Legal Framework for Sustainable Business Practices in India: A Corporate Law Perspective

This article has been written by Victoriya Samuvel Thanaraj, a 5th semester law student at Tamil nadu Dr.Ambethkar Law University, Chennai, Tamil Nadu. College: Government Law College, Vellore.

Abstract:

This comprehensive study develops the Legal Framework, a pioneering approach to integrating sustainable business practices into Indian commercial law. Focusing on the non supervisory  geography, this  exploration examines the Companies Act, 2013, specifically sections related to Corporate Social Responsibility (CSR), and the  places of  crucial government bodies. These include the Ministry of Corporate Affairs (MCA) and the National Financial Reporting Authority (NFRA),  pressing their impact on sustainability reporting.   The Legal Framework addresses environmental, social, and governance (ESG) factors, climate- related  fiscal  exposures, and sustainable development. It aims to enhance  translucency, responsibility, and stakeholder value, easing Indian businesses’ transition towards sustainable practices.

Keywords: Corporate law, Sustainable Business Practices, Economics, Social, Governance, Corporate Social Responsibility, Reasonable Business Practices, Green business, Environmental law, Corporate Governance, Compliance law, Indian companies act.

 Crucial Features:  

• In- depth analysis of Companies Act, 2013, sections 135 and 134 (3)
• Examination of MCA and NFRA regulations
• Integration of ESG factors and sustainability reporting
• Alignment with United Nations’ Sustainable Development pretensions( SDGs)
• Stakeholder engagement and materiality assessment

Introduction:

 India is one of the most economically and socially developing countries in the world. Sustainable business practice is the integration of environmental and social considerations into a company’s actions, products and services. India has emerged as the fifth largest economic power in the world due to the steady growth of many companies operating in India. One of the main factors that determine the economic growth (GDP) of a country is sustainable business practice. Sustainable business practice encompasses three pillars: social sustainability, economic sustainability and environmental sustainability. A lot of progress has been made in India to regulate such an important factor. And there is no doubt that the laws and regulations put in place for this will make India a developed country as soon as possible. Thus, laws and regulations on sustainable business practices that will help India as a superpower can be found clearly and comprehensively in this section.

Corporate Law Legislations:

Organisation and formation of the company, operations, liquidation of the company, etc Corporate law is to regulate all its movements until it is dissolved. And also, it dealt with the rights and liabilities of companies.  One of the main factors is the existence of sustainable business practices in India. A number of laws are included in this corporate law to ensure that sustainable business practices take place. One of them,

  Companies Act 1956:

The Indian Companies Act was first formulated in 1882 during the dark period of British rule in India, adapting the Companies Act of 1862 in England. After 50 years till 1956, it regulated Indian companies. In order to increase its legal strength, the Government of India amended it for the first time in 2013. Later several amendments (2015, 2017, 2018, 2019, 2020, 2021, 2022) were made to regulate modern companies. The act itself ensures that consistent practice takes place in existing institutions in India. Sections of the Act that focus on sustainable business practice include:

Section 135: CSR

This section applies to companies having a net worth of more than 500 crores or having a revenue of more than one thousand crore rupees or a net profit of more than five crore rupees.

All companies eligible under this section are required to spend at least two percent of their average net profit on corporate social responsibility activities.

Composition of CSR Committee:

• There should be at least three directors.
• At least one independent director should be there.

 Section 136: CSR Committee

• Formation of corporate social responsibility policies.
• Implementation of CSR policies.
• Recommending Corporate Social Responsibility activities.
• Monitoring the expenditure incurred on Corporate Social Responsibility activities.
• Attaching the Report of the Corporate Social Responsibility Committee to the Director’s Report.

Section 197 (14):

          The director’s report should disclose the following:

• Corporate Social Responsibility policies
• Implemented corporate social responsibility activities.
• Amount spent on Corporate Social Responsibility activities.

Section 22:

          The director’s report should also include the following environmental information:

• Energy conversion
• Technical absorption
• Earning foreign exchange or details of the amount spent in other countries.

Section 134 (3) (m):

• Impact on society and
• Measures taken to protect the environment.
• Social and economic interests etc. should also be disclosed in the director’s report.

