Vol. XXX • No. 06 • June 2013

Chairman’s Blog

Dear Members,

It is a matter of immense pleasure to communicate through this exclusive medium of first ever E-Focus. After discussions and deliberations, the ICSI-WIRC decided to go for E-Focus, which apart from being cost effective, is a step forward Green Initiative. The E-Focus, is being released at Two days conference of WIRC at Pune on 5th July, 2013. It is hoped that E-Focus will be well received by members. I will be happy to receive your valuable suggestions and feedback.

The WIRC placement initiative in collaboration with Camplace is taking final shape with execution of MOU and release of Placement Initiative at the hands of President of ICSI at Pune on 5th July 2013. I am sure this initiative will benefit large number of students & members to shape up their career.

At WIRC, we repeated the program on “Enhance Your Effectiveness” following overwhelming response to the earlier program. The joint program with We School, Mumbai on “Securities Laws’ was successful with members from ICSI and students of We School attending in large numbers. The Workshop on “Art of Advocacy” is scheduled to he held in July 2013. The WIRC Regional Conference is scheduled to he held on 3-4 August 2013 at Ahmedabad. I hope you have blocked the dates.

The Gujarat State, Students conference held on 29-30 June 2013 was also attended by large number of students. The dates of forthcoming State Students Conference will be announced soon.

We are also holding a joint program with Rajkot Chapter at Diu (Union Territory). Please await announcement of dates and venue. WIRC has finalized the terms and conditions for Class Room Teaching Centres with Vikas College, Vikhroli and RA Podar College, Matunga and the MOU will be inked soon.

Yours truly,

CS Hitesh Buch

Preface to first digital edition of “FOCUS”

We are extremely happy to present before you the first Edition of “digiTal fOcuS”. Keeping pace with the time we have initiated the process of complete transformation of our popular newsletter. We started this journey by sending Focus in PDF format to all the members through email. Then we started uploading it on WIRO Child portal. From last few months we made it available in the eBook form with on Kopykitab portal. These digital initiatives were taken without discontinuing the posting of physical copy to you.

WIRC has recently decided to discontinue the sending of physical Focus to the members and to publish only digital version. The complete transformation to digital world has achieved by releasing this first digital edition of Focus. Email containing Focus flyer will reach to your mail box. The flyer will be having highlights of each edition with section links. By following the links you will be able to open the relevant sections of Focus in your browser and will be able to read, print, copy & share it conveniently.

Digital form is very convenient to carry & store. We are sure that you will love experiencing this. This transformation has opened many new avenues to effectively disseminate information & knowledge to you. Going ahead we have plans to provide audio & video streaming of professional programmes through this newsletter. You will have the facilities to share the contents of the newsletter on social media and to post your comments. You will be getting regular updates from WIRC through RSS feeds. Entire Team of Focus, staff of WIRO & Team at Camplace has taken lot of efforts to create this Digital Wisdom for you.

Please provide your continuous support to WIRC Focus by making contributions in it. Share this digital knowledge among your clients & colleagues and increase the readership of Focus. Share your ideas & thoughts and provide valuable feedbacks.

Enjoy surfing……………


Editorial Board

Editorial Board

Photo Feature

Photo Feature

Status of a Nominee: A Trustee or an Owner

(The legal position about the status of a person in respect of the property for which he/she is appointed as a Nominee is analyzed in this Article.)

1. There are two modes of succession to the property of the deceased i.e. testamentary and intestate. In the testamentary mode of succession, the property of the deceased devolves as per the wishes of the deceased, expressed through the document called “will”. In the absence of the will or on the failure of the will by not acceptance by the Court, the property devolves on the person/s in accordance with the Law of succession. The nomination can be said to be a mode of testamentary succession, otherwise than through the will, to the extent and/or in a cases where the nominee becomes absolute owner of the property. The nomination is primarily a facility for quickly and easily realizing the property from third parties, belonging to the deceased. It also helps the third parties of being relieved and discharged from the liability by making the payment or transferring the property to the person nominated by the deceased. It is a question thereafter, as to in which capacity the nominee holds the property.

2. There is only one law relating to the testamentary or intestate succession for the entire property of the deceased. However, there is no all-inclusive or uniform Law of nomination applicable in respect of entire property. The provision relating to the nomination is to be found in the respective Law in respect of a particular property. There are many property for which provision or facility of nomination is not available. The person owning a flat in the building of a Co operative Housing Society by holding the shares of the Society can make the nomination in respect of the shares and the interest in the flat. But to a person owning the plot of land and the bungalow thereon, has no facility of making nomination in respect of the same.

3. The question of the status of the nominee vis-a-vis the property received by him in that capacity has arisen for consideration by the Courts on many occasions. The consistent view after 1984 Judgment of the Supreme Court in the case of Sarbati Devi, dealt with hereinafter, has been that the nominee is only the “Trustee”, for the persons entitled to the property in accordance with testamentary/intestate succession. This possibly generated a perception that it is a proposition of Law that the nominee is always the “Trustee” and not the “Owner”. However, the rulings all along by the Courts were attributable to the language/expressions used in the particular enactment and not as a general rule. It may be a coincidence that in all the cases considered by the Courts, the language/expressions have been such to make the nominee the ‘‘Trustee.’’ In the recent case, of 2010, dealt with hereinafter, the Bombay High Court has held that the nominee is the “Owner” and not the “Trustee.” This is with reference to the provisions of nomination contained in the Companies Act, 1956 and the Bye Laws of Depositories. In view of this, the proposition has to be that the nominee can be the “Trustee” or the “Owner”, depending on the meaning and/or an interpretation of the provisions contained in the particular enactment. While on the subject, it can be advantageously noted that the Succession Certificate or Letters of Administration issued by the Courts are only for realizing the debts and securities/administering the property and the holder does not become the owner. Further, subject to specific protection against the attachment wherever applicable, the property in the hands of the nominee in either capacity, is available for discharge of liabilities of the deceased.

4. The language/expressions used in the provisions for nomination in some enactments and the Judgments wherever available considered , are as under:
a) Insurance Act, 1938, Section 39:
Nominee is a person to whom the policy money is to be “paid”. Possibly, the provision under this Act came up for consideration for first time by the Courts. Some High Courts took the view that the nominee is the “Trustee” while some others took the view that the nominee is the “Owner”. The Supreme Court in the case of Smt. Sarbati Devi and Anr. Vs. Smt. Usha Devi (AIR 1984 SC 346) approved the view that the nominee is the “Trustee”. The Supreme Court observed that the language of this Section does not warrant to hold that the nomination is one more kind of succession. Therefore, the law of succession applicable to the estate of the deceased continues to apply without being varied by the nomination.

b) The Gratuity Act, 1972, Section 4:
The gratuity amount shall be “paid” to the nominee. On the basis of language of the Act and applying the ratio of the Sarbati Devi’s case, the Bombay High Court, in the case of Gangubai Bhagwan Salawde and Ors. Vs. Chimnabai Suryabhan Salwade and Ors, [2005(104) FLR 158] held to the effect that the nominee under the Gratuity Act, 1972 is the “Trustee” and not the “Owner”.

c) The Employees’ State Insurance Act, 1948, Section 71:
The benefits under the Act due up to the date of death are to be “paid” to the nominee. No reported case is found directly with reference to this provision. However, on the basis of the language of the provision, the ratio in the Sarbati Devi’s case would squarely apply.

d) The Maharashtra Co-Operative Societies Act, 1960, Section 30:
The share or interest of the deceased member is to be “transferred” to the nominee. In the absence of nomination, the share or interest is to be “transferred” to a person as may appear to the committee to be the heir or legal representative. Other moneys due to the deceased member are to be “paid” to the nominee, heir or legal representative as the case may be.
In the case of Gopal Vishnu Ghatnekar Vs. Madhukar Vishnu Ghatnekar, 1982 (84) BLR 41, the Bombay High Court held to the effect that the nominee under the above provision is only the “Trustee” and not the “Owner”. The Section deals with two situations namely, where there is a nomination and where there is no nomination. In respect of both the situations, the word used is “transfer”, which is in fact closer to ownership rather than trusteeship. The transfer is something more than paying/receiving. In respect of the second situation, the Act provides for transfer to any of the heirs or legal representatives as may be decided by the committee. On combining both the situations, the Honourable Court considered that the committee is not competent to decide about the heir ship and the provision relating to “transfer” to heir is to be considered as provisional arrangement and this would apply to “transfer” even in favour of the nominee. If the two situations are considered independently, there can be a possible view that “transfer” to the nominee is absolute.

e) Government Savings Certificates Act, 1959, Section 6, 7 and 8:
The payment due on the savings certificates is to be “paid” to the nominee. A right is conferred on the nominee to “receive” the payment. The nominee becomes “entitled” to the savings certificates and to be “paid” the sum due thereon to the exclusion of all other persons. The above provisions are subject to non obstinate clause to the effect that the provisions of the nomination are notwithstanding anything contained in any Law for the time being in force or any other disposition, testamentary or otherwise. Sub section 2 of Section 8 provides to the effect that the executor, the administrator or other representative of a deceased are not precluded from recovering the amount from the nominee, subject to deduction of expenses paid and liability discharged by the nominee. In the case of Vishin N. Khanchandani and Anr. Vs. Vidya Lachmandas Khanchandani and Anr.,(2000)6 SCC 724, the Supreme Court held to the effect that the nominee is the “Trustee” and not the “Owner”. This finding is based on the overall reading of the Section. The non obstante clause, the words like “entitled” and “to the exclusion of other persons” also were held to have no effect in view of other specific provision in the Section to the effect that the executor, the administrator or other representative is entitled to recover money from the nominee.

f) Banking Regulation Act, 1949, Section 45-ZA:
This Section was introduced in the year 1985. The Section is reproduced as it is, instead of giving the language and expressions in the narrative form, for specific purpose of appreciating the Judgment of the Supreme Court thereon noted hereinafter. “45 -ZA. Nomination for payment of depositors’ money.
(1) Where a deposit is held by a banking company to the credit of one or more persons, the depositor or, as the case may be, all the depositors together, may nominate, in the prescribed manner, one person to whom in the event of the death of the sole depositor or the death of all the depositors, the amount of deposit may be returned by the banking company.
(2) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such deposit, where a nomination made in the prescribed manner purports to confer on any person the right to receive the amount of deposit from the banking company, the nominee shall, on the death of the sole depositor or, as the case may be, on the death of all the depositors, become entitled to all the rights of the sole depositor or, as the case may be, of the depositors, in relation to such deposit to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.
(3) Where the nominee is a minor, it shall be lawful for the depositor making the nomination to appoint in the prescribed manner any person to receive the amount of deposit in the event of his death during the minority of the nominee.
(4) Payment by a banking company in accordance with the provisions of this section shall constitute a full discharge to the banking company of it’s liability in respect of the deposit:
Provided that nothing contained in this sub-section shall affect the right or claim which any person may have against the person to whom any payment is made under this section.”
In the case of Ram Chander Talwar and Anr. Vs. Devender Kumar Talwar and Ors. (2010) 10 SCC 671, the Supreme Court held to the effect that the nominee under this Act is the “Trustee” and not the ‘‘Owner”. This finding is based on the words “right to receive” used in the Section and following the decision in the case of Vishin N. Khanchandani with reference to provisions of nomination in the Government Saving Certificates Act, 1959.
In this case the Supreme Court does not seem to have given proper weightage to the words “became entitled to all the rights of the sole depositor or as the case may be, of all the depositors” and “to the exclusion of other persons”. For this, the Supreme Court has only observed that “But it by no stretch of imagination make the nominee as the owner of the money lying in the account”. The plain reading of the Section puts the nominee into the shoes of the depositor himself who has full disposition power over the money lying in the account. The provision of right of executor, the administrator or other representative to recover money from the nominee as contained in the Government Saving Certificate Act, 1959 is not found in this Section. Therefore, the comparison of two provisions does not seem to have been properly made. One more reason given by the Supreme Court is that the Banking Regulation Act, 1949 is enacted to consolidate and amend the law relating the banking and it is in no way concerned with the question of succession. This reason, at the most can be said to be as to what should be the Law and can be applied if there is an ambiguity. But if the language is clear and unambiguous, the way should be given to it. It is respectfully submitted that on all the three counts, this decision of the Supreme Court requires reconsideration.

g) Companies Act, 1956, Section 109A & Bye Law 9.11 of Bye Laws of Depositories. The shares in or debentures of the Company of the deceased member “vest” in the nominee. This is not withstanding anything contained in any other Law for the time being in force or any other disposition, testamentary or otherwise .The nominee is entitled to all the rights in the shares and debentures to the exclusion of all other persons. The securities held by beneficial owner “vest” in the nominee in the event of death of a beneficial owner. The depository to rely upon the nomination, not withstanding anything contained in any other disposition and or nomination under any other Law.
The Bombay High Court in the case of Harsha Nitin Kokate Vs. Saraswat Co-operative Bank Ltd. and Ors.,(2010)3 Comp. L.J. 508 (Bom), held to the effect that the nominee in respect of the shares/debentures and the securities held in the depository account is the “Owner” and not the “Trustee”. The High Court has considered the ratio in the case of Sarbati Devi and distinguished the said case. The finding of the Court is essentially based on the expression “vest” in both the provisions as opposed to other expressions like “paid” and “receive” in other enactments. The High Court also has clarified that depending on the nature of the case, the expression “vest” may have other meaning and effect. For example, vesting of the property in the Court Receiver, which is always provisional and for the purpose of the managing the property.(The reference to depository bye law 9.11 is made in Judgment as Section 9.11 of the Depositories Act,1996.This may be due to inadvertence.)

h) The Employee’ Provident Fund and Miscellaneous Provision Act, 1952, Section 10(2) and The Employees Provident Fund Scheme, 1952, para 61: As per the Act the amount of Provident Fund “vest” in the nominee. This applies to the pension and the insurance under the Act. As per the Scheme, the nominee is a person appointed to “receive” the provident fund amount.
There does not appear any reported Judgment on the expression “vest” under this Act. Going by the interpretation given by the Bombay High Court with reference to the nomination under the Companies Act and the Bye Laws of Depositories, on the basis of expression “vest”, the nominee under this Act should also be the “Owner”. The expression “vest” in the Act is to override the expression “receive” in the Scheme.

5. The above instances can be categorized into four parts on the basis of relevant language/expressions as follows: (i) In (a) to (c) the words such as “payment” or “receipt” are used.(ii) In (d) the words “transfer” and “paid” are used. (iiii) In (e) and (f) in addition to the expressions such as “receipt/ payment/return” the non obstinate clause is used. The words “to the exclusion of any other persons” are also used. (iv) In (g) and (h) the word used is “vest”. In addition an non obstinate clause is also used. In (g) the words “entitled” and “to the exclusion of any other persons” are also used. Generally, there is a provision in all cases of giving valid discharge to the person making the payment/transferring interest, shares/securities etc. to the nominee.

