Contemporary Issues

[By Swetha Somu]   The author is a student at Gujarat National Law University.  INTRODUCTION “Women Hold Up Half the Sky.”- Mao Zedong Analogous to this article is the proclamation made by Mao Zedong– to bring out women from domestic work to the professional field. Even today, if you walk inside a boardroom, it’s most likely that you’ll see more men like the Ambanis and Elon Musks than women like Kiran Mazumdar and Indra Nooyi. Through the lens of the law, the initial step was to empower women in corporate settings by imparting gender diversity in boardrooms. This article dives deep into the present scenarios in Indian companies and analyses the drawbacks and deficiencies of the mandatory quotas by discussing various other mandatory quotas imposed by countries around the world. The article seeks to bridge the gap in law so that the intention of the legislators, which is- diversity and inclusivity, is truly achieved. THE START: NORWEGIAN QUOTA The first-ever mandatory quota (40% for women in all listed companies) was legislated by the Scandinavian country- Norway, way back in the year 2006. The percentages jumped from 6% in 2002 to 40% in 2008 after its implementation. Although the percentage change pronounces the success of the law, various researchers have recorded negative effects and adverse changes in companies that had to comply with the quota. Shortly after the quota’s implementation, many companies had delisted from the stock exchange to avoid appointing a woman director. Some companies reduced their board size to easily comply with the quota and the women appointed were mostly for non-executive positions hence there was still no strong decision-making authority. Another research found that although the representation of women increased it didn’t mean many individual women in numbers rather the same woman being appointed in different boards. This is known as the “golden skirt” phenomenon. At the same time, researchers noted that more companies in Norway registered themselves in the UK and not their home country, hence pointing out that they were circumventing the regulations. Countries like France, Italy, and Germany followed Norway’s footsteps in implementing gender quotas in the boardroom. INDIA Since the patriarchal notions in the society are also seen to prevail inside the four walls of Indian boardrooms, the need for breaking this glass ceiling was acknowledged. A hindrance to women’s advancement is the existing gender stereotypes which diminish the scope of taking up high-positions in their professional lives. Hence to tackle this, the government introduced the Companies Act, 2013 in which under Section 149(1)(b) of Chapter XI makes it mandatory for the companies (listed companies, public companies with a minimum paid-up share capital of Rs.100 crores or minimum turnover of 300 crores) to appoint at least one woman director in their boardroom which failing to do so will attract penalties. This is known as a ‘hard quota’ where not following the quota will attract strict punishments unlike ‘soft quota’ which merely is a recommendation which if not followed, the company will only face warnings and negative reports. The second proviso to sub-section (1) Section 149 was inserted to increase the participation of women in key decision-making roles inching closer to the women empowerment goal that India wishes to achieve under the United Nation’s 5th Sustainable Development Goal of Gender equality by empowering women through strong enforcement of various policies and laws like this. After the implementation of the Companies Act, 2013 many companies started to comply with the mandatory quota as per the law. Subsequently, in 2015, the Securities and Exchange Board of India (SEBI) made all its top-500 NSE-listed companies compulsorily appoint at least one independent woman to their board by the year 2019, and the same for the top 1000 NSE-listed companies by the year 2020. According to the research article from the All India Management Association, out of the top NIFTY 500 companies in 2013, 303 of these firms did not have a single woman director on their board- which is roughly 60.6% of the companies that need to comply with the new quota immediately. Across these 303 firms, 82.8% had appointed one woman as one of their board of directors and 13.6% had appointed more than one woman in their boardroom going an extra mile! These huge percentages certainly seem to be promising and good going until we consider the scenario of efficiency after the appointment of the so-called women-in-power. Flaws and failures Though it was an overall success, there were some unpredicted drawbacks to the mandatory quota that India saw. Firstly, the imposed quota prompted ‘tokenism’ where companies appoint a woman director from their own family for the sake of complying with the law and to avoid the penalties. The NSE reported that 1667 of 1723 listed companies had fulfilled the mandatory quota but 425 of the complying companies appointed a woman from their family or promoters’ group. Illustration: Reliance Industries Limited has only one woman director (non-executive)- Mrs Nita Ambani, the CEO of the CEO, Mr Mukesh Ambani. Another company is JSW Steels, which has appointed Mrs Savitri Devi Jindal, the wife of the founder of Jindal Organization. The Raymond Group has appointed Mrs Nawaz Modi Singhania (non-executive director) who is the wife of the chairman. Secondly, there is a lack of skilled women willing to take up challenging positions, such as board members, making it hard for the companies to appoint and retain women at that position. This resulted in India being at the bottom of the table according to Egon Zehnder’s 2020 Global Board Diversity Tracker. Only 17% of the women held senior positions in companies and only 11% in leadership roles. Thirdly, the quota fails to meet what is known as the ‘critical mass’. With the minimum requirement of one woman on the board, the underrepresented gender does not have enough representation nor could make any substantial contribution to the boardroom discussions. A single woman on a boardroom meeting is likely to have a lower voice and is often neglected as it takes at least three

