India the first economy in the world with a quantified and legislated Corporate Social Responsibility (CSR) requirement
RATHER than a popular initiative focused on managerial compensation-albeit a central issue with multiple ramifications-the government of India took on the task of completely overhauling its Companies Act, its primary set of rules governing how businesses are incorporated, owned, managed, rehabilitated or closed when insolvent, and challenged in court. The previous version dated from 1956. Ambitious and comprehensive legislation takes time. India's law-making process started in 2004 and was followed by years of drafting, redrafting and consultations on the bill. It was finally submitted to parliament in 2012 and passed by the upper house on August 8, 2013. It received the assent of the president shortly after, on August 29. The date of entry into force is less straightforward. India follows an unusual system whereby provisions are not applicable until the Ministry of Corporate Affairs notifies each section; notification typically happens in waves. The first took place in September 2013 with the notification of 98 sections followed by another series of notifications in April 2014. As of June 2016, 282 of the 470 total sections were notified and eight provisions of the 1956 Act remain applicable. Despite this piecemeal introduction, it has paid off both in economic terms and in India's performance in Doing Business: India's score increased in three of the six indices of the protecting minority investors indicator set.
Four objectives guided the drafting of the reformed Companies Act. First, administrative requirements weighing on companies had to be simplified. Second, more transparency had to be instilled in their operations and decision-making structures. Third, the competitiveness of Indian firms had to be increased by bringing them in line with global standards, particularly regarding accountability and corporate governance practices. Lastly, it had to advance all of the above while ensuring that businesses contribute more to shared prosperity in an economy where demographics and income inequality pose stark challenges.
To simplify administrative requirements, the minimum paid-in capital was abolished. To instill greater transparency, the Act increased disclosure requirements, particularly regarding related-party transactions. To bring Indian firms in line with global standards the Act added requirements to disclose managerial compensation and to have one-third independent directors and at least one woman on the board. The fourth objective, however-contributing to greater shared prosperity-garnered the most attention by aspiring that all companies allocate 2% of their net profits to socially responsible projects. In effect, India became the first economy in the world with a quantified and legislated Corporate Social Responsibility (CSR) requirement. However, it is enforceable on a "comply or explain" basis and goes beyond the scope of areas measured by Doing Business. In practice, this means that companies who fail to meet the target must simply state so in their annual report and provide a justification. The Act provides a statutory definition of CSR as activities relating to hunger and poverty eradication, education, women empowerment, and health and environmental sustainability, among others.
Company regulation is an ongoing process. Since the enactment of the Companies Act, 2013, the Ministry of Corporate Affairs has issued clarifications, notifications and circulars on a regular basis to address ambiguities in the law. Most notably, two sets of amendments were released in August 2014 and in May 2015, highlighting the Indian government's ongoing commitment to reform. On June 4, 2015, it set up a committee tasked with identifying and recommending further amendments to the Act and with centralizing recommendations and concerns from private sector stakeholders and regulatory agencies. The case of India serves as a reminder of the time it takes and the challenges inherent to a holistic legislative overhaul. Piecemeal fixes can be a time-and cost-effective approach, but only a full-fledged legislative reform gives policy makers the opportunity to innovate and sends a strong signal to the business community.