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Focus: Corporate responsibility and anti-corruption legislation in India

10 February 2014

In brief: In the past 12 months, the Indian Parliament has passed two important pieces of legislation relating to corporate social responsibility and the investigation of allegations of corruption made against public servants. Partner Rachel Nicolson (view CV), Senior Associate Dora Banyasz and Lawyer Harini Amarasinghe report.

How does it affect you?

  • The corporate social responsibility (CSR) provisions in the Companies Act 2013 will affect companies that operate in India and meet certain thresholds and will require spending on CSR measures as well as reporting on that spending.
  • The Lokpal and Lokayuktas Act 2013 (the Lokpal Act) introduces both federal and state-level ombudsmen and provides an independent avenue for investigation of allegations of corruption made against public servants.
  • Australian companies operating in, or contemplating moving into, the Indian market should be aware of the new legislation and their impacts.

The Companies Act 2013 – mandatory CSR spending

The Companies Act, assented to on 29 August 2013, updates India's corporations laws. Among other changes, the Companies Act has introduced mandatory CSR spending rules for companies that meet certain thresholds. The CSR-related provisions of the Companies Act are not yet in force, but draft Corporate Social Responsibility Rules 20131 (the draft CSR Rules), made pursuant to the Companies Act, propose that the CSR Rules will come into force for the 2014-15 financial year, suggesting that the CSR provisions of the Companies Act will follow suit.2

The CSR provisions of the Companies Act will apply to companies that are incorporated under Indian companies laws and meet any one of the following thresholds during any financial year:3

  • A company having net worth of Rs 5 billion or more (approximately A$90m);
  • A company having a turnover of Rs 10 billion or more (approximately A$183m); or
  • A company having a net profit of Rs 50 million or more (approximately A$918,000).

The Companies Act requires that those companies constitute a CSR committee of the Board that consists of three or more directors, at least one of whom must be independent.4

The committee will be responsible for formulating and recommending to the Board a CSR policy which indicates the activities to be undertaken by the company in line with Schedule VII.5 The committee must provide recommendations as to the amount to be spent on those CSR activities and monitor the CSR policy of the company from time to time.6 A company is also required to give preference to the local areas in and around which it operates for CSR-related spending.7

Schedule VII of the Companies Act sets out activities that may be included by companies in their CSR policies, such as eradicating extreme hunger and poverty, promotion of education, ensuring environmental sustainability and social business projects.

The Board of every applicable company is required to ensure that a company spends at least 2 per cent of its average net profits made during the past three financial years in pursuit of that company's CSR policy, where average net profit is calculated in accordance with section 198 of the Companies Act.8

Importantly, if the company fails to spend the amount set aside for CSR activities, the Board must specify the reasons for not doing so in its report.9 Failure to comply with the Board's reporting obligations (CSR spending reporting being one of those) may result in a fine between Rs 50,000 and Rs 2,500,000 (A$913 - A$45,600), with potential imprisonment and/or fines for every officer of the company who is in default.10

Once the draft CSR rules have been enacted, there will be more certainty as to what companies are required to do under the Companies Act. It remains to be seen to what extent the new legislation will be monitored and enforced.

The Lokpal Act 2013

On 18 December 2013, the Lokpal Act was passed by the Indian Parliament and came into force on 16 January 2014. The passing of this Act represents a positive step in India's stand against corruption.

The Lokpal Act creates an ombudsman or 'Lokpal' (Lokpal is a Sanskrit word for 'caretaker' or 'protector of the people'11) at the federal level that can investigate allegations of corruption made against public servants. The Lokpal Act also requires the creation of ombudsmen at the state-level (a 'Lokayukta'). The Lokpal Act does not create any new corruption-related offences; rather, it is a mechanism for investigation of complaints relating to alleged offences under the Prevention of Corruption Act 1988 (the Corruption Act).