6. Comments and Suggestions:
a. On the basis of above discussion and at the cost of repetition, it is stated that the status of the nominee i.e. whether as the “Trustee” or the “Owner” depends on the language and expressions used in the concerned Act and also further on the interpretation given to them by the Courts. This leads to a state of total uncertainty for a common man in arranging the financial affairs. It is absolutely necessary that there is a common or uniform Law with regard to nomination or the provisions contained in different legislations are kept identical. Of course, the uncertainty in Law is not limited to the nomination alone.
b. The uncertainty in Law is very often attributed to making of Law. However, the process of interpretation of Law also contributes and may be more, to the uncertainty in Law. The uncertainty attributable to making of Law, when noticed, can be corrected in one go. But uncertainty through interpretation is a continuous process. More alarming is the fact that while the change by making operates prospectively, the change by interpretation operates retrospectively. Pending any view by the Supreme Court on any point of Law, the different position may prevail in different States depending on the view taken by the High Courts. The view of the Supreme Court can also be overruled by it, in subsequent rulings.
c. The issue of the status of nominee is relevant only if there can be disputes. If there is only heir to the deceased who is also a nominee there would not be question of any dispute. If heirs consist of a spouse & child/children and the nomination is in favour of a spouse, chances of disputes are less. If there are two and more children but nomination is only in favour of one, the chances of disputes are high. When the heirs include mother & widow, the chances of disputes are still higher. If the nomination is in favour of brother, sister or other relatives / friends when there are natural heirs like spouse, children and parents then the chances of disputes are highest. In some enactments, there is a specific provision for nomination only in favour of a member of family, as defined there. This has the effect of reducing the disputes. In the event of disputes, normally a person is expected to obtain an injunction order from the Court against third party and property remains either with third party or deposited with the Court, till the issue is resolved.
d. Having said as above, it is necessary to find a way out. Firstly, the nominations should be so made with least possibility of disputes. For the present, the Law relating to will is fairly settled and uniform. One should therefore have the will made and to the extent possible make the nominations also, as nearly as possible close to the distribution made in the will. The nomination may be primarily used for realizing the money quickly and conveniently from third parties. Thereafter, the will can be used as stand by document only if there are disputes. The possibilities of disputes are minimum when the distribution through the nominations and the distribution through the will are substantially, if not fully, close to each other. The will should consider both the possibilities about the status of a nominee.

You and your Investments

(Health and Wealth are much related with each other. As rightly said , a person spends his or her life in earning money and then same money is spend for earning health . A balance between two is required.)

Nowadays, the financial market has become very attractive, yet complex and risky. Majority of the advisors are representing one company or other but there remains nobody to represent “INVESTOR”, who gets totally misled and confused. So, I believe that instead of PRODUCT PUSHING, the understanding of your investment needs is must. For small investors, dealing in capital market is governed by 2 factors Greed and Fear. For High Net worth Individual Investors, Stock Markets are a money minting machine also and sometimes a blaming tool where crores of rupees are washed way.
Ultimately from my angle as CS, it is the discipline that a small investor or large investors should have. Discipline helps in keeping control on our Mind set and thereby irrational decisions ARE PROHIBITED. I feel that proper training and going through awareness programmes to keep track of current changes are required for anybody who is dealing in capital markets. But unfortunately, we only do, so called SIP (Systematic Investment Plans) that to for TAX PURPOSES and do not pay attention to their performances. This is against the interest of investors.

Common Grievances of Investors can be highlighted:
1. Lack of information in approaching authorities for financial crimes particularly in Demat accounts, trading accounts with Member brokers.
2. Delay in getting bonus, dividend, refund orders, rights etc. Though with Demat and Information Technology systems these are reduced, still the CYBER CRIMES have increased.
3. Default in getting money, Deposits, Interest on Deposits from unregistered intermediaries as the post dated cheques get bounced. The investors are attracted on the basis of High Interest rate offers which are false and malafide.
4. Lack of training and knowledge in handling products of Equity, Mutual Funds which are volatile in nature. An investor does not allocate time to review the investments made and checking Demat accounts periodically.
5. Losses from dealing in Derivatives and Commodities market.
6. Problems connected with Transmission of securities on death of holder if no Nomination is done.

There are so many entities and intermediaries like Banks, Depositories, Depositories Participants, Listed Companies, Stock Exchanges, Brokers and Sub-brokers, financial and investment consultants, Mutual Funds Asset Management Companies, Portfolio Managers, Registrar and Transfer Agents etc. But I feel that small and common investor is hesitant, afraid to approach these Authorities for any troubles, problems.

In one of the case of an Investor he lost lakhs of rupees in stock market. An upcoming doctor by profession, he was given wrong information that Future and Options Trading will help him to earn more and quick money. Future and Options Trading was attempted by the doctor without understanding the Risk associated with the trading. After losing the money, he could not share with his wife, his family, his irritation increased; he could not sleep at night. A single hasty decision was the cause of all these problems. Investors Counseling, helping them to understand their Risk Profile is required before taking any investment decision.

A Company Secretary being well versed with the legal knowledge can help investors in redressing the problems faced and guiding them in advance for precautions to be taken while taking any investment decision.

Understanding: "Disposal" & "Undertaking" - In terms of Section 293 (1) (a) of the Companies Act, 1956

(Part - I)

Introduction: In today’s corporate world, the business has become very competitive and at the same time multifaceted also. Initially, business organisations prefer to render different kinds of services or trade in different kind of goods through one business entity. At a latter point, as the business grows; there is a substantial increase in the revenues and areas of operation in which the various services are rendered or goods are traded. At this stage, many issues like revenues, expenses, human resources, plant, machinery and other resources are allocable to each service rendered or goods traded by the Company. The management of such company, at this point of time, may take several steps to reorganise the business which will aim at focusing on its core competency. There can also be a possibility that one of the businesses is suffering from losses and hence eats up the revenues earned or profits generated by other businesses in the same business organisation. One of the ways by which the reorganisation is done is by “disposing” of the business which has under developed or developed over a period of time but not part of the core competency of the management of the company. This is just an example of reorganisation and there could many other reasons and ways of reorganisation.

The Companies Act, 1956 (“the Act”) takes into account the above arrangement and provides one of the ways for reorganisation of the business i.e. disposal of a business undertaking. The relevant provision is Section 293 (1) (a) of the Act.

Section 293 of the Act relates to “Restrictions on powers of Board”.
Section 293 (1) (a) states that “The Board of Directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting – sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking”.

In plain simple language, the Board of Directors of a Public Company or a Private Limited Company which is a Subsidiary of Public Company must obtain the consent of the shareholders of the Company, if the Board decides to sell, lease or dispose of:
i) Whole of the Undertaking or;
ii) Substantially the whole of the Undertaking or;
iii) if the Company owns more than one Undertaking - one whole undertaking or substantially the whole undertaking.
There are two expressions – “otherwise dispose of” and “undertaking” – which are very crucial for proper understanding of the provisions of Section 293 (1) (a) of the Act. Both the expressions are discussed in this article.

The object of the Section 293 (1) (a) of the Act is to prevent the Board of Directors of Public Limited Company and Private Company which is Subsidiary of Public Limited Company from selling / leasing / disposing an undertaking to some other entity without the consent of the shareholders of the Company; as one of the objects of such provision being that the company is incorporated clearly for the purpose of working such undertaking. Also, the shareholders of the company invest in such company after taking into account the growth prospects in the undertaking of the company. Hence, it becomes the obligation of the Company to obtain the consent of the shareholders when it proposes to sell / lease / dispose such undertaking.

The Section 293 of Companies Act, 1956 corresponds to Section 86H of the Companies Act, 1913. The object is to prevent the directors, without the consent of the shareholders, from leasing out an undertaking to some other person (lessee), when the company is formed clearly for the purpose of working the undertaking and not for transferring the responsibility for its working to a lessee. When in pursuance of any general proposal for pooling the resources of an industry or for its controlled and integrated working, it may be necessary for some particular units in the industry to be leased out to some other units in it. But such pooling or controlled and integrated working of an industry does not come off overnight, and is usually the result of prolonged negotiations with the constituent units in an industry. It should not, therefore, be difficult for the directors of a company to consult the shareholders when such proposals are under discussion and we have no reason to think that when the position is fully explained to the shareholders, as it must be, they (here “shareholders”) will not accept the advice of the directors, particularly when such advice will be necessarily in the long-term interests of the company.

Section 105 of the Transfer of Property Act, 1882 defines “Lease” as:
A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.
Lessor, lessee, premium and rent are defined – The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent.
It is a contract under which an owner of property (Lessor) grants another person (Lessee) exclusive possession of the property for an agreed period, usually in return for Rent (and sometimes for a capital sum known as a premium).
The Department of Company Affairs (now “MCA”) had issued Letter No. 8/19/ (293)/ 64-PR, dated July 21, 1964 relating to Section 293 (1) (a) of the Act. It states that:
“If a company mortgages the whole or substantially the whole of its undertaking for obtaining loans or other financial assistance, it need not comply with the provision of Section 293(1) (a) of the Act, but if it is a usufructuary mortgage; the said Section would be attracted. In this view of the matter the question of a conflict between the provisions of Section 293(1) (a) and Section 292(1) (b) necessitating an amendment of Section 293, may not arise.”

To interpret the above Letter issued by MCA, we need to first understand the concepts of “Mortgage” and its type “Usufructuary Mortgage”. Section 58 (a) of the Transfer of Property Act, 1882 defines “Mortgage” as “the transfer of an interest is specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”

Section 58 (d) of the Transfer of Property Act, 1882 defines “Usufructuary Mortgage” as “Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mort¬gagee, and authorizes him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest or partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.”

The characteristics of usufructuary mortgage are as follows:
i) Mortgagor remains in owner of the property;
ii) Possession of the mortgaged property is delivered to Mortgagee;
iii) Mortgagee is entitled to retain the Income - interest, rents and profits accruing from the mortgaged property until the repayment of the loan;
iv) Appropriation of the Income from the mortgaged property in payment of the principal / interest.
Therefore, as per the above mentioned letter issued by DCA, only usufructuary mortgages fall under the provisions of Section 293 (1) (a) of the Act and not any other type of mortgage. But, in practice, it happens that the Banks / Financial Institutions insist that the resolution is passed under Section 293 (1) (a) of the Act, irrespective of the kind of mortgage, with an object to secure the loan granted by the Banks / Financial Institutions to the Company.

The Section 293 (1) (a) of the Act relates to sell or lease of an undertaking. Here, “otherwise dispose of” means disposing of an undertaking and such disposition means discarding of an undertaking of a Company. Therefore, it means “disposition” by way of transfer, gift, sale, exchange, gift, destroy or alienate from the ownership.
In the next part of the Article, we will be discussing on the concept of “Undertaking”, the Accounting Treatment of transactions falling under the provisions of Section 293 (1) (a) of the Act and the applicability of the Section.

Whistle blowing exercise in Indian Corporation: Does it really blow?

It just takes a moment of STUPIDITY to cross the ethical lines whether its sports or corporate life. We have been feeling shame to which is some of our cricketing stars have been alleged to have done the act of stupidity and see how the flourishing careers have gone to jail.

Martin Luther King Jr. said, “Our lives begin to end the day we become silent about things that matter”. For Indians to understand that is not difficult. Just read ‘My experiments with truth’ by Mahatma Gandhi. Ownership of failure gives you so much price and conviction. Running a company is in fact all experiments of failures. You will learn a lot more by discussing failures. Why don’t you discuss failures in quarterly returns? Because today companies that survive they have had many failures. Can you own up your failures like Gandhi and Obama? No doubt, in the world there only a few who own up failure. In the public, business and corporate context this has becoming a serious matter in India.

Recent news on Ranbaxy has prominently featured the role of Dinesh Thakur, a whistleblower. Thakur, who worked at Ranbaxy for four months was responsible for blowing the lid on the company‘s falsification of certification documents submitted to drug controllers around the world. The fraud took place over years and top management was complicit.

While Thakur, received $48.6 million (Rs262.4 crore) for his efforts the case leads to an important question: Why are there such few instances of whistle blowing in India? Is there something in our legal system that makes it harder for whistleblowers? Does the law not accord them the protection they deserve? Or is it just that they don’t have faith that their claims will be heard?

The answer lies in all three.

1. First, the Companies Act does not contain a provision that makes it mandatory for companies to have whistle blowing policies in India.
2. According to a lawyer who has worked in this area all his clients have been multinationals companies.
3. Indian companies don’t show any desire to have a whistle blowing policy in place

Conceptual Framework on Corporate Governance

Corporate governance means best practices of processes, rules, policies etc which affects the way a firm is heading, or being controlled. Corporate governance also says the relationships between the many players interested and the goals for which the corporation is governed.

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. Corporate governance has emerged as an important both in India and globally. Expectations of stakeholders are extremely high and the scrutiny by regulators and investors incredibly stringent. As a consequence, Indian companies are proactively implementing measures for the same. Going forward, one of the most important challenges for Board members is to build a foundation of trust with management, the investment community, regulatory agencies and the public. The stakes are high and the margin for error is low and while new standards are emerging, one thing remains clear: the responsibility to adopt sound governance practices has been placed squarely on corporate Directors and officers.

Indispensable Principles of Corporate Governance: 1. Discipline in operations
2. Transparency in dealings and disclosures
3. Accountability to shareholders
4. Responsibility of company's action
5. Social Responsibility
6. Improving group dynamics and harnessing individual talents
7. Enhancing early-warning mechanisms for critical risks
8. Mitigating exposure to liability
9. Building credibility and trust with stakeholders
10. Embedding sustainability as a corporate value

Mis-Governance in Indian Corporations Whatever be the principles embedded in the process of corporate governance, the world can not be free from malaise of mis-governance. The degrees and intensities of mis-governance matter more on perception, position, interpretation, inflections, and situation. However, truth is truth. In case of corporate governance in India we have many records of good governance as well as mis governance.

1. A study called 'Early Warning Signals of Corporate Frauds', conducted by the Pune-based Indiaforensic Consultancy Services, a forensic accounting and education firm, from January 2008 to August 2008 has come out with shocking revelations about corporate frauds. The study has revealed that at least 1,200 companies out of 4,867 companies listed on the Bombay Stock Exchange and 1,288 companies listed on the National Stock Exchange as on March 31, 2007, including 25-30 companies in the benchmark Sensex and Nifty indices, have massaged their financial statements.

2. The study investigated 11 sectors, viz. real estate, retail, banking, manufacturing, insurance, public sector undertakings, mutual funds, transport and warehousing, media and communications, oil and gas and information technology. The manufacturing sector, which contributes about 28 per cent of India's gross domestic product, is the one most ridden with fraud mainly due to the peculiar nature of the business and the procedural complexities inherent in this sector. Real estate and public sector undertakings came second. Corporate Fraud in India is Rising, 45% of the 1,000 respondents from leading Indian businesses declared that fraud had increased within their organization (KPMG- Study, April, 2010).

3. Nearly one in every 13 corporate houses in India had suffered losses between Rs 40 lakh and Rs 4 crore due to corporate frauds while nearly half had faced such frauds in the last three years. About one in two corporate believes that at present corporate fraud is much more prevalent in India than three years ago. New technologies, new inventions and expansions into new markets have opened the door to various forms of fraud, while the threat has increased mainly because of high attrition. These were some of the major findings of a report on fraud perception among top corporate around the globe by Economist Intelligence Unit (EIU) for Kroll Inc.

