The Companies Act, 20131 (Act) provides a refreshing approach toward the dynamic economic

environment and keeps pace with our counterparts across the globe. The Act, being progressive
and forward looking, has ushered in numerous changes in the Indian corporate domain.
However, we have analyzed below only those changes that are likely to have ramifications from
a broader point of view that of a stakeholder and not a shareholder alone.
1. Whistleblower mechanism-the game changer
Whistle blowing2 means an act of calling the attention of the top management toward some
malpractice happening in an organization. Considering the large number of corporate frauds and
malpractices that have come to light in the recent past3, the Companies Act 1956 can be
considered to be ineffective in this regard. It contained no provisions that related to reporting of
information/evidence pertaining to frauds/malpractices/collusions 4. Such frauds and malpractices
were discovered pursuant only to an extensive internal audit review. However, as per the Act 5
read with the draft rules6, the following companies shall establish a vigil mechanism for their
directors and employees to report genuine concerns:
a) Every listed company
b) Companies which accept deposits from the public
c) Companies which have borrowed money from the banks and public financial institutions
in excess of Rs 50 crore.
The mechanism shall operate through audit committee 7. Two important safeguards have been
carved out in the draft rules
1

Notified in the official gazette of India on August 30, 2013

The term comes from the practice of British policemen who blew their whistles when they
witnessed commission of a crime.
2

Several instances like those of Satyam, Adidas-Reebok, OnMobile, Ranbaxy, etc.

The whistleblower mechanism is popular in many developed nations like US (Sarbanes-Oxley

Act, 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010), UK (Public
Interest Disclosure Act, 1998), etc.
4

Section 177(9) of the Act

Draft Rule 12.5

a) Reclusion of audit committee members in case of conflict8.

b) Adequate safeguard against victimization9.
This is a major step in ensuring that the employees and directors are fearless in
approaching audit committee and report their concern. Furthermore, provision for direct
access to the chairperson of the Audit Committee shall be made in exceptional cases10.
As a deterrent against filing frivolous complaints, it has been provided that suitable action
(including reprimand) may be taken against repeated frivolous complaint filers11. Details of such
mechanism shall be disclosed by the company on its website and in the Boards report 12. It is
pertinent to mention that the Act does not provide that the mechanism shall be operated by
audit committee. Hence, the audit committee can delegate the responsibility to a third party;
formulate policy in this regard, etc. However, the overall responsibility still lies with the audit
committee only.
The introduction of this concept is a game changer as far as corporate governance is concerned.
The Equity Listing Agreement, vide Clause 49, provides for establishment of a whistleblower
mechanism. However it is only recommendatory and not mandatory in nature. Now, with the
mechanism forming part of the statute book, its applicability is wider and much more
effective. The Act has rightly made the independent directors responsible for a functional
mechanism13. Furthermore, it fills a glaring gap in the effectiveness of discovering fraud through
internal audit review i.e. delayed response. Most internal audit reviews take place quarterly or
semi-annually and hence there is a lesser chance of discovering suspicious activities. In fact, a
study shows that employees are more confident using whistleblower hotlines to report
In cases the Act does not require company to have an audit committee, the Board of Directors
shall nominate one director for this purpose
7

Draft Rule 12.5(2)

Section 177(10) of the 2013 Act read with Draft Rule 12.5(3)

10

Ibid

11

Draft rule 12.5(4)

12

Section 177(10) of the Act

13

Schedule IV to the Act - illustrating the duties of the independent directors

fraud rather than internal audit review 14. Provision of adequate safeguard against harassment
and victimization is what stops the concept of vigil mechanism from becoming a toothless tiger.
However neither the Act nor the draft rules provide any clarity on the anonymity of the
whistleblower.
Very recently, the Securities Exchange Board of India (SEBI) has also decided to make it
mandatory for listed companies to have a whistleblower mechanism for their employees and
directors15.
An analysis of the provisions also brings forth certain shortcomings in the scheme. It is noticed
that the term genuine concerns has been defined neither in the Act nor the draft rules. This may
give rise to some confusion regarding the periphery within which such mechanism shall operate.
However, one may borrow an idea from one of the duties of an independent director - report
concerns about unethical behavior, actual or suspected fraud or violation of the companys code
of conduct or ethics policy 16. The exceptional cases referred to in section 177(10) have also not
been defined. Consequently, under what circumstances can a chairman of the audit committee be
approached becomes very subjective. One more grey area is that both the Act and draft rules fail
to take into consideration the situation where all the members of the audit committee are
conflicted.
Despite its various shortcomings, an effective working of this mechanism shall lead to timely
detection of fraud and will save the stakeholders (and not the company alone) from suffering
pecuniary injuries.