[By Abhinav Gupta] The author is a student at the National Law University, Jodhpur.  Introduction While discussing his book, 21 lessons for the 21st Century, Yuval Noah Harari points out that humans face existential crisis due to technological disruption. In his other book, Homo Deus: A brief history of tomorrow, he highlights the good and bad of artificial intelligence (AI). He believes that AI holds the potential to exterminate mankind. The emergence of cases where algorithms and AI have replaced humans has made this prophecy more increasingly daunting. Algorithms and AI are revolutionizing the way businesses operate. The disruptive effects of such technology have been felt across various business functions. These emerging technologies have the potential to create corporations that are completely autonomous and run by algorithms. At the same time, they can be used to just assist in increasing the efficacy of business operations. Business decisions require comprehending a variety of data and AI has proved its capability to process complex data to reach conclusions. The use of AI in boardrooms can help directors and benefit stakeholders by complementing them, if not substituting, in performing their functions. In this article, the author discusses how AI has the capability to revolutionize the functions of directors and what the operational and legal hurdles are in employing AI at the highest level in corporations. Artificial Intelligence AI has the ability to process huge amounts of data. While human intelligence can process only the seemingly important and related data, AI can process unrelated data as well, which might have a bearing on the decision. There are three kinds of AI, differentiated on basis of decision-making rights allocated to such AI, namely, assisted, augmented and autonomous. Under the assisted AI, the tech merely assists in the process of decision making and does not take decisions itself. The decision-making power continues to rest with the human. Augmented AI shares decision rights with humans and both learn from each other. On the other hand, autonomous AI completely replaces the human and operates independently of human intervention to take over all the decision rights. This distinction between different kinds of AI can be implemented in corporations in order to develop a robust technical environment. Using AI in Corporate Functioning The ability of AI, big data, and machine learning can be exploited to assist corporations in taking strategic decisions, managing risks and ensuring compliance. Moreover, humans are often faced by their cognitive biases which prevent them from considering certain relevant information or flip side of issues. AI, unlike humans, is free of these biases which can greatly affect the functioning of a corporation. AI would help directors in exercising ‘independent judgment’ and become appreciative of various views as each suggestion by AI will be based upon concrete data. AI can be used to channel contrarian views based on such data and reduce the occurrence of ‘groupthink’. Groupthink refers to a situation where an individual tends to agree with the viewpoint of the majority in order to form a consensus, irrespective of the validity or correctness of such viewpoint. Hence, directors will be able to convey dissent in boardrooms which is essential in order to ensure that decisions taken by the board are in the best interests of all the stakeholders rather than just the directors or a select group. AI can also be used for the selection of board members. With more and more information available about directors regarding their qualifications, past experiences, AI should be able to process this data to ascertain the future performance of the candidates in light of the objectives and future plans of the company. It would be easier for AI to comply with the law regarding the qualifications of directors. For instance, Section 149(6)(a) of the Companies Act, 2013 (the Act) provides that independent directors should have the relevant experience and expertise. Moreover, they should not have any pecuniary relationship with the company. Naturally, this would entail going through past transactions of the candidate as well as the company. An AI, which has all such data of transactions, would be much better equipped to determine if the candidate possesses such experience and expertise and whether they have any pecuniary relationship with the company, ultimately helping in compliance. The availability of data allows AI to foresee trends and at the same time handle the data of past and present, efficiently. Thus, AI can assist in the early detection of non-compliance, allowing the company to mitigate penalties and punishment associated with such non-compliance. It has been the approach of corporate law scholars that boards must be monitored in order to uphold the interests of shareholders and prevent self-serving directors from putting themselves before the corporation. The Indian regulator has conformed to such an approach by keeping checks on directors and providing for their duties (see Section 152; Section 166; Section 169; Section 171 of the Act). By keeping a record of all the transactions undertaken by the directors, AI allows keeping a tab on the functioning of the board to ensure compliance with the law. Be it reporting related party transactions (see Section 188 of the Act) or whether directors are complying with their duties under Section 166 of the Act or Schedule IV of the Act. Moreover, AI helps in handling the agency problem. The agency problem refers to the conflict of intentions of a principal and agent. Where the principal expects the agent to work in furtherance of his best interests, the agent would have certain interests of his own and might prioritise them over the principal’s interests. However, AI does not have any agenda of its own. It would operate on the basis of the available information and how it is employed by the directors. AI would act to the best of its capability in the best interests of the stakeholders rather than pursuing its own agenda. Directors authority and Duty to delegate to AI After affirming that AI has the capacity to make informed decisions, one must understand whether

