There is now a growing social and political acceptance of private sector contributions to India's development. However, many recent big-ticket corruption scandals have brought into public glare the growing menace of crony capitalism. In addition, large-scale protests by tribal and other rural communities against displacement from their land, habitat and livelihoods have further painted business as a menacing predator. It is in this context that serious implementation of the new Companies Act 2013 has the potential to transform public support for corporations.

Corporate citizenship

The concept of corporate citizenship may be new in India, but has been around in more advanced economies for a couple of decades. Private business corporations potentially have enormous influence. Corporate citizenship implies that they have certain legitimate rights and obligations. Defined in a narrow sense, obligations can be limited to employees, suppliers and consumers. However, obligations can also be understood in a broader context. The Companies Act can be utilised to promote and strengthen corporate citizenship in India in the coming decade.

In today's global business environment, many enlightened business leaders are sensitive to their reputation and that of their company. Several features of the Act can contribute towards mitigating such reputational risks.

The Act provides for the Board of a company to set up a committee of stakeholders (Section 178). An enlightened approach to stakeholders would include not just direct employees, but also:

• Indirect employees, not just those on the payroll but those deployed in the company's business operations through contractors and sub-contractors
•  Suppliers, not just in terms of the quality of inputs they supply, but also the way those suppliers treat their own employees and local communities
• Consumers, not merely as markets for goods and services produced by the companies, but also as enlightened citizens (why cannot they establish enforceable benchmarks of service guarantee, as governments do?).

Local communities in India always expect companies to provide them opportunities for gainful livelihood, better quality of life for their children and more. Positive relations with communities are not just about CSR funds and activities being deployed for charity. Nurturing sustainable relationships with surrounding communities is about being a responsible and responsive citizen. The public-at-large is an important stakeholder too. The growing middle class, a watchful media and assertive voices from the socially excluded (women, dalits, tribals and minorities) are watching corporate behaviour to examine how it complies with not just the letter, but also the spirit of the Act.

Corporate governance

In all of all of society's institutions, governance is in focus today - whether public, private, for-profit or not-for-profit. A transparent and accountable corporate governance approach can considerably enhance the corporate citizenship status of a company in the eyes of diverse stakeholders. The Act provides for many features that can go a long way in enhancing this:

• One-third of all directors have to be independent members of the Board of a company (Section 149). Independence has to be ascertained through a set of criteria that are pretty rigorous: independence requires that directors are not relatives, have not been an employee of an audit or legal/managerial consulting firm doing business with the company for at least three years, and not belonging to a non-profit organisation which receives more than 25 per cent of its annual income from that company
• An independent director to represent the interests of minority and small shareholders (Section 151)
• A clear and enforceable code of conduct for independent directors (Schedule IV)
• A clear statement of avoiding conflict of interest by any director of the company (Section 166) as dereliction of duty to attract punishment, as well as a series of provisions about avoiding conflicts of interest of directors and owners (Sections 184, 188, 189) requiring self-disclosure of business interests in suppliers and contracts, with a publicly available list of such interests of directors for scrutiny
• Appointment of independent auditors and the rotation of auditors (Section 139); auditors not being the relatives of directors/owners (defined strictly in Section 141); and auditors disallowed from providing other accounting, consulting or legal services to avoid conflict of interest of auditors (Section 144)
• Limits to managerial compensation to top leadership of a company so that it has a 'decent' relationship to profits of the company, the median compensation to its employees and prior approval of the shareholders (Sections 197, 198).

Corporate social responsibility

For the first time in India, and perhaps amongst most major economies of the world, the new Act provides for a mandatory provision for CSR in section 135. The ministry of corporate affairs has notified certain draft Rules in regard to implementation of section 135. In so doing, its preamble states: "CSR is the process by which an organisation thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies. Thus CSR is not charity or mere donations."

Therefore, CSR in the new Act can become a powerful lever for promoting and strengthening corporate citizenship in the coming decade.

The transformative potential of mandatory CSR is not limited to the list of activities in Schedule VII of the Act. Its real transformative potential lies in having the Board of a company formulate a focused and result-oriented policy for CSR based on a systematic analysis of challenges and gaps in socio-economic development of the country. Its real potential can be harnessed when the Board-led CSR policy of a company nurtures the long-term business environment in the region or country, thus promoting sustainable and inclusive socio-economic development.

The real import of mandatory CSR, therefore, provided for in Section 135 of the new Companies Act (2013), is to encourage alignment of corporate values, practices and operations towards making them respected and much-sought-after corporate citizens of Indian society.

Rajesh Tandon