2. Class Action Suits- a progressive change

A class action or a class suit is a form of lawsuit in which a large group of people collectively
bring a claim to court. Class action aimed at monetary settlements originated in the US and is
14

KPMG India Fraud Survey 2012, 14-15

http://www.thehindu.com/business/markets/whistleblower-provision-mandatory-for-listedfirms-sebi/article5709482.ece (Last visited March 26, 2014)

15

16

Schedule IV, Clause III(12)

still predominantly a US phenomenon, though several European jurisdictions have, of late,

enacted some provisions permitting class action17.
Though class action suit is not a new concept in the global corporate arena, it is fairly new in the
Indian context. When the Satyam scam broke out in 2009, investors based out of US filed class
action suit claiming damages not only from the company but also the auditors. However, the
Indian investors had no such recourse available to them. This is perhaps the biggest travesty and
irony in the Indian corporate history that the legislature realized the importance of this concept at
the cost of pecuniary injury suffered by many investors and stakeholders.
In India, requisite number18 of shareholders or depositors can file an application with the
National Company Law Tribunal (NCLT) in case the management or conduct of the affairs of a
company (other than a banking company) are conducted in a manner prejudicial to the interests
of the company, its members or depositors19.
It is pertinent to note that Companies Act, 1956 consisted of provisions 20 relating to application
for prevention of oppression and mismanagement whereby, only the members of the company
were given right to file an application against the company. The Act gives the shareholders an
additional right against abuse of power by the company and more specifically- auditor,
management, expert or consultant, thereby broadening the concept. Secondly, now the
depositors have also been included in the ambit so that they can feel secure about their
investments. Earlier their only recourse was to file a civil suit. The Act has also provided an
exhaustive list of seven instances when a class action suit can be filed with the NCLT21.
17

ICSI, Backgrounder on The Companies Act, 2013, 71

(i) Not less than 100 members/depositors or 10% of total members/depositors whichever is
less;
18

(ii) Any member/depositor singly or jointly holding 10% of value of shares/outstanding deposits.
In case of company not having share capital, not less than 1/5th of total members
19

Section 245 of the Act

20

Section 397 398 of the Companies Act, 1956

21

Section 245(1) of the Act

It may be appreciated that inclusion of auditors and consultants of the company within the ambit
of class action suit22 has empowered the members and depositors. This step will ensure that the
company as a whole directors, auditors, consultants, experts, etc is diligent and careful before
acting on any matter. An essential feature is the advantage of economies of scale. Earlier,
individual shareholders avoided filing civil or criminal cases due to huge cost of litigation being
involved. In relation to the litigation costs involved in such class action suits, the Act has
incorporated two provisions which shall encourage the investors to file applications. The
Investor Education Protection Fund (established by the Central Government) shall be utilized for
reimbursement of legal expenses incurred in pursuing class action suits 23. Furthermore, the
NCLT shall ensure that cost related to application for class action suit is defrayed by the
company or any other person responsible24. Now investors are empowered to pool in their
resources and fight for their cause. The involvement of NCLT shall also ensure speedy disposal
of matters. It is pertinent to note that only members and deposit holders have been covered and
remaining stakeholders like creditors, bankers, debenture holders etc. are not eligible. This, in
our view, is a missed opportunity. An analysis of the seven instances provided would result in
one revolutionary finding a suit can be filed against any action by the directors, company,
auditors, etc that has not been taken yet 25. Earlier an application could be made only for current
or past actions and not future actions. Hence, the provision is truly preventive in nature and
serves the purpose for which it was put in place shareholder activism.