Section 452:

     50,000 to 25 lakh fine and imprisonment for 3 years if the companies involved under section 135 do not follow the corporate social responsibility guidelines.

Section 454:

          Provides for a penalty of Rs 50,000 to Rs 25 lakh on companies that fail to submit a sustainability report.

Schedule VII:

          The Companies Act, 2013 specifies the actions taken by companies to fulfil their Corporate Social Responsibility obligations under Schedule 7.

Companies Act allows companies to fulfil their corporate social responsibilities by fulfilling the above activities.This schedule was created and implemented on April 1, 2014. Amendments were made in 2018 to clarify CSR expenditure and new activities. Other amendments were made in 2020 to strengthen the CSR reporting system and disclosure.

Role of Government Bodies:

The extent to which the legal and regulatory systems have contributed to sustainable business practice in India and to what extent government bodies  have contributed can be seen in detail in the areas such government bodies  have provided guidance for sustainable business practice in India.

Ministry of Corporate Affairs:

It is an important department that regulates business practice, sustainability, business laws etc. in India. Also work as a department to monitor the functioning of the Companies Act which was created to regulate  companies. Some of the regulations  and guidelines established by the MCA are as follows:

National Voluntary Guidelines:

Important social, economic and environmental responsibilities undertaken by the business communication sector fall under this category. These guidelines also encourage

• Responsible businesses practices
• Environmental thinking
• Social responsibility
• economic viability

Responsible Business Conduct:

Through these guidelines, the Ministry of Corporate Affairs  has laid out its expectations on Indian companies in the following respects:

• Adopt responsible practices
• Ensuring supply chain sustainability
• Respect for human rights.

Corporate Social Responsibility:

The Corporate Social Responsibility Voluntary Guidelines 2019 have been released with an aim to help businesses adopt responsible drinking practices. Any guidelines

• Society welfare activities
• Environmental sustainability
• The reality of stakeholders etc. is emphasised.

Action Plan on Business and Human Rights:

The project focused on issues such as Human rights protection, Environmental sustainability and  Access to remedies. By implementing such guidelines and regulations the Business Communication Department is developing into a sustainable business practice responsible governance and environmental stewardship in India.

SEBI Regulations 2015:

SEBI is the main regulatory body of Indian stock markets and was established on April 12, 1992 by the SEBI Act 1992 with the main objective of protecting the interests of investors, promoting fair practices in the stock markets, and regulating the sale of shares. SEBI has contributed immensely to the advancement of sustainable business practice in India. SEBI has encouraged companies to undertake sustainable practices through various measures such as recognition of environmental social and governance factors. Such a role by SEBI will help India achieve its integrated national sustainable development goals as soon as possible. Also, SEBI has taken several steps to ensure sustainable business practice in India and through them has created changes. Here are those steps.

Business Responsibility Report 2011

• Listed companies are mandated to submit environmental, social and governance performance reports.
• Introduced 9 new principles for responsible business practices.
• Transparency and accountability are enhanced.

Green Infrastructure Guidelines 2012

• Green infrastructure projects were facilitated by announcing tax incentives.
• Investments in renewable energy, energy efficiency and sustainable infrastructure were encouraged.

Listing Regulations 2015

• Introduced ESG disclosure requirements for listed companies.
• Report on ESG action issues opportunities mandated.

Business Responsibility Reporting Enhancement 2018

• Expanded reporting requirements for companies in the top 500 on the list.
• New metrics have been introduced to assess ESG performance.

ESG Disclosure Guidelines 2019

• Guidelines were issued to the listed companies regarding the ESC report.
• Standardised ESG systems of worship were developed.

Business Responsibility and Sustainability Reporting 2020

• A sustainability report has been made mandatory in place of a corporate responsibility report for the top 1000 companies on the list.
• New metrics are introduced to assess sustainability performance.

ESG Mutual Fund Guidelines 2020

• ESG based mutual funds were introduced.
• Responsible investments are highly encouraged.

Sustainable Finance Roadmap 2021

• Green Bonds, Social Bonds, Sustainability related bonds outlined in the scheme.
• Improved sustainable finance.

BRSR Expansion 2022

• Sustainability reporting requirements have been expanded for 2500 listed companies.
• Improve transparency and accountability.