[By Anchal Bhatheja and Chaaru Gupta] Anchal is a student at the National Law School of India University, Bangalore and Chaaru is a student at the National Law University Jodhpur. Section 135 of the Companies Act 2013 (the “Act”) in India provides for mandatory Corporate Social Responsibility (CSR) by corporations. Prior to 31.07.2019, the provision required corporations to merely ‘comply or explain’, that is, if a company did not spend the earmarked CSR expenditure, it had to disclose the reasons in its board report. However, the 2019 Amendment to the Act turned Section 135 into a ‘comply or suffer’ provision. It went a step ahead and provided for a fine, ranging from 5,000 to 25 lakh or imprisonment for 3 years or both. The provisions pertaining to imprisonment had to be removed due to the backlash from companies. Nevertheless, mandatory CSR continues to remain intact. Interestingly, on 22nd March 2021, the Union Minister of State for Finance and Corporate Affairs in India, while responding during the question hour in the Lok Sabha, said that the policies of the central government were not being implemented using the (CSR) funds that come from the companies.. Article 12 of the Constitution of India provides that governance is the State’s responsibility which makes the validity of the question doubtful. In this article the authors aim to discuss the viability of making CSR mandatory in the Indian context, from the perspective of promoting innovation and growth of businesses as well as social justice. There are overwhelming rationales, rooted in law and economics, to shift from CSR to other ideas namely Corporate legal Responsibility (1), Corporate Social Incentives (2), Individual Social Responsibility (3), and Governmental Social Responsibility (4). This is because the burden of social justice cannot be put on the corporates and should be on the government. And if at all it is to be done by a non-governmental entity, it should be individuals who undertake it voluntarily and not out of compulsion. CLR- Corporate Legal Responsibility Milton Friedman argues that the only social responsibility of corporates is to maximize their profits while playing by the rules of the game. They should be made to comply with regulatory laws like the Environmental Protection Act, 1986, The Air (Prevention and Control of Pollution) Act, 1981, Tax laws, etc. while carrying out their businesses, rather than having to mandatorily comply with CSR requirements. Presently, the law is reflective of a paradox. For instance, on one hand, India loses10.3 Billion Dollars or 75,000 Crore Rupees due to tax evasion by corporates on an annual basis. On the other hand, the CSR regulations mandate these corporates to contribute towards Prime Minister’s Relief Fund, Rural Development Projects, skill development projects, and other such government initiatives under Schedule VII of the Act. The paradox in the data suggests the State invests its limited administrative resources in making the businesses run legally before it makes them run ethically. Furthermore, better legal enforcement will lead to more voluntary compliance and would, consequently, increase investor confidence. This would also reduce disputes and litigation in the realm of company law, which presently puts a burden on state resources as well as hampers the growth of businesses. CSI- Corporate Social Incentive Mandatory philanthropy is an oxymoron. Mandating donations defeats the very purpose of philanthropy or CSR. Furthermore, coercing the corporates to engage in CSR will hamper innovation and corporates will allocate funds just out of fear of penalty. This was in fact witnessed when a lot of corporates invested in the construction of the statue of the popular Indian Leader Sardar Vallabhbhai Patel, dubbed the Statue of Unity, to stay in the good books of the government. It is better to positively incentivize corporates to take initiative on their own accord in the sector they are working, instead of coercing them to work in areas that they do not deal in. This will lead to more efficient outcomes as they would have expertise in those specific areas. Further, from a business perspective – it will also help them in improving their image and market base. For example, incentivizing a software company to build accessible software for the differently-abled is more logical and economical than forcing them to build toilets in a nearby village. Therefore, towards this end, the state can offer benefits like preferential clearances and tax abates to the corporates that act upon corporate social incentives in charity, instead of penalizing them for not being “charitable”. ISL -Individual Social Responsibility If CSR is not mandatory, the individual shareholders’ earnings will increase as the expenditure of the company decreases. This encourages the shareholders to engage in charity on an individual level, for a cause that aligns with their idea of social responsibility. Even if elimination of the expenditure of the company which goes into CSR investments does not lead to an increase in the income of an individual, they will be naturally more inclined to engage in charitable activities as compared to a situation where they know that their company is already investing enough of its resources in CSR and there is no need for them to engage in charity on a personal basis. Further, the decisions regarding the areas in which a company will invest, to fulfill its CSR requirements are taken by the Board of Directors (BoD) on the recommendations of the CSR committee which comprises two directors and one independent director. However, it does not mean that the opinion of the BoD necessarily aligns with the opinion of the shareholders. If the law omits the requirement of this coerced social responsibility on the corporates, the shareholders on their personal level will be able to have a free dialogue with their ideas of what social justice means to them and will be able to decide the areas they would want to engage with as philanthropists. Thus, the resultant satisfaction of the transaction will be much higher for the individuals. In fact, EdelGive Hurun India Philanthropy List 2020 suggests that individual philanthropy has just been