We Must Follow Best Global Practices

Of late, corporate governance has come into limelight both from the point of view of ethics of doing business and as a key factor driving business development. As the India growth story takes shape, Minister of State for Corporate Affairs Sachin Pilot has been at the forefront of the demand for increased corporate governance and of piloting the Companies Bill 2013 through Parliament. With its attendant social responsibilities, the Bill heralds a new culture of business. In an exclusive interview with INCLUSION, Sachin Pilot shares his thoughts and hopes to redefine business.

Recently Parliament ratified the Companies Bill. It seeks to improve corporate governance, auditing norms and empower independent directors. It also stipulates some mandatory corporate social responsibility. How will this usher in greater degree of corporate governance and corporate participation in development?

The last time this country had a Companies Act was in 1956. We have been able to rewrite it and now, with the consent of the Upper House, this Bill has become a law. The whole concept of corporate governance and a few things you mentioned – about shareholders protection, independent directors on board, more transparency, more disclosures, more compliance with regulations – are the need of the hour. The Indian economy must grow in a fashion that is in line with the global best practices. This new Companies Act, I think, is going to usher in a new era of forward-looking economic scenario. It is going to usher in reform in a way that it will bolster the investment climate and, to my mind, bring about more transparency. We have included a lots of parts about e-governance and good corporate governance, using technology, making sure that there is a wider ambit for companies to operate.

The concept of CSR is a new initiative and one that has been welcomed by almost everyone that I have spoken to. But, there is some confusion on this. CSR is not a tax the company has to pay to the Government of India or a State government. It is not a levy or a cess. It is primarily just a portion of the net profit of a company – it is also an opportunity for the large and profit making, established companies to give back to the communities in the area that they operate.

We are still forming the rules of how this will be implemented. But, primarily it is about them being able to allocate 2 per cent of the net profits to go back into social development. They can choose any type of work they intend to do – from schools, roads and hospitals to environment and wild life. We are keeping the canvas very open. There will be no inspector raj and there will be no auditing by the government. It is just self-reporting and self disclosures. It has to pass muster from the CSR committee on the board and then they can put it up on the website for the shareholders to see and for the world to know the good work they are doing. In no way will it be intrusive and there’ll be no interference by the government. That is something that I want to make sure.

How does the new Bill take care of complexities of compliance? Will it make compliance easier?

I have been advocating few regulations for 100 per cent compliance. There is no point having 5,000 regulations and one is not able to fulfill most of those. So, compliance should become easier.

We are also having a new concept of the OPC, or the one-person company. It hasn’t really been talked about much in the media but the OPC is really a unique idea. It is a concept where today the minimum requirement to open a company is, two persons and 100,000 rupees paid up capital to incorporate a company. But think about the millions of artisans, weavers and craftpersons – all these people who work as individuals. These people will then have the legal sanctity of having an incorporated body, a separate legal entity without having the multiplicity of reporting, auditing and compliance. We are trying to reduce such issues and, for an OPC, substantially lower the `100,000 limit that is required today to start a company. I think, this will give them access to credit, financial services, banking and also to have a separate entity besides themselves. Today they work as proprietors or LLPs, but they don’t have the benefits of having an incorporation. That, I think, should take off in small towns and townships where people are doing a lot of masonry work.

There are so many people doing so many different things, but they are not able to take the benefit of access to the market, mergers and people taking over or investing money – all that will only happen when they form a company. I hope the OPC concept takes off. Only time will tell how successful it is, but I am confident it will help us expand the formal economy.

What rule is your ministry trying to incorporate for good corporate governance and how will that boost investor confidence or improve shareholders’ trust?

There are a few things we have now mandated like, one-third of the directors on the board have to be independent directors – independent in the real sense of the word, both in letter and in spirit. Also, we are seeking more clarity on related party transactions, that means more disclosures. We have now allowed board meetings to be conducted through video conferencing and also allowed electronic voting in the boards and in the AGMs.

For shareholders, we have introduced the concept of class action suit. It gives protection to shareholders and small investors. To protect the investment community, especially the small investors, I think is one of the primary concerns we have been able to address through the Companies Bill. For good corporate governance, we have ensured that certain class of companies have at least one woman as director on the board. This is to have some gender parity in the corporate sector.

These are the new initiatives in the Companies Bill. It took some effort to pass this Bill, which was about 10 years in the making, in the Lok Sabha in December last year. With more than 40 parties in Parliament, to evolve a consensus on any bill is not easy. But, I must thank all political parties that were able to participate in the debate in the Upper House and almost with unanimity we passed this Bill.

It has taken some effort to get it organised. It went to the standing committee twice. Of the 193 recommendations that the standing committee headed by Yashwant Sinha made, we accepted 187, almost 96 per cent. There was much debate and discussions amongst political parties, shareholders, investors, lawyers and auditors, and all their inputs were brought in. That’s why this Bill was comprehensive. The consequent Act ensures a paradigm shift in the environment in which companies operate. It is a very positive and forward looking Act and, hopefully, will bring much desired benefit to our economy.

