideas of which edu-tech companies probably features at the top. Senior Professionals and start-ups In a recent survey it has been found that almost three-fourths of the senior professionals prefer to work for a startup over bigger companies for a variety of reasons of which the following are some: Better growth opportunities Diverse experience Possibility of better impact at the workplace Flexibility of work timings Flexibility of work location Politics free culture A flat hierarchy In addition to the above, new ideas and solutions that start-ups come up with are a big factor of attraction towards them. Further, start-ups provide scope for innovation and creativity. Senior professionals are being attracted to start-ups as a fresh start in their career paths due to the above reasons. Further, in India’s positive start-up environment there is a huge number of senior professionals who decide to go on the start-up path and become founders themselves. Independent Directorships A large number of the new applicants for DIN are probably the professionals who wish to take up the position of Independent Director (ID) in the Boards of larger companies. Total number of people that have registered with the Independent Directors Databank as on date is 20,189, of which a substantial majority comprises of young and senior professionals like Company Secretaries, Chartered Accountants, Cost Accountants and lawyers. Of this total number, only 5,655 are women. The databank is an initiative of the MCA to register high quality of candidates for filling up the position of IDs in various companies. It is mandatory for persons willing to be appointed as an ID to register themselves with the databank. It may be noted that every listed company is required to have one-third of its total number of directors as Independent Directors. Further certain unlisted public companies are also required to have independent directors as follows: (a) company with paid-up share capital of Rs. 10 crores or more; (b) companies with turnover of Rs. 100 crores or more; and (c) companies with total outstanding loans, debentures and deposits of Rs. 50 crores or more. 1 The analysis is based on the following data from MCA portal for the FY 2021-22: Total number of DINs issued – 4,20,000 approx DINs issued to people < 30 years – 1,23,000 approx DINs issued to people aged 31-45 years – 1,82,000 approx 2 One downside noticed in the data is the gender gap noticed in it. Of the new directors below 30 years, 75% were male and 25% were women and in the age group of 31-45, 67% were male and 33% were female.