3. Corporate Social Responsibility-ushering a new era of corporate governance

Corporate Social Responsibility (CSR) is the continuing commitment by business to behave
ethically and contribute to the economic development while improving the quality of life of the
workforce, their families as well as of the local community and the society at large. 26 CSR is the
22

Section 245(1)(g) of the Act

23

Section 125(3)(d) of the Act

24

Section 245(5)(d) of the Act

25

Section 245(1)(a) (f) of the Act

26

Definition for CSR as given by The World Business Council for Sustainable Development

deliberate inclusion of public interest into corporate decision making and honoring the Triple
Bottom Line27: People, Planet and Profit.
In India, CSR as an activity was primarily carried out by high profile cash rich corporate groups.
But with the introduction of the CSR Voluntary Guidelines, 2009, a recommendatory initiative
was introduced by the MCA. The main objective was to make CSR an integral part of the
overall business policy of the company28. Several big groups like Mahindra, Wipro, Infosys, etc.
started spending heavily on CSR activities 29. But much was left to the discretion of the company
and most of the expenses were superficial with no real impact on the society. Firms would
greenwash their profitable activities under the garb of CSR as a result of which the scheme
failed to achieve the desired objective. .
Banking on the recommendations of the 21st Report on the Companies Bill 30, the Act introduced
compulsory guidelines on CSR. From April 1, 2014 every company with a net worth of atleast
500 crore or annual revenues of 1000 crore or a net profit of more than 5 crores will have to
spend at least 2% of their average net profits for the past 3 years on CSR activities31.
This provision makes India the first country to make CSR a statutory requirement. A comply
or explain approach has been introduced whereby if a company fails to spend such an amount,
the Board shall specify the reasons for not spending the amount. Hence for the very first time,
there would be uniformity in CSR spending.
A study states that an increased spending on CSR is stated to have a multiplier effect in the
society. An additional 22,000 crore rupees is expected to flow into sectors such as education,
27

Coined in 1997 by John Ellington, noted management consultant

Six core elements like care for stakeholders, respect for environment and activities for social
inclusive development was introduced.
28

The Mahindra Group had been spending about 1% of its net profits on CSR activities since
2005. They spent 75 crores rupees in the last year and it is expected to increase to 175 crores
rupees this year. Tata Group was one of those companies who were following the 2% rule by and
large and spent over 1000 crores rupees over the last two years.
29

Clause 147(2), Recommendations of Parliamentary Standing Committee on Finance-21 st

Report on the Companies Bill, 2009
30

31

Section 135 of the Act

healthcare, women and child welfare.32 Companies can operate its CSR activities through trusts
and societies operating in India either established by the company themselves or independent
bodies33. In order to ensure organized and successful CSR initiatives, companies will have to
identify and hire an appropriate team of professionals: Tech Mahindra hired Loveleen Kacker, a
former senior IAS officer and a domain expert in children's education 34. Thus an estimated
100,000 jobs is likely to be created in the next 6 years35.
An analysis of the provisions brings forth certain shortcomings too. Significantly, there is no
penalty for non compliance and the provision is fairly non coercive in nature. However a duty is
cast on the board members to give an explanation, which they may not be able to get away from
easily and on the regulator to question their roles. There is also a question as to whether a
separate provision needs to be created with respect to the unspent amount or whether it is to be
accommodated the next year. Clarity in this matter would address all important transparency
issues. Further, finding the money equivalent return on investment (ROI) of the firms activities
(impact assessment) would also be a challenging proposition. Finally, the Act is a great step
forward in moving from ad hoc philanthropy to understanding the ground realities leading to an
amalgamation of stakeholder interests with the companys long term goals.
To conclude, we may say that the new Act brings corporate traditions of western countries in the
Indian setting. It aims to revolutionize the current corporate culture and thought through holistic
measures, aimed at long term sustainability rather than short term profitability.

http://www.hindustantimes.com/business-news/new-csr-guidelines-to-generate-100-000-jobsover-next-6-years/article1-1195290.aspx (Last visited on March 26, 2014)

32

Rule 4(2) read with 1st Proviso, Companies( Corporate Social Responsibility Policy) Rules
2014
33

http://articles.economictimes.indiatimes.com/2013-09-05/news/41803586_1_csr-corporatesocial-responsibility-india-inc (Last visited on March 26, 2014)

34

35

See note 32