4. Weak internal control systems, eroding ethical values and a reluctance on the part of the line managers to take decisive action against the perpetrators are cited as the most vital underlying reasons for frauds being on the rise," the report said. Corporate fraud may be on the rise, at the same time, to reduce there are rules and policies to protect from the corporate frauds are also increasing day by day. Whistle blowing policy is also a recent emergence in the spare of corporate governance.

What is Whistle blowing?
Whistle blowing can be defined in number of ways. In its simplest form, whistle blowing involves the act of reporting wrongdoing within an organization to internal or external parties. Internal whistle blowing entails reporting the information to a source within the organization. External whistle blowing occurs when the whistleblower takes the information outside the organization, such as to the media or regulators. Whistle blower is an informant who exposes wrongdoing within an organization in the hope of stopping it.

Why Whistle Blowing is required?
Whistle Blower is required where a person is appointed in a fiduciary duty towards the public at large or towards its stake holder and its malpractice or wrongdoing affects others such as clients, suppliers, other staff, the firm, the government, share holder or the interest of public at large.

Policy of Whistle blowing in Various Jurisdictions:
In United States of America: Sarbanes-Oxley (SOX) Act of 2002 provides for the substantive corporate governance provisions that tried to change the attitude of corporation towards work place crimes. For the first time Whistle Blowing was included as a legislative precept of corporate governance norms. Sections 806, 301, and 1107 of SOX provided additional guidance for whistle blowing and Section 307 provides for mandatory whistle blowing in certain cases.

Section 301 compels audit committees to develop reporting mechanisms for the recording, tracking, and acting on information provided by employees anonymously and confidentially. By mandating policies and protection for reporting wrongdoing, the SOX standards go beyond merely encouraging companies to be more responsive to employee whistleblowers.

Forteiture of Shares

This is a brief note on forfeiture of shares, explaining the whole process of forfeiting the shares and again reissue of such shares. The concept of forfeiture of share is complicated as there is no clear uniform law which is similar for all form of companies. We have tried to elaborate the process for unlisted and listed companies. This note is divided into two parts, first part is relating to the process and procedure for forfeiture of shares and second part is relating to accounting treatment for forfeiture of shares.

1. To forfeit means to take away or to withdraw the rights.
2. Forfeiture of shares means termination of membership as a result of the non-payment of calls by the shareholder on or before the due date prescribed by the Company.
3. It is a process by which the Board of directors of a company cancels the rights and powers of being a shareholder of the company by deleting the name from the register of members, if the call money is not paid when the company demands for it.

Why the Company forfeits the shares?
1. In case of partly paid-up shares, only part of the amount is collected in the initial stage of application while rest of the amount is collected over a period of time
2. When Company makes call for the unpaid amount of shares from the respective shareholder and such shareholder fails to pay the call money on or before the due date, the Company has a right to forfeit those shares and thereby can remove the name of the shareholder from the Register of Members

Is there any provision in the Companies Act for Forfeiture of shares?
1. There is no provision in Companies Act, 1956 relating to forfeiture of shares. However majority of companies adopt “Table A” of Schedule I, Companies Act, 1956 in their Articles of Association which clarifies the process for forfeiture of shares.
2. Secretarial Standard 9 issued by the Institute of Company Secretaries of India also specifies set of procedure to be followed which is recommendatory but not mandatory. 3. SEBI ICDR Regulation, 2009, Regulation 17 specifies that calls on equity shares to be collected within a timeframe of 12 months from the date of allotment and if the equity shares on which there are call in arrears beyond 12 months, such shares shall be forfeited.

“Table A” of Schedule I, Companies Act, 1956, provides the following regulations relating to forfeiture of shares:

Here it is imperative to note that it’s up to the Company or rather the Board of directors to take a call on forfeiture of shares or not (except for listed companies, where it mandates to collect the unpaid amount within 12 months or otherwise get the shares forfeited). Further Board also has the right to revoke the forfeiture on shares in case it finds it justifiable to do so.

What is the procedure regarding forfeiture of shares?

What are the benefits of forfeited shares to the Company?
1. Amount already received from the shareholder transferred to Forfeited Shares A/c (Reserves)
2. Balance unpaid amount shall remain outstanding in the books of the company even after the shares are forfeited
3. Forfeited shares can be reissued by the company
4. Reissue of Shares can be used as a tool to increase the shareholding of the Promoters and to avoid takeover
5. Reissue of shares does not require filing of prospectus

How to re-issue the forfeited shares?

Company can reissue the forfeited shares at suitable time based on the market conditions and requirements of the company to get the benefit of such forfeited shares.
Important points to be considered while making such reissue of shares are as follows:
1. Company shall intimate stock exchange about the reissue of forfeited shares within 15 minutes of passing the resolution in a board meeting (Cl. 22(b) of Listing Agreement).
2. Such shares can be reissued after passing special resolution in a general meeting pursuant to section 81(1A) of Companies Act, 1956 r/w Cl. 23(a) of Listing Agreement.
3. Such new issue of forfeited shares shall require in-principle approval from stock exchange for listing on stock exchange (Cl. 24(a) of Listing Agreement).

Important Case Laws relating to forfeiture of shares:
1. The forfeited shares can always be reissued by the Company and there is no need to file a return with RoC for such reissue of shares. (Shri Gopal Jalan & Co. Vs. Calcutta Stock Exchange Association (1963) 33 Com. Cases 862: AIR 1964 SC 250)
2. The defect in the notice for forfeiture of shares shall invalidate the forfeiture of shares. (Madras High Court in case of Public Passenger Service Ltd. vs M.A. Khader and Anr. on 21 December, 1961)
3. Sufficient days notice not provided by the Company leading the act of forfeiture of shares to be void. (The Jawahar Mills, Ltd. vs Sha Mulchand And Co., Ltd.)

Accounting Treatment of Forfeiture of Shares:
When shares are forfeited, the paid up amount of such shares shall be transferred from “Share Capital Account” to separate account called “Share Forfeiture Account.” Accounting treatment for forfeiture of shares differs considering originally issue of shares at par, discount or premium:

Accounting treatment of reissue of forfeiture of shares:
Forfeited shares may be reissued by the Company either at par, premium or discount. But the discount on reissue of forfeited shares should not be excess of the amount forfeited. Accounting treatment for reissue of forfeited shares differs considering its reissue at par, discount or premium:

1. If all the forfeited shares have been reissued, the credit balance of shares forfeited account shall be transferred to Capital Reserve account.
2. If all forfeited shares are not reissued, then difference between amount received from forfeiture and discount on reissue share will go to capital reserve account.
3. Accordingly, any capital profit on reissue of forfeited shares shall be transferred to Capital Reserve Account.
4. This capital reserve account will show in liability side of balance sheet of company.

For that purpose, following entry will be passed.

Whether amount collected on Forfeiture of Shares is subject to tax?
Taxation of shares forfeiture is always matter of debate between the assesse and the Department.
When the Company forfeits the share application money, call money, it is a capital receipt in the hands of the Company. The definition of Income under Section 2(24) of Income Tax Act is wide enough but it does not cover such a receipt.

Important case laws which deal with tax treatment of forfeiture of shares:
1. In Sunita Gupta Share Brokers Limited V. ACIT (ITAT Delhi), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital receipt.
2. In Ahmedabad Bench of ITAT in Dy. CIT V. Brijlaxmi Leasing & Financing Ltd. (2009) 118 ITD 546 held that the share application which had been forfeited as per the terms of the prospectus could not be treated as a receipt in the normal course of business, which was engaged in the financing and leasing activities.
3. In Asiatic Oxygen Ltd. (1994) 49 ITD 335(cal), it was held that amount forfeited from shareholders for default of payment of call money was capital receipt. Further amount received on reissue of forfeited shares and credited to shares premium account was also a capital receipt.
4. In Mumbai Bench in Jaikishan Dadlani v. ITO (2005) 4 SOT, 138, it was held that there cannot be any dispute about the position that the share capital forfeiture receipts are in nature of capital receipt.
The tribunal went to the extent that amount on forfeited shares is not available for distribution of dividend and therefore cannot be treated as deemed dividend under section 2(22)(e) of Income Tax Act.
5. In DCIT v. BPL Sanyo Finance Ltd. (2009) 312 ITR 63, it was held that loss on account of forfeiture of share application money because of failure by assesse to pay balance amount on allotment of shares is allowable as a Short term capital loss.

To conclude, it can be said that Tax payer shall not consider share forfeiture as illicit means of laundering their black money. Tax Payer shall interpret the law and judiciary judgments in its spirit while deciding tax treatment of the amount on forfeited shares.

Crowdfunding: Is this an idea whose time has come

The JOBS (Jumpstart Our Business Startups) Act, signed by President Obama earlier in 2012, will dramatically change the nature of early-stage funding. With buzz from fundraising websites like Kickstarter and Indiegogo, equity crowdfunding is gaining traction in US. Crowdfunding relies on online intermediaries to communicate with the general public an idea for a business or product. Interested parties may then invest money in the business or cause, providing financing in conjunction with other donors.

Ways of Crowdfunding prevalent in USA
1. Equity-based: Investors receive a stake in the company, that is, follow a revenue-sharing model. Angle investors or private equity and venture capitalists follow this model
2. Lending-based: Investors are repaid for their investment over a period of time, either just the principle amount or with an interest on it. Many times when individuals secure funds from friends, relatives or acquaintances, they could follow this model
3. Reward-based: Investors receive a tangible item or service in return for their funds. Depending on the amount of contribution, different rewards could be offered like a 'thank you' note or tokens of appreciation, a key chain, contributor's name on the credits. Increasing number of movies is being financed this way
4. Donation-based: Contributors donate funds mostly for charities and other non-profit organisations / causes. However, this represents a small proportion of overall crowd funding activity

Few queries on JOBS Act which has legalised crowdfunding in US are presented here:
1. What kinds of businesses can use crowdfunding?
Any business can use crowdfunding, but financial professionals say that product-based companies will be able to reap more benefits from the platform than service-based companies. The idea of crowdfunding began in the nonprofit realm, but for-profit companies are also taking advantage of the trend. Some intermediaries are more suited to one type of business over another. For example, Kickstarter is used mostly for arts-based endeavours. CommunityFunded, however, hosts a variety of companies and organizations.

2. What was allowed under the old crowdfunding law in US?

Startups may accept donations from people or organizations that want to support their causes, but were not allowed to sell stock or other securities through crowdfunding sites or social networks, such as Twitter or Facebook.

3. What does the new law do? Final rules and regulations pertaining to the law would be determined by the Securities and Exchange Commission, but the legislation does lay out a few basic points. The largest change is that start-ups will be able to sell securities through crowdfunding sites or social networks as long as the company complies with the law. The company will have to meet these key provisions among others:
•  The company may only raise a maximum of $1 million.
•  The issuer or the intermediary must take a number of steps to limit risk to investors, including warning them of the speculative nature of the investment, requiring them to answer questions demonstrating their understanding of the risks, and providing reports to the SEC.
•  Investors are limited to an amount equal to $10,000 or 10 percent of their annual income, whichever is smaller.

Crowdfunding: Scenario in India Crowd funding is not new to India although it is at a nascent stage. The idea became noticed after filmmaker Onir raised part of the funds for his film “I Am” through this route. And, in 1976, Shyam Benegal collected Rs 2 lakh from 500,000 farmers to fund Amul's ad film Manthan. But recently capital markets law and regulator SEBI don’t allow raising money from the public in this way with a promise of return on investment of any nature - unless someone can go through the complicated and costly procedure of listing on a stock exchange. The Sahara case is a case in point – where the giant conglomerate tried to use legal loopholes to raise money from the public. SEBI has hence tightened the screws of the system, and it is practically impossible for a startup to raise money from the public – until it becomes profitable and reaches a big scale. The company looking for crowdfunding has little to offer as incentives to the potential funders. Hence they can only hope to get money from people who are willing to donate the money, or perhaps pre-order some products or services being proposed. In the USA, crowdfunding is a legally recognized capital market transaction - and the investors can get shares in the company they are funding - and therefore profit from the idea becoming successful. USA has made a special law in April last year to allow this to support startup companies under the Obama administration. But in India Equity based online crowdfunding is not legal yet. Donation based crowdfunding is the most pragmatic approach as of now. Lending based crowdfunding like microfinance platforms need prior approvals from RBI. The new companies act, which mandates all companies to spend 2% of their profits on corporate social responsibility, will surely help crowdfunding gain traction. Only time will tell who will succeed: whether tight regulation in India on crowdfunding or start- up friendly crowdfunding regulation in USA?

Company Secretary meets Two Lordships in......

Once a stressed and worried qualified Company Secretary (CS) was amazed to see before him a charming personality. After quick thought, he then just communicated to him. “ Welcome Sir...! But may I kindly know who are you and for what purpose you have come to meet me ? Surely ,I can see a bright light Aura around your face. You should be a very near and dear to Almighty God or his Messenger.”

He replied," I know that you are a Company Secretary i.e. CS by Profession ..dear CS...! I saw you stressed and worried. While taking a circular route of Earth, I just read your face and thought, it is the right time to meet you. May be I am helpful to you. As such you know me well but you need to re‐collect your childhood memories. I am Vidur here . Just go back to your childhood, your Grand Mom used to tell stories pertaining to Mahabharata in your tiny age and amongst them I was also one of the known figure under the Ruling of King Dhrutarashtra, one of my unfortunate Blind Brother in Hastinapur. Further if you go back to history, you will come to know about me ...just re‐collect ...I was Mantri to King Dhrutrashtra , Father of Duryodhan and Kauravas & Uncle of Pandavas, and considering my profession in today’s time, you people may better recognise me by Role and function similar to Sachiv or Secretary i.e. Company Secretary . "

CS , “ Oh! Yes Sir. Very right, Sir. You remained a very close childhood classmate and friend of Shree Lord Krishna , I re‐collect now. May I kindly request you , My Lordship.. to please take the Chair and then proceed this meeting with shorter notice consent . Then I shall give background agenda stuff, Sir .”

Vidur ji, "Thanks ..and sure dear CS . But you appear to be in a great stress these days , isn’t it ?”

CS,"Yes...My respected Lordship. In fact I was remembering you as well as Shri Chanakya ji a lot while working as Company Secretary . You see these days, I come under lot of stress. As such my Management is having very good track record but all the time I am afraid that they should not get influenced and carried away by strategies followed these days by some Management which are short‐sighted, selfish motivated and money minded for name fame ,flattery and window dressed progress chart etc in the age of this keen competition at the cost of Company Law and other Enactment compliance . Many of my Colleagues are also facing the same problem.”

