Gender Diversity in the Boardroom

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-Mahak Agarwal | corplaw@vinodkothari.com

Diversity in the Boardroom, specifically gender diversity is in the limelight owing to the general awareness for breaking gender stereotypes and adopting a gender neutral board structure. While the Companies Act, 2013 and SEBI LODR Regulations have already taken their first steps towards implementing the same, considering the progress in global perspective, India still has a long way to go in increasing women participation in corporate boards  . This article discusses the concept of Board diversity, specifically  gender diversity,  and the ways in which Indian corporate laws could take their next step in achieving a gender-diversified Board.

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Responsibility by rod: MCA adjudication orders deal punches of penalty for CSR breaches

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– Vinod Kothari | corplaw@vinodkothari.com

If the intent of CSR provisions coded in the law was to promote socially responsible conduct on the part of companies, that lesson of responsibility is being taught the very hard, indiscriminately harsh way – by imposing penalties of 2X of the amount involved in CSR breaches, even if the breach was a pure timing mismatch. By now, there are several such adjudication orders – purely as an example, is  where the order clearly notes that there has been no failure on the part of the company to spend the failed amount of Rs 14.50 lacs. The amount was indeed spent, as intended for “ongoing projects”, but there mere segregation of this money into a separate bank account, required to be done within 30 days, was missing. Applying the provisions of sec. 135 (7) which provides for a “penalty of twice the amount” which failed the segregation requirement, though it did not fail the spending requirement.

There are several points that arise here: segregation of the amounts meant to be spent for ongoing projects is merely a ring-fencing requirement, such that companies are aware of the purpose for parking the money, and such money is indeed not commingled with the company’s own funds. If the funds are indeed spent for the purpose for which they are to be segregated, the failure to segregate is, at the most, the failure of the method and not the ultimate result. The failure was transient, and only a timing issue, and not a substantive failure. Therefore, even if punishable, the punishment could not have been the maximum amount provided by the law.

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SEBI prescribes thresholds for determining material events, stringent approval for sale of undertaking and more

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– Sharon Pinto and Shreya Salampuria | corplaw@vinodkothari.com

Keeping in view of the significance of the amendments, we are conducting a workshop on the same. Details can be accessed here – https://vinodkothari.com/2023/06/workshop-on-sebi-lodr-2nd-amendment-regulations-2023/
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Also read our detailed article on –

(i) Disclosure of material events under Reg 30

(ii) Insertion of new Reg. 37A

Stricter framework for sale, lease or disposal of undertaking by a listed entity

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– Nitu Poddar | corplaw@vinodkothari.com

Reg 37A of Listing Regulations requires additional voting and disclosure requirements

Keeping in view of the significance of the amendments, we are conducting a workshop on the same. Details can be accessed at – https://vinodkothari.com/2023/06/workshop-on-sebi-lodr-2nd-amendment-regulations-2023/
The article was also published by IndiaCorpLaw and can be viewed here

Disposal of an undertaking (whole or substantially the whole) can be done either as part of a scheme of arrangement or otherwise by way of slump sale / business transfer agreement (‘BTA’). Disposal, other than by way of scheme of arrangement, have so far been regulated as per section 180(1)(a) of the Companies Act, 2013 (‘Act’) which requires approval of the shareholders by way of special resolution. SEBI has prescribed approval requirement in this regard by way of introduction of regulation 37A vide SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (‘Amendment Regulations’) effective from June 14, 2023 that requires listed entities to follow a stricter regime for disposal of undertaking inter alia mandating approval from majority of the public shareholders who are not interested in the transaction, disclosure of the object, commercial rationale and use of proceeds arising from such transaction. While there is an exemption provided in case of transactions with a wholly owned subsidiary (WOS), the approval regime will apply in case of disposal of undertaking by such WOS or any reduction in shareholding in the WOS subsequent to transfer of the undertaking.

The said amendment is based on the Consultation Paper rolled by SEBI on February 21, 2023. Apart from incorporating the provisions proposed in this regard in the Consultation Paper, the amendment has introduced new provisions as well. Provision with respect to seeking approval from the shareholders of the listed entity in case a WOS is used as a conduit for transfer in undertaking is a new requirement brought in through the amendment.

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Understanding CSR for NGO

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– Pammy Jaiswal, Partner | corplaw@vinodkothari.com

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Succession planning: failing to plan is planning to fail

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-Anushka Vohra | Manager | anushka@vinodkothari.com

The article was also published in the CRA E-Bulletin and can be viewed here

Background

Passing the torch, lighting the way – an expression that can be used to refer to succession planning. Be it a household, business organization or institution, succession planning is needed everywhere. In a household, as the family possessions and culture are passed on, it is simply termed as continuing the legacy. In an HUF, according to HUF laws, after the Karta (head of the HUF) dies, the senior most coparcener becomes the head of the HUF. In corporates, the larger the scale and complexity of business, the need for succession planning becomes much more important. Unlike in the case of a household, corporates involve the livelihood and interests of thousands of people,  i.e., the shareholders, vendors, customers and other stakeholders. The intent of succession planning is not to oust the leader from his / her position but to prepare the next generation to become the future leaders. Succession planning is required to ensure smooth running of business. The torch bearer (leader here), has to groom his / her successor to take over his role.