Climate Risk Disclosure Guidelines 2022

• Climate – related financial disclosures were introduced.
• Encouraged companies to disclose and assess climate-related risks.

Key Regulations:

The following three regulations are important regulations developed by SEBI that have contributed to sustainable business practice in India.

• Listing Agreement Clause 49 (2014): CSR reporting made mandatory for listed companies.
• SEBI Circular (April 2014): CSR reporting requirements specified.
• SEBI (Listed Obligations and Disclosure Requirements) Regulations 2015: including CSR Reporting.

Additionally SEBI’s National Financial Literacy Strategy 2021 also covers education related to ESG.

National Financial Reporting Authority

          The National Financial Reporting System was created on 21 October 2018 by Section 132 (1). of the Companies Act. Its main objective is to

• Globalise and monitor financial reporting and
• Enhance transparency and accountability.
• Enhancing investor interest
• Undertakes work related to protection of public welfare etc.

Monitoring accounting standards. Conducting inquiry into irregular accounting and audits. Development and improvement of sustainability reporting mechanisms are considered key tasks in this system. The organisation is run by a chairman with full-time and part-time members and a secretary. The Institute contributes to sustainable business training in India by publishing the following guidelines.

Guidelines on Sustainability Reporting 2020

Its main objective is to provide guidance on reporting on corporate sustainability activities. It’s key concepts are,

Environment: Climate change, resource use pollution

Social: Labor practises, human rights, and community engagement

Governance: Composition of the Commission, audit activities, executive compensation.

Based on these the requirements for the following report were determined.

They are,

• Material evaluation
• Actual status of stakeholders
• Measurements of call quality measures.
• Goals
• Affirmation and Recognition.

A sustainability report issued by a company should meet the above requirements.

Environmental Society and Governance Guidelines 2020

Purpose: Assisting companies in financial reporting by integrating ESG factors.

Important ESG factors

Environment:

• Climate change
• Resource sharing
• Pollution
• Biodiversity

Social:

• Labour trainings
• Human rights
• Social reality
• Material liabilities

Governance:

• Structure of the Commission
• Audit exercises
• Risk management

 A company’s financial reporting should include the above ESG factors.

Conclusion:

The Legal Framework offers a methodical  approach to sustainable business practices, harmonising  profitable growth with social and environmental responsibility. Crucial findings indicate:

• Effective CSR  perpetration enhances stakeholder trust and character
• ESG considerations  alleviate environmental and social  pitfalls
• NFRA regulations ameliorate governance and responsibility
• Sustainability reporting fosters  translucency and informed decision- making   By  espousing the Legal Framework,

Indian businesses can

• Strengthen stakeholder connections
• Ameliorate environmental and social performance
• Enhance governance and  threat  operation
• Contribute to sustainable development

          This  exploration contributes to the being literature on sustainable business practices,  furnishing  precious  perceptivity for policymakers, commercial leaders, and stakeholders. The Legal Framework serves as a vital resource for Indian businesses seeking to integrate sustainability into their operations.

Recommendations:  

• Regular updates to CSR regulations
• Enhanced NFRA oversight
• Obligatory sustainability reporting
• Capacity – structure programs for businesses
• Assiduity-specific sustainability guidelines unborn exploration

Directions:

• Assessing Snehal Framework perpetration probing assiduity – specific sustainability challenges
• Exploring transnational sustainability reporting  norms
• Assaying stakeholder comprehensions of sustainability reporting

By embracing sustainable business practices, India can achieve long- term  profitable growth, social development, and environmental stewardship. The Legal Framework paves the way for Indian businesses to prioritise sustainability,  icing a better future for all stakeholders.

 Limitations:

• Focus on Indian nonsupervisory frame
• Limited compass for  transnational comparisons
• Dependence on secondary data sources

Counter Accusations:

• Informing policy  opinions on CSR and sustainability
• Guiding businesses in sustainability reporting
• Enhancing stakeholder engagement and responsibility.

 The Legal Framework demonstrates the  eventuality for sustainable business practices to drive positive change in India. Its relinquishment can contribute significantly to the country’s sustainable development  pretensions.

Bibliography:

https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

https://www.mca.gov.in/content/mca/global/en/home.html

https://www.sebi.gov.in/

https://nfra.gov.in/