Vidur ji, “Ok. Ok. ..Got it. Please read and follow my developed Niti most popular as Vidur Niti , my dear. To precisely brief you, I suggest that you take an appointment and find suitable time when your Management is available to seriously discuss and coolly listen to these concerns and at a time when they are in a proper frame of mind. At this juncture, you can very patiently explain your Management about Companies Act and other applicable Enactments , Regulations ,Provisions etc by making clear that no unwanted decision and action will be taken by them hurriedly without such compliance in a short run as it will look financially beneficial in short time but then will realize with heavy heart and it may be even penalized in future. Further you take pain to advice your Management to be always compliance friendly and the same is in its and everybody’s interest. It is your duty to guide and convince Management that vis a vis progress and prosperity, Compliance of all Laws and Companies Act and related Regulations is it’s moral and ethical duty. May be we are slightly slow in progress race but are always on sound and steady path. This may take some time but once they are convinced they will have peaceful sleep through out and surely you will have too."

CS, “ My Lordship .. hope I shall come up to our expectations. I think my Management will be interested in considering an accepting these advice and suggestions. Actually My Lordship... in this Kali Yuga many individual and selected Managements are following indecent approach in cut throat business competition to earn thick money in hurry for the sake of name and fame. In this competitive and complex age and in the short run overnight monetary race, compliance to certain Enactment and Regulations becomes secondary. What do Company Secretary and other Professionals do then .. Sir ?”

Vidur ji,” Ok. Noted ...(after thinking ) ..Then why can’t you be bold, blunt and bitter in polite way pursue and peacefully make understand your Management that compliance need to flow first from within and in true spirit, consequently giving justice to business ,authority, event and professionalism .”

CS, “ My Lordship ! As you are aware this is not time of your Dwapar Yuga but unfortunately it is present critical Kali Yuga. If I become bold , blunt and bitter I may have to keep my resignation letter ready and no wonder, if submitted, possibly same will be accepted with immediate effect also . Furthermore I am having my Family and I have to feed my Family Members also ,hence what do I do ?”

Vidur ji,” Remember my dear CS ! Be fearless, bold and straight forward. Make more attempts to convince Management for timely and due statutory compliance. Just inform to have impact of such timely and proper Statutory compliance will pave a way for better image in a long run that will earn and yield Punya to their pious karma . Simply don’t get carried away by just short time bound opportunities since we all are responsible first to our own Soul or Spirit and will have to face the result of good and evil work done . Money is only a Sadhan or Temporary Purpose Vehicle (TPV). Tell them that there should be clear, impartial, respectful compliance approach towards Acts and Rules. If these qualities and approach being, implemented then and then only, all of us and future generation will be getting better and sweet fruits ahead. For that you need to guide and advice Management accordingly .”

CS, “ I know it is difficult task but I am sandwiched performing my role here .”

Vidur ji,” Where there is a Will, there is a way out. Please narrate them that a Dhrama Raja Yudhisthir while in Mahabharata War under influence was asked to convey , “Narova....Kunjrova...”i.e. either Ashwatthama, Son of Guru Drona or an Elephant Ashwatthama has been killed in war“ and due to this statement made by him against his principle just one time only this half truth and half wrong, his Chariot then never flew inches from ground as it used to be earlier and since then Chariot was grounded to Earth. So narrate them these types of legendary incidents and see that the Management does not get influenced and see that it walks on the path of paragon of truth, dutifulness, attached to the impartial judgement, steadfast dharma, play within ruling boundaries and be self searching from where we began our journey and where we are going and where will it finally take us. Since at the fag end of the life journey evil thought and wrong doers will repend but that will be too late perhaps. Almighty God is our ultimate Court and one can not escape the same. Whereas you being a Professional especially Company Secretary is expected to be playing a responsible Role.. politely ,respectfully, prudently, wisely, religiously clubbed with wellmannered be dedicated to truth , fearlessness etc .”

CS, “ My Lordship , my worry is that even after possessing all these qualities , if I do not succeed , if that time comes ,then? Sir....This is because at your time there was only one King Dhrutrashtra and now there are ......!”

Vidur ji,” Vatsa...! do not get scared by numbers. It is only evil thoughts within such King Dhrutrashtra were required to be defeated and abolished. What is to be done is to improvise, to be positive, committed, truthful, clean, non selfishness attitude thought process all around . Request the Management to think of one and all before taking any self motivated decision for self benefit and be away from decision which benefits only within the Management meaning self centred" Just at that time CS show Vidurji as if he was aware about his arrival ,welcoming Shri Chanakya ji and requested him, “ I only remembered that you also convey a precise message to this CS and all concerned . Somehow , CS could not resist welcoming Shri Chanakya ji as per his pious and Professional duty.So he welcomed him.

CS,” My Lordship Shri Chanakya ji ! It is indeed my pride and privilege to welcome you, Sir . Please take the adjoining Chair and I am eagerly waiting for your a precise message in the need of an hour.”.” Shri Chanakya ji occupied the adjoining Chair with Shri Vidurji and thereafter proceeded and took a minute for a deep thought.

Shri Chanakya ji conveyed his message,” He whose hands are clean does not like to hold an un ethical and immoral office; he who desires nothing cares not for bodily decorations; he who progresses ethically following Rules framed for the purpose from the Spirit, can not fall in long run in ultimate; he who is only partially educated and not Professional cannot speak agreeably; and he who speaks out professionally and plainly cannot be a deceiver , but a right guide and adviser .”

Suddenly Wife of the Company Secretary awakes him of sleep since as it is early morning. Consequently, Company Secretary on disappearance of two Lordships Shri Vidurji and Lordship Shree Chanakya ji was heard conveying his vote of thanks ... “My two Lordship Dignitaries , I , as Company Secretary , sincerely convey my Vote of Thanks to both my Lordships to advice me at the right time."

Threshold – CSR Strategy

The business community in India is having rounds of heated discussions on the so called ‘Mandatory CSR’ while the world is waiting and watching out for the outcomes as India will be the first country to (apparently) make Mandatory CSR . Everyone is waiting for clarity on ‘The New Game Changer’ and contemplating how to apprehend ‘CSR in the Boardroom’! The clarity anxiously sought for is just round the corner once the bill is passed by the Rajaya Sabha.

How we wish we had a far more aware and equally committed consumers (being one of the significant most stakeholders) for ‘shared values’ who would have looked at this as a great opportunity as the ultimate power will be now vested in them. I feel it is only a matter of time for them to realize and capture the same.

The question is why have we reached such a stage of ‘Mandatory CSR’ when from the time of inception of industrialization in India, philanthropy and huge genuine charities have gone hand in hand? In fact India has most outstanding examples of giving back to society selflessly and much before the western world could even think of it. The legacy of giving back to society has been continued by many business houses even today, Tatas, Birlas, Bajaj and we have many names from industrialists and service sector of current era too.

The most exemplary of all is Tata group and their trusteeship. Sir Ratanji bequeathed his assets worth about Rs. 80 lakh (8 million rupees)to the Sir Ratan Tata Trust which was founded in1919. Even today about 66% of the equity capital of Tata Sons is held by philanthropic trusts endowed by members of the Tata family. Before we look into the company bill and relevant sections and the impact on how corporates will need to change the perception as the meager 2% will amplify the manner in which rest 98% of profits are brought to kitty. Let’s have a look at extremes; that’s todays India: First the Success Story:

‘There is broad consensus that the global center of economic growth is moving to Asia, and as a large emerging nation with a growing middle class, India has captured the attention of developed economies looking for new investment and trade opportunities. By some estimates, India’s economy will grow from its current $1.8 trillion GDP (Gross DomesticProduct) to be the world’s third largest in 2030, with a GDP of close to $30 trillion. A recent report by the National Intelligence Council (Global Trends 2030: Alternative Worlds) states that by 2030, “India could be the rising economic powerhouse that China is seen to be today.” (India’s Emerging Economy: Sector by sector – U.S.- India Insight December 2012)’

Unfortunately ‘The Feel Good’ factor ends right here, let’s have a look at the other side of India: Mr. Sankaran Krishna brings out very clearly in his article ‘The great number fetish’ (The Hindu, Saturday Essay, January 26, 2013).

‘One of the most prominent features of India’s middle-class-driven public culture has been an obsession about our GDP growth rate, and a facile equation of that number with a sense of national achievement or impending arrival into affluence. In media headlines, political speeches, and everyday conversations, the GDP growth rate number — whether it is five per cent or eight per cent or whatever — has become a staple of our evaluations of the state of national well-being and future trajectory. Ever since Goldman Sachs (an investment banking firm headquartered in New York city) released a report in 2003 (“Dreaming with BRICs: the path to 2050”) touting Brazil, Russia, India and China (BRIC) as the harbingers of a new wave of global accumulation, we Indians have been afflicted by an optimism disease with little empirical traction. Since then, the GDP number’s implications for India’s development, her attractiveness as an investment site, our standing relative to China, and our competitiveness in the games nations play have become an inescapable part of our social lives.’

“Ever since Goldman Sachs released a report in 2003 touting Brazil, Russia, India and China (BRIC) as the harbingers of a new wave of global accumulation, we Indians have been afflicted by an optimism disease with little empirical traction.” File photo shows Goldman Sachs headquarters in New York.

In the same article there are some more distressing revelations: Fast growth, limited results

‘Yet, in a recent essay, the eminent economists Amartya Sen and Jean Drèze pointed to an important problem with equating India’s economic performance with its GDP growth rate. They noted: “There is probably no other example in the history of world development of an economy growing so fast for so long with such limited results in terms of broad-based social progress.” Sen and Drèze were referring to the fact that for about 32 years now (since 1980), India has averaged annual GDP growth rates of approximately six per cent — whereas, the nation’s ranking in terms of the Human Development Index has remained unchanged over that period: we were ranked an abysmal 134 in 1980, we were ranked exactly that in 2011.’

And as if this is not enough let us see ‘UNDP brackets India with Equatorial Guinea in human development index’ ‘India has been ranked 136 among 187 countries evaluated for human development index (HDI) — a measure for assessing progress in life expectancy, access to knowledge and a decent standard of living or gross national income per capita.’

The Human Development Report of the United Nations Development Programme (UNDP) for 2013, released on Thursday, puts India’s HDI value for the last year at 0.554, placing it in the medium human development category, which it shares with Equatorial Guinea. (The Hindu, NEW DELHI, March 15, 2013, Special Correspondent)’

Somehow we need to keep an eye on our HDI and not get flabbergasted by euphoria of higher GDP and look within for improving HDI index as well. The picture and caption captures it all:

The Hindu, SATURDAY ESSAY,The great number fetish, Sankaran Krishna January 26, 2013 India as a nation and society, we need to look within for answers and find new equations and ways so that GDP and HDI are at least at equally promising levels. The need of the hour is coming together of the government, industry, enterprise and civic society comprising all areas including NGOs.

Before we look in to significance of CSR let us see where India stands in “the results in cooperation with the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ). This collaboration proves the importance CSR has recently gained for private and public sector actors. Cooperation is both the basis of this study and the principle underlying CSR.

The CSR Navigator - Public Policies in Africa, the Americas, Asia and Europe: Profiling and Navigating CSR public policies in Africa, the Americas, Asia and Europe

“The present international study – the first of its kind – is a systematic analysis of CSR policy in 13 different countries and it aims to demonstrate which policy tools are best able to promote corporate social engagement.

“Political, economic and social leaders need to join together to meet the social, ecological and cultural challenges of globalization. Whether in Europe, Africa, Asia or the Americas, it is becoming more and more important that all societal actors contribute to solving the complex problems we face. This means we must redefine the rules determining how we live and work together. Businesses can be particularly effective in helping to improve living conditions for people throughout the world. Thus, more than ever before, long-term entrepreneurial planning and action must be coupled with a sense of social responsibility. This core conviction has always informed the Bertelsmann Stiftung’s project work.

“We are convinced that such cooperative efforts are the key to shaping globalization in a sustainable way.”

The study states ‘CSR policymaking can develop when it builds on a country’s existing instruments and identifies Deficits in key focal points: the economy, civil society, politics and strategies for cooperation. The diagram below depicts the focus of future CSR development in the countries investigated

I - 01 CSR Generations

The findings of The Navigator:

CSR Public Policy Maturity Level
First generation:
• Some activities are in place, such as encouraging the employment of backward castes in the private sector
• Stakeholders are taken into consideration sporadically
• The level of communication is low
• Evaluation by the government does not take place

CSR Recommendations

• A coherent CSR strategy is to be clarified and developed, international standards should be applied
• Local business especially SMEs are to be incentivized more to take up the subject
• Addressing the issue of implementation, stressing voluntary initiatives and incentives
• CSR should be used to give voice to deprived groups
• Arriving at greater agreements on CSR by state, business and societal actors

With above background, it is high time that we look at CSR as a part of our strategy to ensure a progressive and prosperous society and nation. That brings us to the core question ‘Why strategic CSR?’

What impact can CSR make, let us see some figures as per Suresh Nandi, Feb 3, 2013, DH News Service, PSUs fail to bridge the social responsibility gap, Deccan Herrald, ‘interestingly, one report points out that Indian listed companies had a combined net profit of Rs 4,37,167 crore last year. At 2 per cent, this will yield slightly less than $2 billion a year as the CSR kitty of India Inc, and such a large sum generated every year could solve many of the country’s social and environmental issues.’

The question is do we have the resolve, commitment and leadership at business & enterprise level that can make it happen.

Let us now look at different facets of the question ‘Why CSR?’

First let’s recall series of events in the 1980s and the 1990s that were catalysts to force companies to address the issues of their responsibility towards society and the environment. Events such as:

• The battle between the environmentalists (led by Greenpeace) over the proposed Sinking by Shell of their Brentspar oil platform; the sinking of the Exxon Valdez and the consequent pollution of the Alaskan coast line
• The fraudulent activity of the management of Enron leading to its collapse
• The plundering of the Mirror Group’s pension fund by its owner, Robert Maxwell
• The collapse of WorldCom
• The issues surrounding TyCo International and its former Chief Executive, Dennis Kozlowski

Also what first few years of the twenty-first century brought before us:

• The debate about the ethical product sourcing practices of companies such as Nike and Gap
• The development of FairTrade products – initially sold in more ethically minded retailers such as the Co-Op but now seen in shops across the retail spectrum
• The publication of the Stern Review on the Economics of Climate Change and the release of Al Gore’s film ‘An Inconvenient Truth’
• The discussion about the ethical behaviour of the world’s banking and finance system in the run up to the 2008 financial crisis
• The environmental disaster resulting from the fire and explosion on BP’s Deepwater Horizon rig in the Gulf of Mexico in April 2010

Why has CSR become significant?
The blinkered two-faced changes in world society and politics, alarming developments regarding climate change in the early twenty first century were influential in creating awareness and new dynamics for shift in outlook. Ubiquitous apprehensions of changing world-order were further mobilized by several significant developments that made the manifestation more fertile for the creating distinct need for CSR, some of them are:

• Wider shareholder franchise
• Globalization
• Social, Political & Economic initiatives
• Corporate mis-governance / indifference
• Changing world politics
• The internet & Social media
• Public recognition of climate change
• Evolution of the phenomenon called ‘Stakeholder Engagement’
• Communication and dissemination of information not dependent on pure literacy

To add to above major drivers for CSR, there are many other reasons which demand adherence to CSR
• CSR pressure is increasingly bottom up, not top down
• As the world’s top brands rush to adopt new marketing methods better suited to digital media, most
• companies are continuing to utilize the same dry, dull approaches to convey their efforts in CSRs

• Social responsibility and sustainability:

• An annual report buried deep in some back page of a corporate website
• Boring statistics and percentages proving a reduced eco footprint since last quarter
• Enough jargon to guarantee alienating everyone outside of seasoned, though still yawning – professionals

• ‘What matters to your customer has to now matter to your business’ - will have to be concerned what matters to your customers and make a note of it
• Learning how to create ‘shared values’ is not a strategy, but a necessity for any business looking to thrive in a market driven by new media
• CSR is Here to Stay -The fact remains that, despite its critics, a rapidly growing number of companies in the world practice some form of CSR: At last count, more than 3,500 companies were part of the Global Reporting Initiative, and had issued more than eight thousand environmental and social sustainability reports. This number was less than 1400 just two years ago. In a 2008 Economist online survey of 1,192 global executives, an estimated 55 percent reported that their companies gave high priority to corporate responsibility. The number was projected to increase to 70 percent by 2010, demonstrating that a rapidly increasing number of companies across the globe are committed to CSR practice, and many more are increasingly entering the fray.