  • Emerging concept of Special Purpose Acquisition Companies (SPACs) in India

    In line with its motto of ‘Ease of Doing Business’ an SPAC is one of the newest alternative fundraising option that is all set to be introduced by the Government of India. The Special Purpose Acquisition Company is a concept that is well-known globally and has been making rounds in high level discussions for a couple of years in India. Finally, the Company Law Committee Recommendations, 2022 provide for introduction of SPACs in India. What makes this new concept interesting is that under these amended provisions (as and when introduced) even a shell company can get listed in the stock exchange. This article digs deeper into the concept. Background A Company Law Committee was set up by the Ministry of Corporate Affairs in 2019 to make recommendations towards promoting ease of doing business in the country. The Company Law Committee which submitted its report on a fresh set of amendments to the Companies Act, 2013 earlier this year provided for introduction of SPACs in India with corresponding enabling framework in the Companies Act, 2013. What is an SPAC? SPAC is an investment vehicle that is used by institutional investors to fund their acquisitions. These are generally formed by private equity funds or financial institutions, with relevant expertise in a particular industry or sector. To explain in simpler terms, a Special Purpose Acquisition Company is an entity formed with the objective of raising investment capital through an Initial Public Offering (IPO). The basic idea behind floating such a company is to allow investors to come together to pool their resources to acquire one or more companies to be identified only after the IPO. After incorporation it goes straight away to the capital market to raise money through an IPO. Interestingly, as on the date of the IPO the company has no existing commercial operation (hence a shell company) or any target for acquisition but is formed strictly to raise capital through IPOs. The money raised through IPO is kept in an escrow account, which can be used only when making the acquisition after the target has been identified. Where the SPAC fails to make the acquisition within two years of the IPO, the money is returned to the investors and the SPAC is delisted and finally dissolved. The money as well as the assets in escrow is returned to the investors on pro-rata basis. Such an SPAC is also popularly referred to as a ‘blank-cheque company’. Recommendations of Company Law Committee In its recommendations made earlier this year, the Company Law Committee has recommended the introduction of listing of SPACs in India and for the MCA to come up with enabling framework in the Companies Act, 2013 for SPACs allowing entrepreneurs to incorporate an SPAC. The Committee has also recommended that for SPACs incorporated under the Companies Act, 2013 there should be an exit option for shareholders in case they do not agree with the choice of the target company. The provisions of #CompaniesAct, 2013 with respect to strike off has also been recommended to be modified in so far as they relate to SPACs as these companies do not have any business of their own. In fact, just like many provisions of the Companies Act, 2013 have been modified to accommodate the newest concept of One Person Company (OPC) therein, to make the concept of SPAC a reality necessary modifications will be required in many sections of the Companies Act, 2013. Global Experience It was reported that in 2020 about 250 SPACs were formed globally (mainly in the US) and the investment therein was about USD $80 billion. The next year, 2021, saw a hike with about 600 SPACs being listed globally. There are many US-based SPAC entities that are created by Indian promoters or which target Indian new-age tech companies. Stone Bridge Acquisition Corporation, one such SPAC, recently listed on the NASDAQ and raised USD $200 million in 2021. Another good example is the merger of Indian company ReNew Power Private Limited with US-based SPAC entity RMG Acquisition Corporation II and its listing on the NASDAQ and raising USD $8 billion. Advantages of an SPAC Raising of money through the IPO route is not only lengthy, but also involves heavy regulatory obligations. In contrast, by getting merged with a Blank cheque company, an entity can get listed on exchanges (even in foreign stock exchanges like the #NASDAQ) in a matter of days. Many companies prefer to choose to merge with or being acquired by an SPAC rather than going for an #IPO because of some inherent advantages of SPACs which are listed below: - Beneficial for target companies: SPACs provide better option of funding and liquidity to target companies. Compared to other IPOs they are valued higher with lesser dilution rates, lower fees and less regulatory hurdles. - Time and Cost Efficient: Even a private limited company can go public within few months by being acquired by an SPAC. Indian companies being acquired by foreign listed SPACs can get listed on foreign stock exchanges without incurring the huge costs involved. - Minimum Risk: For a target company, listing through an SPAC involves minimum risk since the entire process takes place within a well-defined agreement with assured security. - Opportunity of foreign listing and tapping foreign market: Some target companies prefer SPACs as a way of achieving higher valuation by tapping the foreign market and foreign consumer base where the demand for its products exist. - Safeguards dissenting shareholders: The recommendations provide for an exit route to #dissentingshareholders which ensures that their interests are safeguarded as they always have an option to sell their shares to the SPAC promoters if they are not in agreement with the choice of target of acquisition. Disadvantages of an SPAC The concept of a Special Purpose Acquisition Company also has its share of disadvantages as follows: - Less profitable to retail Investors: Most SPACs underperform in the long run and eventually stock prices fall below the IPO price. This makes SPAC more beneficial to acquired companies and less beneficial to retail investors in the long run. - Inability to attract target company: The SPACs are required to start looking for a target company soon after listing and complete the acquisition within two years of listing. This time-bound restriction cripples many SPACs who are unable to locate an attractive target company in that time frame. - Hasty Decision w.r.t. target company: The time restrictions for completing the take-over sometimes prompts the SPAC to take hasty decisions, which turn against the company in the long run. - Exit of dissenting shareholders: The option provided to dissenting shareholders to exit if they do not agree with the choice of the target company is another obstacle that limits the overall gains for investors. - Investors initiating Investigations: From the US experience with SPACs it has been seen that in many cases the disappointed investors initiate investigations or even class action suits against SPAC promoters. Concluding observation In India the concept of SPAC is only in a nascent stage and capital market regulator, the Securities and Exchange Board of India (#SEBI), is expected to come out with rules defining the scope of SPACs in the country and providing detailed regulations for their running. While SEBI is looking at the possibility of introducing an SPAC framework in India, the Ministry of Company Affairs (#MCA) will also have to modify several provisions in the Companies Act, 2013 should the SPACs become a reality in the country based on the recommendation of the Company Law Committee. Several amendments will also be required to be made in the tax laws in the country. In case SPACs become a reality in India, there will be a demand for the SPACs to be allowed to list in global Exchanges. This will enable Indian SPACs to target acquisition of foreign companies in order to achieve their fullest possible potential. However, foreign listing of Indian SPACs will attract the provisions of Section 23(3) and Section 23(4) of the Companies Act, 2013 which enables certain classes of companies to list their securities on stock exchanges in permissible foreign jurisdictions. However, one must remember that not all #SPAC experiences have been good. Globally, many cases of underperformance by SPACs have slowly begun to surface now. This is a cause for concern and only points towards the need to weigh the pros and cons before finalising the #SPAC regulations in the country. Regulations must be equipped with sufficient safeguards to protect the interests of retail investors. #CapitalMarket, #SPACs, #Specialpurposeacquisitioncompany, #easeofdoingbusiness, #blankchequecompany, #CompanyLawCommittee2022, #IPO, #ShellCompanies, #Escrow Account, #MCA, #SEBI

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