For the CSR, is there any plan to measure the outcomes and its timeline?

It is a very good point. In the beginning I don’t want it to be looked at as a draconian sort of a thing where the government is mandating that you have to and how to spend and it will measure the outcomes. We have asked for creation of a CSR committee on the boards and it should have at least one independent director. Any project that the company believes is good, the committee and the board have to approve it. I have encouraged companies to come up with projects that are going to be timeline and target-driven, like you said. It is much more beneficial if the work is tangible and you are able to quantify and specify the benefits that will accrue. Therefore, we have said that whatever a company does, the board’s approval is a must and it should be put on the website.

The government is not going to tell you right and wrong or yes and no. The company’s conscience should dictate the good work that it does. The CSR committee will also be measuring the outcomes. It will tell what are the benefits that they are accruing once the money is spent. Writing a cheque or allocating funds is very easy, but the real test is how much benefit a community is getting and how many people’s lives are being enriched. Is there more sustainability in the ecosystem in which you operate? All these are issues that we leave to the companies to decide because if, right at the beginning, the government mandates and then regulates, monitors, verifies and certifies, it becomes unpalatable to many in the corporate sector.

How do you bridge the perception gaps between the Ministry of Finance and that of Corporate Affairs on what is CSR, what is Section 25 company, what is the kind of tax rate that is …?

I think it is nothing to do with the Finance Ministry because Section 25 companies are ones that are not taking profits. They make money, but they re-plough the profits. They don’t take dividends or take money out of profits. It is very clearly defined. Yes, there has been a demand by some corporates that CSR should get some tax benefits. I also believe that some sort of financial taxation benefits could be given. But what shape and form it will take and what formula one adopts, will depend on the Finance Minister. As far as MCA is concerned, there is no confusion between what the Finance Ministry should do and can do and what we do through the Bill, which has now become an Act.

But taxation will become a prickly issue. If your CSR spend is taxed again because it is not your core area of your business, then?

No, this is 2 per cent of the net profit. You do this after all taxes are paid.

After you pay all the taxes? It would not even be allowed as an expense?

Some companies have asked to write it off as an expense. That decision is not mine to make.
The Finance Minister has to make that decision.

That is where the problem is.

There is no problem. As of now, it is 2 per cent of the net profit. It is just the demand that the corporate sector has made. Whether it is accepted or not, is up to the Finance Minister. There is no confusion. Today the Bill has been passed that says 2 per cent of the net profit is to be invested in the CSR. As for the demand of the corporate sector that they should be able to write this off as expense, the Finance Minister has to decide.

Perhaps they could donate 2 per cent of the net profit to Section 25 companies and get 80G exemption…

That is one option, but where they spend on CSR is not for us to decide. They can give it to the PM Relief Fund, they can give it to some charity, they can use in their own foundation, own trusts. They can take advantage of the 80G provisions. That decision is that of the company.

If the law provides for faster liquidations, mergers and acquisitions, class action suits and serious fraud investigation office, how seminal are these changes and how’ll MCA implement these?

It is often said that in India it is very tough to start a company, but it is almost impossible to wind it up. So we decided that we must make that process less painful. We are setting up special courts for this and a National Company Law Tribunal, which will replace the CLB. This will ensure that there is much faster winding up, faster mergers and faster acquisitions.

Today, the companies have to go to the high court if they want to close. The pendency in the high courts is so much that it takes years for companies to do so. Mergers too sometimes get very tricky. So, through these special courts and NCLT it’ll take much less time for such activities. So far the serious fraud office is concerned, the idea is to use technology and inter-ministerial data, and to do data mining to be able to have red flags going up before problems occur. We have RBI, SEBI, State governments and the economic offenses wing – but all these agencies are working in silos. We will try to get them all together and SIFO will be entrusted with the task of doing the data mining. Technology has already been tested and in about a month or two we will be able to implement it. It will help us to check the problem before it becomes a huge one.

Do you foresee class action suits becoming common in India and how does that impact minority shareholders?

I don’t know how it will take off, but the provision is there in the Companies Act because today you need at least 10 per cent of the shareholders to approach the CLB for mismanagement or for some wrong actions by the board. There is also protection for the whistleblowers on the board in this Act. It depends on how the investors in companies or employees take up the class action suits. We are there just to make the provisions, it is up to the people to take advantage of it. I think that it will also help us in quick disposal of issues. Today all disputes go to first lower courts and then higher courts. There are appeals after appeals. This becomes cumbersome and expensive. We are trying to limit that timeline.

What has been done to ensure that corporates have a strong ethics policy and what would be the enforcement mechanism?