With passing of time they will have to pay attention, rather look at stakeholders’ demands out of deference and just not the obligation.
Potential challenges can also emerge from a recalcitrant attitude towards CSR. Further down in this article I have covered ‘What is the business case for CSR and Key potential benefits for implementing CSR’ – missing out on one or many could be detrimental to the organization.
To substantiate points covered above let us look at the vulnerability of corporates who take the decisions based on pure business strategy and are forced to bring the commercial/ industrial activity to a complete halt. The days of ‘might is right’ seem to be losing its weight, today one has to carry every one along with the road of prosperity and care for those at whose instance and displacement one manages to amass unreasonable wealth due to sheer power.
We cannot afford to miss quoting of a timely and most appropriate article to illustrate what has been written above. The Economic Times, April 19, 2013, Friday on page 5, Corporate states “SC Leaves Vedanta Projects’s Fate in the Hands of Gram Sabhas – Gram Sabhas to take a call on Niyamgiri mining; co to get final word after 5 months”. An eye opener for any person interested in understanding what it means when we talk of ‘Sustainability’. The article further states, “…the question whether Schedule Tribes and other traditional forest dwellers (TFDS) Dongaria Kondh, Kutia kandha and others have got any religious rights – rights of worship over Niyamgire hills …. have to be considered by the gram sabha,” the bench said.

On Page 14, The Edit Page is an interesting article ‘The Niyamgire lesson for the Vedanta chief: even bold dealmakers have to manage perceptions – Being Anil Agarwal’ an interview with Mr.R Sriram. The article reads ‘Hostile Global NGOs – Tribals are often smarter than city dwellers. They know the advantages of proper schools, housing and a decent standard of living, and are unlikely to dismiss sincere outreach efforts. But for that to happen, Agarwal needs to be sensitive to their religious feelings.

‘Here’s the reason why he needs to do this: Vedanta has somehow acquired this public image of being hostile to environment and the habitats of tribals and villagers. It has faced a lot of flak from global NGOs that have accused it of riding roughshod over tribal rights, and this has started to affect Vedanta’s reputation.’

Do we need to elaborate further? What will happen to brand equity, stocks and over all position of the company?
Company Bill & CSR

With the above description we can now look at Company Bill with reference to CSR. The changes in the bill have created a serious debate on apparently ‘Mandatory’ status of the feature. There are different views expressed by experts and the debate will go on for a while. One needs to interpret the section in holistic perspective and though word ‘shall’ is used in the section the thrust is on words in sub-section 5 which states “Provided that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending”.
According to this the emphasis is on management’s reporting the failure of capturing the opportunity to strategically contribute to the community and go beyond seeing only ‘shareholders’ ’ interest. This should bring in the concept of ‘stakeholder engagement’ and moving towards it systematically. ‘Stakeholder engagement’ is a more matured approach that alone can bring ‘sustainability’ and is being seen as the just way all over the world.
Even otherwise when businesses are inter-dependent globally either as customer, supply-chain, finance & investors and service providers, businesses in India of all sizes & sector, will have no option to look at CSR with serious commitment lest they may have to opt-out of the global business fraternity. Europe is looking forward for structured & strategic changes for bringing in CSR reporting by the business. There are number of plans and activities taking place, let me quote here some remarkable facts from Europe 2020 Strategy:

“Chapter three can be seen as the most important progress that the new CSR Communication provides, as the Commission puts forward a new definition for CSR which creates a really new perspective. While the previous communication (and a great number of publications which took up this perspective) defined CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and their interaction with their stakeholders on a voluntary basis”, the new Communication defines CSR as “the responsibility of enterprises for their impacts on society”.

To emphasize the need that European CSR policy should be made fully consistent with internationally recognized principles and guidelines, several of them are quoted. Compared to the previous Communication, several new international documents were integrated into this list of references (e.g. Single Market Act, Public Procurement Directives, UN Principles for Responsible Investment). However, two of the most important reference documents of sustainable development policy are no longer quoted in the new Communication: the European Sustainable Development Strategy (EU SDS) and the Millennium Development Goals (MDGs). This remarkable fact might be explained by a loss of practical importance of the EU SDS compared to the Europe 2020 Strategy (which is quoted several times), and by the high importance of Human Rights (which might be perceived as the business responsibility while the MDGs might be seen rather as the responsibility of states and international organizations). From the content point of view, several objectives of the EU SDS (e.g. biodiversity, resource efficiency) are emphasized in the chapter on the multidimensional nature of CSR, while most of the objectives of the MDGs are not touched (e.g. global partnership, fighting poverty and hunger; health is just limited to employee health).”

(Focus CSR: The New Communication of the EU Commission on CSR and National CSR Strategies and Action Plans)

Not only Europe, even Japan and many other countries are focusing on CSR as strategy to be followed.

Will Business Inc. of India be able to disregard the new reckoning and still prosper or rather even survive is a question.

Mandatory, voluntary, applicable to who, why and how to go about it are some of the common questions being asked by the businesses today. Mandatory or not including CSR as a strategy will by and large change our mindset and the way we conduct our enterprises today. It will integrate community and business in true sense as they become integral part of the society and learn to trust each other for common welfare. And hopefully this new learning will manifest in an all-inclusive & matured society, obviously a far better place to live. The details of the section are as per Annexure…

What is CSR?
Definition of CSR:
Can we define CSR in just one exhaustive definition? The answer is no and difficult. For one most significant reason is that it is still evolving as the outlook of society is becoming more vigilant towards the manner the businesses are conducted and polarization of the society in extreme wealth concentration by handful on one side and enormous mass of hapless poor on the other hand due to such self-centered attitude. To an extent the businesses themselves are looking at deeper, broader and scalable result oriented outcomes as the ‘sustainability’ of business is one of the biggest challenges today.

MNC’s prefers sustainable development or sustainable business while Indian perspective is responsible business or Triple P (People, Planet, and Profit).

Let us have a look at some of the definitions:
It is important to note that Indian companies and stakeholders give a broader definition of CSR then MNC and stakeholders. According to the Indian Corporate: “Sustainable development implies optimizing financial position while not depleting social and environmental aspects and CSR implies supporting issues related to children, women and environment”.

The World Business Council for Sustainable Development’s (WBCSD) definition of CSR states “Corporate Social Responsibility is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large."

The European Commission puts forward a new definition of CSR as “the responsibility of enterprises for their impacts on society”. Respect for applicable legislation, and for collective agreements between social partners, is a prerequisite for meeting that responsibility. To fully meet their corporate social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders, with the aim of:

– Maximizing the creation of shared value for their owners/shareholders and for their other stakeholders and society at large;
– Identifying, preventing and mitigating their possible adverse impacts.

What else is also looked at as CSR?
An additional challenge for narrowing down scope of CSR and arriving ta one universal definition arises from the fact that several terms exist, which are used similarly; Corporate Responsibility, Corporate Sustainability, Business Ethics. The most prominent concepts close or similar to CSR are:
• Corporate Social Responsiveness - Vallentin 2009
• Corporate Governance - Yoshikawa and Rasheed 2009
• Corporate Social Performance (CSP) - Martínez 2008; Carroll 1999; Wood 1991; Wartick and Cochran 1985;
• Corporate Sustainability - Schaltegger and Burrit 2005; Steurer, Langer 2005
• Corporate Philanthropy - Seelos and Mair 2005
• (Corporate) Social Entrepreneurship - Seelos and Mair 2005
• Corporate Citizenship - Matten and Crane 2005; Rondinelli and Berry 2000
• Social Responsibility Dhillon 2002
• Business Ethics - Göbbels 2002

National & Global Instruments which can support CSR implementation and can be used for stating strategy:

Among the better known international instruments which make up "an evolving and increasingly coherent global framework for CSR" are as under (the list is indicative, not exhaustive):
• National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business
• The Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational
• Enterprises
• The 10 principles of the United Nations Global Compact
• ISO 26000 Guidance Standard on Social Responsibility
• United Nations Guiding Principles on Business and Human Rights
• International Labour Organisation (ILO) Tripartite Declaration of Principles concerning Multinational Enterprises on Social Policy and Core Labour Standards
• Corporate Social Responsibility: An Implementation Guide for Business
• The Global Reporting Initiative (GRI) Sustainability Reporting Guidelines
• The Accountability AA1000 Series
• The Social Accountability International SA8000 standard (multi-stakeholder auditable standard)
• Amnesty International’s Human Rights Principles for Companies
• Ethical Trading Initiative (ETI)
• Principles of Global Corporate Responsibility- Measuring Business Performance
• Global Corporate Responsibility
Before the present company bill was introduced in the Parliament, PSUs were already roped in for structured CSR guidelines.
Public Sector Undertakings guidelines & Challenges faced by PSUs:
Public Sector Undertakings (PSUs) have to follow Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises effective 1st April 2013 which covers major areas for implementation.

Further Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises, Government of India, has recently set up the National Corporate Social Responsibility Hub (NCSRH) at the Tata Institute of Social Sciences. PSU’s will work with NGOs registered with Tata Institute of Social Sciences (TISS) for their CSR projects.

Implementing CSR is totally different and even more challenging then running an enterprise for profit alone, to some extent though and will depend upon the collective leadership of the organization. The organization must be open to it, accept CSR as part of its business strategy at all levels and involve the entire workforce for grand success. CSR is not a domain specific or technical expertise of an individual or the team. The foundation of CSR is based on intrinsic feeling for “shared values”. The leadership at top must have competence to nurture, motivate, assist, support, facilitate and scale-up this new arm of conducting the main business.

Ad probably this is the reason that in spite of huge availability of funds and a very high level of professional management, PSUs are hard-pressed to deploy available funds for CSR – so obviously it is something beyond charity, donation or even ‘parking money’.

Let us some of the challenges faced by PSU’s:
• Problems finding good social projects most of the time – for example Six PSU’s mandated to spend Rs 1,203 crore in FY12, only one-third disbursed
• The bigger challenge for PSUs is in finding sustainable projects, more so in Tier II and III towns
• Want of dedicated professionals who can ensure that the CSR money is spent well and judiciously
• Loosely-held bureaucratic structures cause delays in money reaching projects, which in turn results in the inability to spend allocated funds within a specified time period
• Lack of
• Partnerships with NGOs
• Common language and work ethos between professionally driven corporates and NGOs who are still struggling to imbibe professionalism (majority of them)
• Top management’s vision for CSR
• Dedicated teams, with one person handling two or three functions with CSR as an added responsibility
• CSR is a ‘department’s role and responsibility’ unlike percolating ethos throughout the organization, it is just another business vertical in silo
• Competencies to address issues which are different from their particular industry and core competencies
The brighter aspect is that the internal stakeholder engagement is becoming receptive to the notion, that there is the mindset shift of top managements of companies; to an extent that leaders at the level of COOs are also now sitting in the meetings of CSR initiatives.

What is the business case for CSR?
The business case for CSR will differ from organization to organization, depending on a number of factors. These include size, products, activities, location, suppliers, leadership and reputation (i.e., of the sector in which the organization operates). Another factor is the approach taken for CSR, which can vary from being strategic or responsive and incremental on certain issues to becoming a mission-oriented.
Key potential benefits for firms implementing CSR include:
• Risk Management – Environmental, financial and reputation
• Improved human resources practices, recruitment and retention
• Ideal stakeholder engagement
• Enhanced operational efficiencies and cost savings. These flow in particular from improved efficiencies identified through a systematic approach to management that includes continuous improvement.
CSR – Economic topics:
• Pursue sound corporate governance practices
• Ensure transparency through economic, social & environmental reporting
• Engage in fair competition
• Foster innovation
• Combat bribery & corruption
• Employ Socially Responsible Investment
• Protect intellectual property rights
• Offer safe and high-quality products/services
• Foster sustainable consumption & production
• Implement sound risk management systems

CSR – Environmental topics
• Support the protection of air and water, land biodiversity
• Minimize the amount of toxic substances, emissions, sewage and waste
• Conserve natural resources, apply renewable energy & avoid the usage of raw materials
• Engage in climate protection
• Boost innovation for improvement in efficiency
• Consider the whole product life-cycle, facilitate reusability & recyclability of products

CSR – Social topics
• Engage in fair and efficient Human Resource Management
• Guarantee safety, occupational health & security
• Respect freedom of association
• Abandon discrimination & encourage diversity
• Respect consumer interests

CSR – Global topics
• Raise stakeholders’ awareness for social & environmental topics
• Practice sound stakeholder management
• Facilitate sustainable supply chains
• Respect Human Rights
• Engage in poverty reduction
• Participate in the development of public policies

• Improved ability to attract and build effective and efficient supply chain relationships.
• Enhanced ability to address change
• CSR can help build “social capital.” Community acceptance, respect and support
• Access to capital
• Improved relations with regulators
• A catalyst for responsible consumption

Who are stakeholders & what stakeholder engagement is:
Like CSR there are various definitions and connotations. To get the broad idea it is defined as “Stakeholder engagement is the process by which an organisation involves people who may be affected by the decisions it makes or can influence the implementation of its decisions. They may support or oppose the decisions, be influential in the organisation or within the community in which it operates, holds relevant official positions or be affected in the long term.” Companies engage their stakeholders in dialogue to find out what social and environmental issues matter most to them about their performance in order to improve decision-making and accountability. Engaging stakeholders is a requirement of the Global Reporting Initiative (GRI), a network-based organization with sustainability reporting framework that is widely used around the world. Stakeholder Management is essentially stakeholder relationship management as it is the relationship which can lead to amicable stakeholder engagement.

A general stakeholders list will include:
Civic society & community, financial institutions, Regulatory bodies, Supply chain, Local bodies, Media, NGOs, Unions, Consumers, Customers, Human rights group, Workers, Employees, Shareholders, Government, Equity Placement agencies, Trade bodies, Councils any such entity which can be benefited or aggrieved by conduct of the management.