In an organization, succession planning is an important element of corporate governance. In this write-up, the author has tried to emphasize on the need and importance of succession planning.

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Need for strategic vision in CSR spending by companies

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– Pammy Jaiswal, Partner | corplaw@vinodkothari.com

The article was also published in the CRA E-Bulletin and can be viewed here

Background

While the sense of ‘Corporate Social Responsibility’ (‘CSR’) might have been the result of the statute, first on a “comply or explain” basis, and later, as a mandate, it is heartening to note that companies are now not looking at CSR as a mere compulsion, but are seeing this as an instrument for social bridge-building. As is well known, the provisions were introduced, arguably as a unique case globally, in 2014 under the Companies Act, 2013 (‘Act’). From that year till FY 2021-2022, companies have spent approximately INR 1,39,202 crores[1] on CSR activities. In fact, it is pleasantly surprising to note that companies have been targeting to spend their minimum obligations; the gap between the prescribed spending and the actual spending has consistently been narrowing as can be seen from the graph given below.  With the introduction of the Companies Corporate Social Responsibility Policy (Amendment) Rules, 2021[2], read with the changes under section 135 of the Act pursuant to the Companies (Amendment) Act, 2019[3], an element of penalty for not doing the needful has been added, at the same time permitting companies to overspend their obligation and claim a set off within the next 3 years, there are several companies which are spending more than their targets.

   Data Source: India CSR Outlook Reports

Having said that, it will be important to discuss whether spending itself will help attain the motive for which the CSR framework was introduced? CSR is a part of a larger business responsibility and sustainability.  If companies confine their CSR ideologies to simply adding up to a requirement of spending amount, will the society get back what it ought to be getting back form a responsible business?  Should companies look at CSR beyond mere spending, and construct a CSR vision based on the negative footprints created by their activities, if any, or otherwise, create social impact relevant to their businesses?

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Evolution of concept of related parties and related party transactions

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-Team Vinod Kothari and Company | corplaw@vinodkothari.com

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Our Resource Centre on Related Party Transactions can be viewed here

Corporate succession events: Treatment of unspent or overspent CSR obligations

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CS Aisha Begum Ansari, Manager & Payal Agarwal, Deputy Manager | corplaw@vinodkothari.com

Background

The identity of a corporate entity may undergo various restructurings, either in the form of merger, demerger, sale of one or more divisions or undertakings. conversion of a company into LLP etc. Let us, for the sake of convenience, call them a “corporate succession” event, implying a situation where a corporate entity is succeeded by another entity, or its business, operations or undertaking shifts to another entity.  In some cases, say, amalgamation, the erstwhile corporate entity gets dissolved. In case of a demerger, the transferor entity continues. In case of conversion into LLP or vice versa, a company gets transformed into an LLP or other way round.

Usually, in corporate succession events, the assets and liabilities forming part of an undertaking are shifted to another undertaking, say, the successor entity.  The assets and liabilities that are comprised in an undertaking are mostly defined to include all liabilities existing on pertaining to a certain date, let us call it “appointed date”.

One of the perplexing aspects of this process of transfer of assets and liabilities may be the treatment of the unspent CSR obligations, or excess spending,  by the corporate entity which is undergoing a change in its identity. The question becomes increasingly significant in the present day regulatory environment due to the shift in CSR from COPEX (Comply or Explain) to COPP (Comply or Pay Penalty).

In the present write-up, we discuss the treatment of CSR obligations as a result of the following actions resulting into a change in the identity of a corporate –

  1. Merger
  2. Demerger
  3. Sale of a division/ undertaking (“Slump sale”)
  4. Conversion of a company into LLP
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Entering in FY 23-24: Regulatory review of corporate law developments

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– Payal Agarwal, Deputy Manager (payal@vinodkothari.com)

As the new financial year 23-24 commences, we look back at where we stand at the end of FY 22-23, in terms of the regulatory developments. While there has been no substantial traffic in terms of regulatory developments to the Companies Act, the migration of various forms in MCA’s V3 portal proved to be (and still continues to be so in some cases) a turmoil, with a standstill in the fundraising process, and other practical difficulties, even resulting in levy of additional fines. 

There has been significant traction on the part of SEBI too. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. Having stiffed the nerves of the Compliance Officers in the listed entities through the quarterly compliance certificates, the same has been finally absorbed in the annual secretarial compliance reports under the Listing Regulations.

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