The Lokpal Act does not appear to place a restriction on who may make a complaint to the ombudsman. Once the ombudsman receives a complaint that a public servant has committed an offence punishable under the Corruption Act, it can either order a preliminary inquiry or, where a prima facie case exists, order an investigation by an agency.12

A public servant, for the purposes of the Lokpal Act, can be (among others) current or previous Prime Ministers (with some restrictions), current or previous Ministers of the Union, or current or previous members of either House of Parliament.13

The ombudsman can also inquire into the conduct of a person who is not a public servant but who was involved in abetting, bribe giving or bribe taking or conspiracy relating to any allegation of corruption under the Corruption Act.14 Therefore, while the focus of the Lokpal Act is public servants, there is some scope for the ombudsman to investigate the actions of persons in the private sector as well.

The ombudsman has various powers that allow it to ensure that a complaint is considered with evidence. These include search and seizure powers,15 the power to recommend the transfer or suspension of a public servant under certain circumstances,16 and the power to give directions to prevent the destruction of records during preliminary inquiries.17

If, after an investigation, the finding of the Lokpal discloses the commission of an offence under the Corruption Act by a public servant, the Lokpal has the discretion to file a case in the Special Court.18 The Central Government can constitute Special Courts to hear and decide cases arising out of the Lokpal Act or the Corruption Act.19 The limitation period for the investigation of claims is seven years from the date on which the complaint is alleged to have been committed.20

It will be interesting to monitor India's approach to, and use of, its federal Lokpal (and state equivalents) and the extent to which this will result in greater enforcement of anti-corruption legislation in India.

Conclusion

Through the introduction of mandatory CSR-related spending, the Boards of relevant companies will not only have to monitor compliance with CSR-related obligations, but will also be required to actively contemplate what 'social responsibility' measures will be supported. Leaving aside the requirement to preference the physical areas in which such companies operate, the bases of such choices have the potential to be closely scrutinised, particularly where large sums of money are to be spent.

Further, the recent introduction of the Lokpal Act appears to have bolstered the push for a tough stance on anti-corruption in India. While this is a positive step, it remains to be seen if and how the ombudsman will be used to stamp out corruption in the public service.

We expect that companies' CSR spending decisions and the approach to corruption allegations against the Indian public service will be closely observed over the coming years.

Companies that have a presence in India or are contemplating doing business in India should consider the impact of both pieces of legislation on their operations in the long term.

Footnotes
  1. The draft CSR Rules are available at the Ministry of Corporate Affairs India website. See 'First Phase comments'.
  2. Draft CSR Rules, Part 1, s2.
  3. Section 35 of the Companies Act. 'Net worth', 'turnover', and 'financial year' are provided in section 2. Although the Companies Act does not define 'net profit', the draft CSR Rules define 'net profit' (for the purposes of s135 of the Companies Act) as 'net profit before tax as per books of accounts and shall not include profits arising from branches outside India', (see draft CSR Rules, Part I, s3(d)).
  4. Section 135(1) of the Companies Act.
  5. Section 135(3)(a) of the Companies Act.
  6. Section 135(3)(b)-(c) of the Companies Act.
  7. Section 135(5) of the Companies Act.
  8. Section 135(5) of the Companies Act.
  9. This is also required under s134(3)(o) of the Companies Act.
  10. Section 134(8) of the Companies Act.
  11. Manoranjan Kalia, 'Lokpal can act as a deterrent', Hindustan Times (Chandigarh), 2 January 2014.
  12. Section 20(1)(a)-(b) of the Lokpal Act.
  13. Section 14(1) of the Lokpal Act.
  14. Section 14(3) of the Lokpal Act.
  15. Section 26 of the Lokpal Act.
  16. Section 32 of the Lokpal Act.
  17. Section 33 of the Lokpal Act.
  18. Section 24 of the Lokpal Act.
  19. Section 35 of the Lokpal Act.
  20. Section 53 of the Lokpal Act.

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