The above is generic list; the stakeholders’ profile will change and depend upon the actual activity of the organization.

Fundamental focus areas for CSR success:

1. Must have top management’s commitment, entails leadership qualities which percolate down the organization
2. Clarity & focus on mission & purpose: Clearly defined CSR goals will enable to create competitive advantage through CSR. Align CSR strategies with organizational goals and capabilities
3. Selection of CSR project: CSR activity should be an extension or close to core business as much as possible and will enable holistic value-add, consistency and motivating results for the management team and beneficiary partners
4. Selection of Potential Partners: Businesses and nonprofits often are looking to partner with companies that are committed to corporate social reasonability. Selection of the partners and decision to associate must be taken after due verification and credibility. Chances are that in spite of the best motives and commitments even accidental association with the wrong partner can defeat the purpose or could lead to a CSR disaster. Regenerating interest across the organization can be a challenge and can tarnish the name as well
5. Geographic location: working on one’s strength always has a multiplier impact, selection of CSR projects in and around Corporates business units yield better, visible outcomes
6. Strategy & Planning: Strategic planning, economic and management sustainability, monitoring, scalability, succession and exit policy after 3 to 5 years depending upon the project are some of the core areas which need focus. The activity should continue on its own or a smaller external support. The endeavor should be that today’s beneficiary partners should shoulder the role of becoming a contributor of future and this should be part of policy & process Let us see how strategy can be a safe guard as risk management: a major disaster

“Without ties to environmental leaders, Exxon had nowhere to turn for advice after the oil spill.
It wasn’t until the Exxon Valdez oil spill in 1989 that the shortcomings of that style of philanthropy were fully exposed. Without ties to environmental leaders nurtured by the foundation, then Exxon Chairman Lawrence G. Rawl had nowhere to turn for advice on handling the crisis.
Meanwhile, Arco, one of Exxon’s competitors, had been using philanthropy strategically since 1971, when it began funding and forming alliances with environmental groups. The resulting partnerships and informal environmental education taught Arco executives to respond quickly and openly when accidents occurred. In turn, environmental groups depended on Arco to testify in support of legislation, such as California’s Clean Air Act, which addressed both business and environmental concerns.” (Harvard Business Review on Corporate Responsibility) 7. Risk Management: Assess risks and opportunities before making capital investments or other business decisions, evaluate and understand how CSR directly affects current and future regulatory practices
8. All inclusive, across organization: Companies should look at CSR as a 360 degree perspective- including their business processes, people & planet policies, regulations and compliance and avoid charity and donations. This will enable building of brand equity almost by default.
Experiential outreach for everyone in the organization should be an organizational effort and not a departmental ‘Role & Responsibility’ realization that will percolate down the entire society. Unless it becomes the way of life we will keep on debating on various aspects for not doing it.
Specific effort should be made so that today’s young generation look at it integral part of their work in any capacity or role.
9. Commitment, Honesty, Transparency & Accountability: Honesty & Transparency will enable the organization to sail through difficult phases and establish credibility. The CSR project should be for implementation and not for sake of ‘reporting’ or else it can boomerang, impair the brand equity.

Marianne M. Jennings brings this out beautifully, “Pressure to Maintain Those Numbers
Antidote #1 for Pressure to Maintain Those Numbers: Surround Goal Achievement in a Square Box of Values
If you tell employees nine time a day to “meet those numbers” and then remind them once a year in a superficial training session on ethics to “ never do anything unethical,” which direction will they follow? I have helped many companies and organizations with their once-each-year ethical training, and I am pleased to help. But a once-a-year reminder session on ethics does not provide a sufficient antidote to numbers-pressure culture. One annual session on ethics does not an ethical culture make!” ' The Seven Signs of Ethical Collapse, , J.D., page 44-45
10. Authenticity & credibility: Social audits for authenticity & credibility – this will help accurate reporting and enable desired monitoring for PDCA for the management and outsourced partners (NGOs / associates /facilitators / consultants) as well.
11. Stakeholders versus Shareholder:
Benefit of this approach towards corporate governance is that it recognizes the broad objective of maximizing shareholder value, whilst acting fairly in the interests of other stakeholders
Challenges for SR in India:

Earlier in the article I have already covered challenges faced by PSUs and list can be unending! Let us look at some more possible challenges:
• Difficulty in making a business case for CSR, difficulty in integrating CSR with organizational values and practices, and the lack of organizational buy-in and commitment to CSR
• Accuse companies of treating CSR as a kind of public relations exercise, managements do not let go of the smallest opportunity to get mileage from CSR.
• Mindset ‘shareholder’ reaction driven – shareholder a ‘mini corporate looking at investment with multiplier impact’
• Long way to go for true ‘stakeholder engagement’
• Consumers yet to grasp ‘sustainability’ in larger context then ‘just the best value for money
• Lackadaisical attitude of citizens / consumers commitment / awareness to CSR / SR / Sustainability

Desired competencies & experience for selection as a facilitator for CSR projects:

Selection of consultants / facilitator

• Breadth of Experience: Exposure to different business categories, corporations and not-for-profit organizations, small and large businesses, application of CSR in a wide range of situations
• Depth of Experience: passion about CSR is a must but one needs to balance enthusiasm with experience and professionalism
• 3. Diversity: access to a wide range of different opinions, ages, genders and ethnicities.
• 4. Capacity Building: Willing ness and ability to create strong in-house team which can continue the activity
• Capacity of understanding nature and process how social changes work as they take longer times to percolate effectively in the area of work, community
• Attitude: provocative and positive
• Knowledge: Global & national instruments and latest position of CSR
• Adequate knowledge / background on local laws
• Attitude: Own commitment towards ‘shared values’, values & principles, having heart for social causes 7 commitment

To sum up:
• Barring few top business groups and corporates there is a leadership vacuum as far as CSR commitment is concerned – these groups are also not in position to demand or even create awareness about CSR in supply-chain as they then lose the competitive edge. CSR is a distant expectation; most of them have not even managed to demand compliance from their supply-chain for the same reason, unless they are implementing or making an effort to implement one or other instrument mentioned above.
• Total disconnect with significance attained by CSR world over and hence no realization of possible challenge to survival or sustainability
• Businesses having exports give-in to adherence to ‘compliances’ (to an extent again and mostly unwillingly) for getting business and feel that this will enable sustainability too
• Huge local consumer base which does not really care for CSR or even ‘compliances’ as long as they can buy at cheapest price.
Let us take one example. Unfortunately even after 65 years of independence, the general civic mindset with reference to ‘child labour’ is that ‘India is a poor country and we cannot do without child labour. Children have to work to support their family!’ (If we check their need to work full time and even in hazardous conditions, the reasons could be many and just not the poverty alone. The reasons too point fingers at our callous attitude). Are we a confused lot – are we a promising nation or an utter disaster as a society, we need to look within.

If this is our level of commitment towards all-inclusive society and self-esteem as a nation, we are undoubtedly ages behind to even think of “the responsibility of enterprises for their impacts on society”.

• No vision beyond shareholders’ interest and the bottom line
• Absence of ‘Lead by action’ examples – be it political, civil or enterprise level
• Banking and financial fraternities generally (other than equity placement) do not see CSR investment (not even statutory compliances) as a sustainable business practice nor demand it. There is an absence of policy & strategy at the top management level to demand CSR implementation from their customers. This is in spite of the fact that they are exposing themselves to huge risk if they do not check whether the customer has undertaken proper due diligence on Environment Impact Assessment (EIA), Social Impact and Equator Principles and such other requirements
• ‘Intangibles Assets’ could go way beyond in financial valuations over a period of time and create a brand equity which can stand any disaster – the businesses do not pay heed to it, the age old myopic vision, the bottom line equation
• Reluctance to change and even experiment
• Absence of realization on this accord i.e. CSR even amongst the so called elite, affluent and /or even intellectuals, there are no debates, discussions at any level
• Media which can be positively instrumental has to realize the role it can play and the cost of omission of the same as of now (probably being part of the same apathetic society)

The Ministry of Corporate Affairs through changes in the Company Bill on CSR has placed tremendous power and faith in the hands (the correct word would be hearts!) of citizens of India and the civic society as stakeholders. Hopefully they will assume their responsibility with accountability and propriety by bringing the desired positive results so that we have a better place to live for all.

The owners of the process are Company Secretaries and hence they can be the true torch bearers and light! Lest even CSR can go Corporate Governance way and the Company Secretaries will end up paying price for ignoring importance of ‘Values & Principles’.

Before I close let me share ‘Company secys in the Line of Fire’, one more eye-opener, especially for the company secretaries and managements. The Economic Times, front page (and corporate 5), April 19, 2013, Friday; “Over 120 company secretaries have quit in the past three months as small-and mid-sized firms grapple with governance issues.” To quote few top brand companies as given in ET are S Kumars Nationwide, Birla Power, Muthoot Finance, ABG Shipyard….

And to conclude we have Hope and the Road Ahead:

‘However, as the saying goes, the third time is the charm. Having witnessed three cycles of ethical collapse, I see that the patterns are clearly defined, the signs universal, and the outcomes similar in their disastrous impact. But with this third round of observations, I have also discovered that there are antidotes. If organizations can just work at applying them, the inevitable need not occur. Ethical collapse is not a natural market adjustment - it represents utter defiance of the principles of fairness and morality that markets and capitalism demand. If we are to continue to enjoy the magnificent benefits of the free market, we must be prepared to self-govern through ethical choices. We must also be willing to put into place the checks and balances that ensure such self-government via the free market work. Virtue ethics coupled with a healthy dose of antidotes are the key to preventing ethical collapse.’ The Seven Signs of Ethical Collapse, Marianne M. Jennings, J.D.

Company Bill Sec 135

Explanatory note on the section and general points:

1. Presently only the section is available for public disclosure. Though the ministry has framed rules the same shall be made public only after the bill is passes by the Rajya Sabha and it is declared act
2. The spend is not mandatory if we see the articulation in holistic manner. The mandatory obligation is reporting which is given in section 135 (5):

The section states:

The Board of every company referred to in sub-section (1), shall make every endeavour to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending

3. In view of the above failure to ‘reporting’ becomes mandatory. If the company spends on projects as per schedule VII the report will cover the activity undertaken and outcome of the same.

Either way the management becomes vulnerable at the instance of stakeholders or the list of stakeholders is ever increasing one. Again here the power is vested outside the shareholders who are stakeholders just by default.

Ironically it is ‘and/or’ situation for the management of the companies: if they implement half-heartedly or do not implement at all. Either way they are at the mercy of the stakeholders.

The accountability will be on the committee but further details on the same will be available once the rules are declared. Under all circumstances the process holder will be the Company Secretary and hence undertaking all activities as per section 135 will have to be followed by the CS.

Understanding what is HDI (Human Development Index) and its relevance to the countries overall civic society is very vital. The government is short listing backward districts, around 272 or so. The government is going to seek adoption of such districts by willing corporates.

4. Do all Companies have to do CSR?

Every company having a net worth of Rs. 500 crore or turnover of Rs.1000 crores or net profit of Rs. 5 crore or more has to constitute a “CSR Committee of the Board” consisting of at least 3 directors and out of these three directors, one has to be an independent director. This is a foolproof provision ensuring that the committee is not just a quasi committee addressing the whims of the board but is in fact taking up an initiative.These companies have to spend minimum 2% of “net profits” (Average of last three years) towards CSR policy. If not spent, board has to give detailed reasons for not spending on CSR in the Director’s Report.

5. Duties of the Committee as per Clause 135

The main role of the committee is to formulate and recommend to the Board a Corporate Social Responsibility Policy which should indicate the activities to be undertaken by the Company. Additionally, the Committee has to also recommend the quantum of expenditure to be incurred on these activities. Finally, the Committee has to monitor the Corporate Social Responsibility Policy of the company from time to time.

6. The reporting format also will be available ones the rules are declared. Presently as a CS one should inter-act focus on schedule VII and generally short list areas of possible interest and discuss the same with board in light of Fundamental focus areas for CSR success and Generic Topics in the article.

7. The CS will have to gear up for facing / responding to the queries of the stakeholders and may have to set a process for the same so that the stakeholder engagement is undertaken in the proficient manner across the organization and across all geographic locations.

8. The company bill and relevant sections and the impact on how the corporates will need to change the perception as the meagre 2% will amplify the manner in which rest 98% have been brought to kitty. The peep through will become a magnifying glass for the conduct of the management and by the time the report is out it will be too late for damage control. As the process owners CS will have to be vigilant and keepers of the brand equity.

More clarity will be possible once the act is published.

For further details and direction one has to wait for the rules as per the act.

The Sections:

Sec 134 (o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year; (p) in case of a listed company and every other public company

(ii) Concept of Corporate Social Responsibility is being introduced.
(iv) Additional Disclosure Norms:

(a) New disclosures like development and implementation of risk management policy, Corporate Social Responsibility Policy, manner of formal evaluation of performance of Board of directors and individual directors included in the Board report in addition to disclosures proposed in such report in the Companies Bill, 2009.

(b) Consolidation of accounts
Clause 135 — This new clause seeks to provide that every company having specified networth or turnover or net profit during any financial year shall constitute the Corporate Social Responsibility Committee of the Board. The composition of the committee shall be included in the Board’s Report. The Committee shall formulate policy including the activities specified in Schedule VII. The Board shall disclose the content of policy in its report and place on website, if any of the company. The clause further provides that the Board shall endeavour to ensure that at least two per cent of average net profits of the company made during three immediately preceding financial years shall be spent on such policy every year. If the company fails to spend such amount the Board shall give in its report the reasons for not spending.

Item (a) of sub-clause (4) of clause 135 proposes to empower the Central Government to prescribe the manner of disclosure of contents of Corporate Social Responsibility Policy in the Board’s Report and on the company’s website. First Proviso to sub-clause (1) of clause 136 proposes

(k) In case of Companies covered under section 135, amount of expenditure incurred on corporate social responsibility activities;

135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,—
(a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII; Corporate Social Responsibility.
(b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) Monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and
(b) Ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall make every endeavour to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy: Provided that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending

(See sections 135)
Activities which may be included by companies in their Corporate Social Responsibility Policies
Activities relating to:—
(i) Eradicating extreme hunger and poverty;
(ii) Promotion of education;
(iii) Promoting gender equality and empowering women;
(iv) Reducing child mortality and improving maternal health;
(v) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
(vi) Ensuring environmental sustainability;
(vii) Employment enhancing vocational skills;
(viii) Social business projects;
(ix) Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
(x) such other matters as may be prescribed.

Insurance and Risk Management


Corporates have always laid great emphasis on RISK MANAGEMENT to ensure steady growth over a period of time and Insurance forms an essential tool in the Risk Management exercise as it is one of the best known and time-tested method of Risk Transfer to the professional Insurers for a premium. It is pertinent that Company Secretaries, who play a pivotal role as advisers to the Top Management, appreciate the nuances of Insurance and Risk Management and use these insights to develop a robust and comprehensive Risk Management Programme for their Organisation.