Good corporate governance is not something that you can legislate. In my view, it is the initiative of the company itself. It has to be the top level and the management which decide that we must inculcate good sustainable business practices. So, this 2 per cent CSR is meaningless if all the profits that you are earning is being done by destroying the community, by paying people pittance, by destroying the environment. If you earn a profit by such means and then give 2 per cent as CSR, that is not the idea. The national voluntary guidelines have been adopted by the top 100 listed companies. That is for the large corporates. I think every company must do this and internalise the good corporate behaviour. Through the Act we have given the platform, but each company has to take a call whether the good business behaviour or good business practices are something that will help the company be sustainable and grow in long-term.

It is not just about making profits really; it is how you earn the revenue, how much benefit the society gets. I don’t think it is up to us, or it should be our job, to force companies to do this. This must come from within.

This kind of distorts the playing field. MNCs work under a strong compliance environment. You have the Sarbanes Oxley Act, the FCRA Act and so forth. While operating in India, they have to follow that law to the letter. For example, they can’t entertain anyone, whereas none of these rules apply to Indian companies. They feel a level playing field is not there. Also, when Indian companies do business outside, there is no law to stop them from engaging in unethical practices. You can’t be ethical at home and unethical abroad…

There are two issues. One is about ethics and the other about legality. In Parliament we make laws for legality and illegality. What is morally acceptable, what is ethical and what is unacceptable in terms of value systems is a cultural issue. As a government, we can only focus our attention on lawmaking. We can say bribery is illegal because it is not acceptable in the eyes of law. Ethical practices, moral practices, good value systems – all are dependent on the companies themselves. I think it is wrong to compare because different countries have different ways of doing things. But, we are trying to make sure that our standards of operations rise because Indian companies are now increasingly becoming global. We must project the best that India has to offer. This will happen over time and is a cultural transformation. It will not happen by signing a Bill or passing a law. It has to be done with the collective efforts of the corporate sector along with the regulatory environment that they are operating in.

There is a perceived gap between corporate governance standards in the public sector and the private sector. How can this be bridged?

I think good governance in the corporate sector is standardised. There should be no distinction between private and public or government-owned companies. By the way, the CSR provisions for government companies is 5 per cent of profits and for private companies 2 per cent because, I think, government companies have more of an obligation. But yes, like you said, it is more about perception and CSR will help as bridging that trust deficit. Sometimes there is also a clash of perception between large companies and people who are giving up their land or forest or tribal areas. May be because of the trust deficit. This will help endear companies to people they are working amidst. It will generate the goodwill that is perhaps missing.

Sponsorships and commercial sort of branding is one thing, but doing something to enhance the lives of people will really earn goodwill. You will rather have happy faces, fulfilled lives and content families than having this trust deficit. At no point is the government abdicating its responsibility. It will still provide the midday meal, the school, the electricity, the road and sanitation, but this added effort by companies will help bridge that gap which, sometimes, is the perception.

While drafting this Bill you would have looked at legislations in other countries as well and some of them are pretty forward looking. How do you think we compare?

We looked at the company law in the UK – in 2006, they passed the new companies law. We have also taken a look at all company laws, whether it is the US, Europe, Australia or Asia, and I think we are now amongst the best in terms of regulatory compliances. It is a 21st century law and forward looking; we are now right at the top of the few countries that have such laws.

Traditionally, transfer pricing laws in India have been very opaque. That has been again a major grouse. Is there anything that is going to make that better and more transparent?

That is the aspect that Competition Commission of India (CCI) looks at and it doesn’t pertain to the Companies Act.

You recently spoke about the need to regulate lobbying norms and observing that the word lobbying has a negative connotation in India. How do you think this is going to help because India also has this huge culture of black money. People don’t really have to disclose things. So, there are people who are law abiding and end up disclosing everything, but the suitcase diplomacy still flourishes on the other hand. So how does one balance the two?

We have to distinguish between what is bribery and what is advocacy. If you are pitching for a policy that is going to help the economy in the sector that you are talking about – it still happens as companies or chamber of commerce or individuals or people affected by the change in policy come and air their views to the policymakers – that is completely acceptable. But we must be able to define what is legal and what is illegal. Lobbying, advocacy, giving inputs and ideas – I don’t see anything wrong in that as long as you are doing within the provisions of law. If you do an illegal activity and then call it lobbying and advocacy, that is not acceptable. I have always said that we must be able to clearly define what is right and what is wrong; what is legal and what is illegal. In the absence of that, there is confusion and then we get into all sorts of grey areas. So, there should be a clear definition. I don’t think we should ape the West or America or European sort of conventions on what is lobbying. We must define our own concept of what is the special interest that you are representing, but it must be done transparently. Sometimes you do this advocacy in enclosed rooms, you say something in letter and then say something else while speaking in public. You lobby for ‘a’ policy and lobby for ‘b’ policy – that sort of ambiguity and the closed room lobbying also is not a good idea. We must clearly stand up and say, well, I am for it or against it. Clarity, transparency and clear definition is I think much required as far as that issue is concerned.