The term Risk is usually associated with dangerous situations and unpleasant events. In simple words, Risk is the exposure to Danger. Risk may be defined from the Industry standpoint as the structures, processes, rules, circumstances and events which could have an adverse effect on the capacity of the Organisation to fulfill its goals or on its ability to do so efficiently and cost-effectively.

In Insurance parlance, Risk means the UNCERTAINTY OF A FINANCIAL LOSS. The different physical features that exist are called Hazards. Physical hazards increase the probability of a peril occurring. Risks are classified as Pure risks and Speculative risks. Speculative risks may result in loss or gain and are not Insurable, but Pure risks which may result in only losses are Insurable.


Risk Management is concerned with the planning, arranging and controlling of activities and resources in order to minimize the impact of uncertain events. Every trade has certain hidden risks which may be called ‘Organisational Risks’. These risks affect the profitability of the business and can be divided into-

1. Business Risks which may be further divided into :

a) Financial Risks
b) Marketing and Distribution Risks
c) Political Risks
d) Personnel Risks
e) Reputation Risks

2. Operational Risks which may arise due to various physical hazards and extraneous and operational factors, administrative failures, inadequate systems and/or defective control mechanisms leading to inventory losses, injury to employees, physical loss/damage to property, consequential losses etc.

3. Legal Risks arising out of contractual liability, public liability, statutory liability, pollution liability, product liability, employers liability, Directors and Officers liability, etc.

4. Environmental Risks arising out of natural calamities or changes in the social/ cultural/ legal and statutory environment. The Risk Manager’s basic job is to “ensure financial sufficiency of the Organisation against the consequences of different types of risks at the lowest possible cost’. All Business Organisations have well defined Objectives/Goals. One of the major objectives is the MAXIMISATION OF PROFITS and a comprehensive and robust Insurance and Risk Management Programme helps the Organisation to tide over even the worst case loss scenario and ensure that the profits are not eroded.

The size of loss which an Organisation can tolerate without financial embarrassment will depend upon its cash flow, profitability, liquidity, capital reserves and assets which could be used to finance losses. Therefore, in considering its risks the Organisation should pay regards to the following four important factors:-

1) The probability of a loss producing event occurring
2) The severity of the loss
3) The size of loss it can tolerate and
4) The potential degree of variation in actual outcomes from expected outcomes


The Risk Management Process involves the following steps:

1) Risk Identification
2) Risk Evaluation
3) Risk Control
4) Risk Financing
5) Risk Review

The Procedural Aspect will encompass the following activity---

• Identification and Evaluation of Risk Exposures- The Risk Manager will conduct the Risk Identification and Evaluation exercise with the active involvement of the concerned departments.

• Determination of Insurable Amounts--Valuation of assets like Building/Plant & Machinery and decision to insure on RIV or Market Value basis, selection of Standing Charges and Indemnity period for Fire/ MB Consequential Loss Policy, Basis of Valuation for Marine Insurance, AOA/AOY limits under Public/ Product liability policies, amount of coverage and Sum Insured under P.A./MEDICLAIM policies etc.

• Selection of the appropriate Risk Management Technique or combination thereof--Depending upon the solvency position, liquidity, working capital, long-range capital fund requirements and a thorough cost-benefit exercise, the Organisation can decide to combine the Risk Management techniques to obtain the best overall result.

The detailed Risk Management Process can be broken down into three elements which follow a logical sequence. They are as follows:

• Risk Analysis
• Risk Control
• Risk Financing

A) Risk Analysis:-

This is a TWO-STEP Process comprising of Risk Identification and Risk Evaluation.

I) Risk Identification--. Risk Identification requires a knowledge of the Organisaiton, the market in which it operates, the legal, social, economic, political and climatic environment in which it does its business, its financial strength and weaknesses, its vulnerability to unplanned losses, the raw material, finished products, the manufacturing process and the management systems, plant and premises, suppliers and customers, methods of distribution and business mechanism by which it operates Risk identification helps in identifying what could go wrong that could impact the business significantly.

The task of Risk Identification breaks down into two parts namely:-

1) The perception of RISK i.e. the ability to perceive that there is an exposure and
2) The identification of the operative causes or perils and the likely results

The popular techniques normally used for identification and analysis of Risk Exposure are as follows-

1) Check Lists- are used as an aide memoire where each peril is considered in relationship to the Business operations. Check Lists must be prepared after a detailed Inspection of the Plant and after collecting all relevant information about the assets owned (both tangible and intangible),personnel employed, facilities utililised such as public utility supplies/rail and road access/water and electricity etc., sources of exposure to loss-producing events and the physical, legal, social, natural, economic and political environment in which the Organization operates. Similarly, in analyzing fire and explosion risks, special consideration will have to be given to the originating and contributory hazards associated with the potential sources of ignition or explosion from both inside and outside the premises.

2) Flow Charts-- A flow chart is a graphic representation of the production and distribution process. Flowchart analysis reveals the firm’s relations with suppliers, customers, utilities and modes of transportation. Risk Managers analyse flow charts to spot production bottlenecks. Flowcharts also help to reveal the consequential impact of losses.

II) Risk Evaluation-which is the second step in the Risk Analysis process and consists of the assessment of-

(a) the probability of a loss occurring and
(b) its severity.

Risk evaluation serves two important purposes----

1) It helps to evaluate the loss potential due to the perils identified and decide upon the Risk Control measures to be adopted.
2) It involves information regarding values at risk or potential liabilities, and the estimated frequency of losses of differing size, including business interruption losses.

B) Risk Control :

This is the second element in the Risk Management process and covers all those measures which are aimed at avoiding, eliminating or reducing the chances of loss-producing events occurring, or limiting the severity of the losses, if at all they arise.

Physical Risk control involves the use of one or more of the following Risk Management tools-

• Risk Avoidance
• Risk Prevention
• Risk Minimisation/Reduction

1) Risk Avoidance: Risk avoidance means the possibility of loss has been eliminated. In practice, it may mean not introducing a new product, ending the production of an existing product, discontinuing some operations, or selecting a business location where a particular peril is not present. The basic rule is -- When the frequency of loss is high and loss severity is also high, avoidance is often the best, and sometimes the only practical alternative.

2) Risk Prevention: Successful Risk/Loss prevention activities lower the frequency of losses. The more effective the loss prevention, the lower the insurance premiums. Examples of loss prevention activities include the use of tamper-resistant packaging, no-smoking regulations, driver training, safety education programmes, installation of burglar alarms and posting of security guards etc.

3) Risk Minimisation /Reduction: Successful Risk/loss reduction activities reduce the severity of loss. Loss reduction activities aim at minimizing the impact of losses. Examples of loss reduction devices includes fire walls and doors, installation of fire extinguishing appliances, salvaging operations etc. When the severity of loss is high and when the loss cannot be prevented, loss reduction measures are the only recourse. Risk Reduction measures may be preventive/protective or quasi-preventive/ minimizing/ salvaging. Risk Reduction through prevention / minimization is concerned with achieving a reduction in either the probability of a loss-producing event occurring or in the size of the ensuing loss, if any.

C) Financial Risk Control/Risk Financing: Risk financing determines when and by whom loss costs are to be borne. Risk Financing includes the following alternatives----

• Risk Retention
• Insurance

1. Risk Retention: Often risk assumption is a deliberate risk management decision. That is, the assumption of the risk is undertaken with the full understanding of the consequences of the potential loss. Sometimes, however risk is assumed because the potential loss was not identified before it occurred.

Business firms assume risks when loss costs are small and can be funded from current cash flow or from reserve/contingency fund. The risks may be retained by the business enterprise through internal financing by --

a. Charging of losses to operating costs as they occur
b. Formation and operation of internal Contingency Funds
c. Formation and operation of Captive Insurance Companies

2. Insurance: From the Risk Managers’s view point, Insurance represents a contractual transfer of risk. Insurance is an especially appropriate Risk Management tool when the probability of loss is low and the severity is high. Many situations facing both business firms and individuals meet these two criteria, and thus insurance is widely purchased. The benefit of Insurance is that it converts uncertainty to certainty, because by payment of a definite amount of premium the Organisation can transfer the financial cost of uncertain loss-producing events, which may seriously affect the Business, to the Insurer.

Summary of the Risk Management Process:

A successful Risk Management Programme should proceed according to the following sequence of events-

1) All exposures to Risk must be Identified
2) After Identification, the exposures need to be Evaluated according to their respective probabilities and severities
3) In respect of those exposures where probabilities and severities are high, the possibility of Avoiding or eliminating should be investigated, and if feasible, the appropriate steps should be taken
4) In the case of other exposures,Risk Reduction/Prevention measures need to be explored and implemented
5) The residual Risks need to be evaluated in terms of frequency/severity, so that decisions can be taken as to whether they can be Retained or Transferred
6) The results of the whole programme need to be monitored and reviewed on a regular basis so as to keep pace with the changing circumstance

Risk Review: After the potential sources of loss have been identified and plans to deal with them Implemented the Risk Manager must review the programme regularly to be sure that it meets current needs.

The essentials of the Risk Management Process are summarized in the Matrix given below -

To conclude…… Risk Management makes an effective contribution to the achievement of Corporate Objectives and the purpose of Risk Management is to achieve MAXIMUM PROTECTION AGAINST RISK EXPOSURE AT MINIMUM COST


INSURANCE is the best method of Risk Transfer globally. In Insurance the losses of a few are shared by many. The loss of the individual is made good by all those who are likely to face a situation of loss. Insurance Operations are governed by the LAW OF LARGE NUMBERS. The Law of Large Numbers is a MATHEMATICAL PRINCIPLE whereby with the increase in the number of cases, the difference between the Actual Future Losses and Estimated Future Losses will become less and less. The Insurers apply this Principle while studying Past Loss Experience as this will help them to anticipate future losses more accurately and fix the premium rate accordingly with proper margins for changing conditions and Market trends.

Insurance is broadly categorized into Life and General Insurance Business and the Insurance Market worldwide was US $4597 billion as on 31/12/2011.Global insurance penetration (premiums per gross domestic product) was 6.6 %. The Advanced Markets accounted for 86 % of global premiums and the Emerging Markets controlled 14%.

We shall briefly examine the scope and essential concepts in Life and General Insurance Business with special relevance to the Indian Insurance Market--


Life Insurance primarily deals with the Insurance of Lives and covers perils related to the life of Human Beings. These are mainly Risks related to dying early or living too long. Life Insurance Products are usually referred to Plans. Besides, the Insured may also require Funds on specific occasions like marriage, children’s education, unexpected Medical expenses towards Hospitalisation, chronic ailments, etc. The Life Insurance Companies have launched excellent products to cater to this need of Customers. There are more than 100 different Plans/Products available in the Indian Life Insurance Market and can be broadly categorized as follows—

1) Term Assurance Plans
2) Whole Life Plans
3) Endowment Plans
4) Plans for the benefit of Children
5) Annuity/Pension Plans
6) Group Business Plans
• Group Term Life
• Group Term Life in lieu of EDLI
• Group Superannuation Scheme
• Group Gratuity Scheme

These Plans have either or both of the TWO BASIC ELEMENTS-

I. Death Benefit--- also known as Death cover and payable on the Death of the Insured Person during the tenure of the policy
II. Survival Benefit--- also known as Maturity Benefit and payable on the maturity of the Policy if the Insured Person survives the entire tenure of the policy
The two Basic Plans offered by Life Insurance Companies are-

• Term Assurance Plan--- Insurance Plan that provides only Death Cover
• Pure Endowment Plan--- Insurance Plan that provides only Survival Benefit Cover

The Life Insurance Companies combine the features of the two basic Plans into an Endowment Assurance Plan and offer it to their Customers.

Annuities—cover the Risk of living too long. Annuities are periodic payments made to an Individual in consideration of a lumpsum amount paid to the Insurer before the commencement of Annuity payments.

General Insurance deals with the Insurance of Property, Liability, Interest, Personal Accident, Health, etc. There are more than 300 different products launched in the General Insurance segment which can be broadly classified as follows---

• Fire Insurance
• Marine Insurance
• Motor Insurance
• Miscellaneous Insurance
1. Personal Accident Insurance
2. Mediclaim Insurance
3. Overseas Travel Insurance
4. Engineering Insurance
5. Liability Insurance
6. Guarantee Insurance
7. Property Insurance
8. Package Policies


The Standard Fire and Special Perils Policy covers STANDARD FIRE RISK AS WELL AS CERTAIN SPECIAL PERILS. The policy covers Twelve different types of Perils and there are 15 Add-on covers which can be selectively added by the Insured by payment of extra premium.


The subject matter of profits insurance is the business of the insured, that is, the earning capacity of the property. Profit Insurance is concerned with the ‘revenue’ loss, i.e, trading loss due to interruption of business as a result of an insured peril. The cover provided will be limited to loss of gross profit due to -

(a) Reduction in Turnover and
(b) Increase in cost of working


This class of insurance relates mainly to insurance of Vessels, Cargo and Freight. Marine Cargo Insurance is of special relevance to Manufacturing Companies and it primarily deals with goods in transit by Road/Rail/Ocean/Air/Registered Post/Courier, etc. Manufacturers require Transit Insurance cover for Raw material purchased by them and finished goods supplied to their customers. An Open Policy is issued to cover a number of incoming and outgoing consignments automatically. For regular exporters and importers, continuous and automatic insurance protection is afforded by Open Cover. The inland transit of the cargo may be by Rail or Road or Inland water ways and Coastal shipments. Sendings by Air, Courier and Post are also likely and can be insured.


Motor Third Party Liability Insurance is compulsory in India. Hence, there are two types of Policies sold in the Indian Market----

1. Liability Only Policy: covers Third Party Liability for bodily injury and/or death and Property damage. Compulsory Personal Accident Cover for Owner/Driver is also included.
2. Package Policy: covers loss/damage to the vehicle insured (Own Damage) in addition to (1) above. Package Policies are issued in three different formats.

This is the biggest Branch of the General Insurance Portfolio and there are more than 200 different Products of the Miscellaneous Portfolio being canvassed in the Insurance Market in India. They comprise Commercial Line products meant for Industrial Corporates and Commercial Establishments, Personal and Retail Line products meant for the Individual Retail customers, Rural Insurance products for the Agricultural and Rural population of India and Package Insurance Covers for all segments of Clients and niche Markets like Bankers, Jewellers and Diamond Merchants, Infrastructure Companies, etc. Since Commercial Line Insurances are of great interest to the Corporates, the focus will be on these products with closing remarks on a sample Package Policy. A brief outline of the important Lines of Business in the Miscellaneous Portfolio is given below---

A.PERSONAL ACCIDENT INSURANCE-- This policy primarily provides monetary compensation in case of death or disablement resulting from accidental injury arising out of External, Violent and Visible Means.
B.MEDICLAIM INSURANCE – This policy covers reimbursement of Hospitalisation/ Domiciliary Hospitalisation expenses arising out of illness/diseases or accidental injury. The policy also covers certain DAY-CARE procedures on a restrictive basis.
C. OVERSEAS TRAVEL INSURANCE--This is a policy for persons undertaking overseas travel. The policy provides cover for emergency medical expenses incurred in relation to bodily injury, sickness disease. It also provides for personal accident cover and other travel related losses like loss of passport, delay/loss of Checked Baggage, etc.
D. ENGINEERING INSURANCE--This branch of General Insurance deals with Insurance of Projects i.e. the Construction phase of Civil Engineering Works like Dams, Bridges, Roads, Flyovers, Metro Projects, etc. and erection of Manufacturing Plants/Industrial units etc. This Branch also deals with the Operational phase Insurance covers such as Machinery Breakdown, Electronic Equipment, Boiler/Pressure Plant Explosion/Implosion, etc. required by Commercial Establishments/ Industries.
E. LIABILITY INSURANCE--The Important Liability Insurance Covers are as follows---

1) PUBLIC LIABILITY INSURANCE (ACT)--The Public Liability Insurance Act was framed by the Government in the year 1991 to provide compensation to the victims affected by accidents occurring due to handling/ manufacturing/ storage/ transportation of any hazardous substances defined under the Environmental Protection Act, 1986, and exceeding such quantity specified by notification of the Central Government.
2) PUBLIC LIABILITY --- NON-INDUSTRIAL RISKS---The insurance applies to risks such as Hotels, Restaurants, Theatres, Auditorium, Residential Premises, Schools, Library, Film Studios, Fairs and Fetes, Godowns, Shops and other similar risks. The policy covers liability to the Public arising out of accidents due to the Negligence of the insured/servants.
3) PUBLIC LIABILITY---INDUSTRIAL RISKS---Policy applies to Industrial and Manufacturing risks of all types. The policy covers liability to the Public arising out of accidents due to the Negligence of the insured/servants.
4) PRODUCT LIABILITY INSURANCE--- Policy covers liability arising out of accidental death/ bodily injury or disease to third parties and/or loss of or damage to Third Party property due to any defect in the products manufactured and covered under the policy after such products have left the insured’s premises.
5) WORKMENS COMPENSATION LIABILITY INSURANCE--- Policy protects the assured against his legal liability towards his employees arising out of employment injuries. In such cases, the following laws may apply-

Workmen’s Compensation Act
Fatal Accidents Act
Common Law
Although the WC Act does not provide for payment of Medical Expenses, the policy can be extended to cover limited medical expenses on payment of additional premium.

6) PROFESSIONAL INDEMNITY INSURANCE----The policy covers liability arising out of errors, omissions or negligence on the part of the professionals whilst rendering their services. This applies to doctors, medical establishments, engineers, architects, interior decorators, chartered accountants, financial and management consultants, advocates etc. The I.T. Sector Companies avail Comprehensive ERRORS AND OMMISSIONS Policies which are specially designed to cover their Global operations.


Directors and Officers are now perceived as Professional Managers who should be accountable for their actions. They are therefore liable to face civil and/or criminal suits from various quarters for alleged breach of duty due to wrongful acts resulting from various reasons. A Director/Officer owes a duty towards--

a) The Company
b) The Shareholders of the Company
c) Employees
d) Creditors
e) Customers
f) Competitors
g) Members of the Public
h) Government and Other Regulatory Bodies

He is therefore liable to face civil and/or criminal suits from these quarters for alleged breach of duty due to wrongful acts resulting from various reasons. The term Wrongful Act is usually defined in the policy as follows:

“Actual or alleged breach of duty, breach of trust, neglect , error, misstatement, misleading statement, omission, breach of warranty of authority or other act done or wrongfully attempted by any Director or officer.”


This branch includes ---
1. FIDELITY GUARANTEE INSURANCE---which indemnifies financial loss sustained by the insured due to any act of fraud/dishonesty committed by the employee in connection with his employment specified in the schedule.

2. CONTRACT GUARANTEE---There are various types of Contract Guarantee viz.- Earnest money bonds, Bid Bonds, Performance Guarantee, Security Deposit or Retention Money Guarantee, Advance Payment Guarantee and Hire Purchase Guarantee.

3. CREDIT GUARANTEE/CREDIT INSURANCE--Credit Insurance protects the Insured against defaults, non-payments and insolvencies of the buyers. In short, it provides a business enterprise the protection against the failure of its customers/debtors to pay their debts.


The stand-alone policies in this segment are as follows--


These Stand-alone products are normally incorporated into Package Policies which are the preferred option of the clients.


There are various package Insurance covers available for Commercial and Industrial Establishments combining the benefits of the Stand-alone products plus some Add-on features and premium incentives. The advantages of Package Insurance covers can be illustrated through the following example of a popular Package policy for SME Sector--- INDUSTRY CARE POLICY

This is a special tailor-made Package Policy for Industrial Risks where the combined Sum Insured under one or more locations does not exceed Rs.100 crores. Indemnity is provided under the following Sections---

Section I – Fire and Allied Perils as per Standard Fire and Special Perils Policy plus Earthquake Risks.
Section II – Business Interruption due to perils covered under Section I of the Policy.
Section III – Machinery Breakdown – unforeseen and sudden physical damage caused by electrical and/or mechanical breakdown of electrical and mechanical appliances,
Section IV-- Electronic Equipments/appliances--loss or damage to electronic installations specified due to any cause other than those specifically excluded. Laptops may also be covered.
Section V – Burglary & Housebreaking
Section VI --- Money Insurance--loss of money relating to Insured’s business due to – a)accident or misfortune whilst in transit and due to Burglary/Housebreaking/Robbery/Hold-up whilst in--

a) safe at the Insured’s business premises
b) till/counter at the Insured’s business premises

Section VII – Goods in Transit---This section covers loss or damage to the Insured’s cargo (raw materials, finished goods, semi-finished goods, spares, consumable etc.) in transit (Inland transit- inward and outward, imports and exports) against all risks except those specifically excluded under the applicable clauses attached and relevant warranties.

Section VIII – Personal Accident This Section covers Death/Disablement of the Employees due to accidental injuries.

Section IX – Infidelity/Dishonesty of employees This section covers Direct pecuniary loss due to dishonest acts/infidelity of employees.

Section X – Legal Liability--This Sub-section covers Insured’s legal liability towards Employees and towards the Public


Insurance Premiums should never be treated as a COST. They are a RISK MANAGEMENT TOOL. In Insurance, the endeavour should always be to get the—

I. best product at the appropriate price
II. from an Insurer who has the willingness and capacity to pay the genuine claims as and when they arise and within a reasonable time-frame
III. keeping the worst case loss scenario in mind

Corporates sometimes encounter calamities and disasters wherein a proper Insurance and Risk Management Programme can make a difference between survival and solvency. Therefore, across the World, especially in developed Countries,Insurance and Risk Management is a very important portfolio and normally handled by experts. In India, with the opening of the Insurance Sector and entry of Foreign Insurers through Joint Venture partnerships, Corporates have started evincing keen interest in this area. As such, there is tremendous scope in this domain in the Corporate arena and Company Secretaries, who normally play a major role in evolving and implementing KEY MANAGEMENT STRATEGIES must acquire a working knowledge of Insurance and Risk Management as this will definitely augment their role and responsibilities in Decision-Making at the Top Level.

About the Author:

The Author; Mr. Rajiv R. Joshi, holds a Masters Degree in Chemistry & Masters in Philosophy and is also a Fellow of the Insurance Institute of India. He started his career as a Direct Recruit Officer in United India Insurance Co. Ltd. in 1981 & served in various capacities at Divisional & Regional Offices of United India for 23 years, subsequent to which he joined as an Assistant Professor at the prestigious National Insurance Academy, Pune. He then went on to handle the insurance portfolio as General Manager for the RPG Group, before moving on to the Aditya Birla Group and subsequently Gammon India Ltd. He is currently the Vice-President – Commercial Lines & Head Technical at Deccan Insurance and Reinsurance Brokers Pvt. Ltd.

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RD Column .....

Shri Amardeep Singh Bhatia, Joint Secretary, MCA and Shri Anil Kumar Bhardwaj, Director (E-Governance) had series of interactions with stakeholders at various cities. One such meeting was held at Mumbai on 6th May, 2013 along with senior officers of Infosys to interact and find MCA-21 application related front office and back offices issues.

This meeting was attended by members of three professional Institutes namely ICAI / ICSI & Cost Accounts along with various corporate representatives’. The meeting was attended by more than 40 members and each one of them gave their valuable feedback and suggestions not only on the working of MCA-21 system but also on the policy matters and technical issues. Thereafter Joint Secretary, Director (E-Governance) and Shri C.N. Raghupathi, (India Unit Head of Infosys) addressed the gathering and explained in detail about function of MCA-21 system and assured that all the issues to be resolved in due course of time.

MCA-21 has planned the following initiatives which will benefit stakeholders at large:

(I) Application enhancement:

(i) Single sign on to stakeholders for navigating between different applications of MCA-21.
(ii) Dashboard for displaying the company related information to directors/company representatives/certified professionals on MCA portal.
(iii) Application & receipt of good standing certificate.
(iv) Facilities for rectification of errors in eform/documents.
(v) Integration with “PAN” and address verification with other Government Departments.
(vi) MCA services integration with external agencies in compliance with the National e-authentication framework issued by DT-GOI.
(vii) ‘SMS’ enabled interface for MCA-21 service delivery which will help getting and providing information to the stakeholders.
(viii) Redesign of “View Public Documents” functionality.
(ix) Additional service will be available on portal like – track refund status, revised view of the company, company master data, etc.

(II) Hardware and Networking:

(i) Upgrade all the networking and desktop hardware at MCA offices which will result in increasing the application processing speed at the end user level.
(ii) Increase the bandwidth at each location for faster working of the applications.

(III) Helpdesk:

(i) In order to resolve application related issues an officer on special duty has been deputed by Infosys.
(ii) Dedicated team set up to resolve all Mumbai ROC related front office and back office application related issues.

(IV) Application upgrade::

Augment hardware infrastructure to meet peak filing loads.
Apart from the above initiatives, MCA is also planning to upgrade the MCA-21 software which will provide better services to stakeholders.
I trust that this would help the stakeholders. Stakeholders are herewith requested to submit their compliance documents well in advance, so as to avoid last minute rush.

Clarification under the Companies Act, 1956:
With effect from 08/05/2013, the power to extend the validity of the work item beyond the time limit under Regulation 17(6) rest with ROC.

A Bird’s Eye View: Recent judgements on Company Law

[Case Laws at a Glance]


Government initiated revival of Petitioner-company. As part of corporate debt restructuring scheme, secured creditors, mostly banks, converted their loans into cumulative redeemable preference shares and dividend on shares were converted as a part of debt restructuring scheme. There was need to write off losses and then pay dividend to shareholders. Objector creditor raised plea that a winding up Petition against company filed by Respondent was pending. Further, a suit was filed against objecting creditor claiming damages. These precarious position of Petitioner was not furnished to equity and preference shareholders and creditors. However, scheme for reduction of capital so as to write off past losses was just, fair and reasonable to all concerned and it was not against law or public interest. Petitioner should not be penalized by way of refusing either sanction of scheme or reduction of capital as that would only result in Petitioner defaulting in payment to these banks, their debts being treated as non-performing assets and, thus, disastrous consequences would automatically follow therefrom.


A Petition under section 111 is a summary procedure vesting CLB with jurisdiction to rectify share register; it is not a suit. Respondent purchased shares of company ‘M’ from appellant. On ground that shares were lost, Respondent immediately filed FIR, informed stock exchange, asked company ‘M’ to rectification of register of shareholder, filed suit against company for transfer and said suit was withdrawn after two years. On other hand, appellant had neither taken any steps to get these shares re-register in their own name nor had asked for ‘stop transfer’; it opposed transfer only on ground of limitation. However, it was found that delay to come before CLB could not be wholly attributed to Respondent. Respondent had been continuously trying to rectify register of shares. Order of CLB directing rectification of share register in favour of Respondent was to be upheld.


Section 284 provides for removal of directors by company in certain situation; it does not provide shareholders any right to move CLB. For inclusion of circulation of proposed resolution of removal of director from Board of Directors of Company, correct section is section 188. Petitioner, held insignificant shareholding in Respondent Company. Petitioner sought to include resolution for removal of Director of Respondent-company alleging fraud, etc., and sought resolution to be circulated which Respondents declined. Petitioner having insignificant shareholding had not fulfilled requisite qualification to get resolution circulated.
– GRUH FINANCE LTD. IN RE., [2013] 118 SCL 146 (CLB - MUMBAI)


Only those persons who are named in section 391 can file a petition seeking sanction to the scheme of arrangement. Therefore, where the petitioners are not actual propounders of the scheme so as to revive company for the benefit of the company or its members and they have merely lent their names to a propounder who does not qualify under section 391, the petition seeking sanction of the scheme of arrangement is liable to be dismissed.


Where the shareholding of the Petitioner gets reduced to below 10 per cent on issue/allotment of further shares, which is challenged as oppressive, the maintainability of the petition would be decided after determining the validity of the issue of allotment. Where reduction in shareholding of the petitioner is held to be an oppressive act, the petition is maintainable, and the petitioner is entitled to relief. Where the changed shareholding cannot be sustained, issued of further shares is required to be set aside.

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Editorial Policy

A : “FOCUS” published monthly as a magazine aims to be a forum for members of the Western India Regional Council of the Institute of Company Secretaries of India ( WIRC of ICSI) for;

a. DISSEMATING information,
b. COMMUNICATING developments affecting the Institute and its members in particular and the CS profession in general,
c. ARTICULATING issues of contemporary concern to the members of the profession.
d. CEMENTING and DEVELOPING relationships across membership by promoting discussion and dialogue on professional issues.
e. DISCUSSING and DEBATING issues particularly of public interest, which could be served by the CS profession.
f. FACILITATING Members of the profession to share their views on matters of professional interest by way of articles and write-ups.

B : The WIRC of ICSI recognizes the fact that;

a. There is a growing emphasis on the globalization of the CS profession;
b. There is an imminent need to position the profession in a business context which transcends the traditional and specific CS applications.
c. The Institute members increasingly will work across the globle and in global context.

C : Given this background the WIRC of ICSI strongly encourage contributions from the following groups of professionals;

a. Members of other Professional bodies across the globe
b. Regulators and Government officials
c. Professionals from allied professions
d. Academia
e. Professionals from other disciplines whose views are of interest to the CS profession
f. Business leaders

D : The magazine also seeks to keep members updated on the activities of the Institute including events on the various practice areas and the various professional development programs on the anvil.

E : The WIRC of ICSI while encouraging stakeholders as in Section C to Contribute to the Magazine , it makes it clear that responsibility for authenticity of the contents or opinions expressed in any material published in the Magazine is solely of its author and the WIRC of ICSI, council members, any of its editors or members of Editorial Team & Advisory Board, the staff working on it or “FOCUS” is in no way holds responsibility there for. In respect of the advertisements, the advertisers are solely responsible for contents of such advertisements and implications of the same.

F : Finally and most importantly WIRC of ICSI strongly believes that the magazine must play its part in motivating students to grow fast as Members of tomorrow to be capable of serving the Legal & Compliance area within ever demanding customer expectations.


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