Is public money in safe hands?

A few days ago, the trustees of a well-known public charitable trust in Pune were accused of running a private company that was siphoning off earnings from the trust. A lot of public trusts have accumulated enormous wealth, even as more flow in. Are the trustees taking adequate care of these public funds?

In his speech at a law forum, Justice V. Ramasubramanian of the Madras High Court said, “Today, public trusts are flooded with money. But, unfortunately, they do not have men of character to administer them. It has led to complete deterioration of the concept of trusts, and law also does not help genuinely interested people to take control and regulate the affairs of such institutions.”

Corporate entities have an elaborate legal framework to ensure directors and senior management members perform their duties lawfully and in the interest of stakeholders. Do public trusts have anything similar?

The governance mechanism of the Bombay Public Trust Act, 1950 (BPT Act) and the Bombay Public Trust Rules, 1951, is

post facto or reactive. For example, Section 39 of BPT Act authorises the Deputy or Assistant Charity Commissioner to report to the Charity Commissioner instances of gross negligence, breach of trust, misappropriation or misconduct by a trustee if they are reported through auditor reports/ complaints. Given the number of public trusts and their tremendous collections, a pro-active mechanism is needed to ensure the money is used for the stated purpose and lawfully.

The income tax provisions for public trusts to encourage charity are in line with, or even better than those of several developed countries. They include application of income for charitable or religious purpose;

application of income or property to benefit persons referred to in section 13(3) of the Income Tax Act, 1961;

investments held during the previous year(s) in concerns in which the persons referred to in section 13(3) have a substantial interest.

According to BPT Act, auditors have to report on governance aspects, including

specify irregular, illegal or improper expenditure, or failure/ omission to recover money or other property belonging to the public trust, or loss/ waste of money or other property;

state whether such expenditure, failure, omission, loss, or waste resulted from breach of trust, or misapplication or other misconduct by trustees or any other person.

When it comes to trustees, it is interesting to note that there are no specific requirements on the composition of board, trustees’ independence, need for audit committees to regularly review financial statements, review of internal controls, risk management, frauds, and code of ethics.

As large trusts continue to accumulate wealth, a sound governance framework is needed, alongside a monitoring mechanism, to ensure public money is put to the right use.

Hemant M. Joshi is Partner, and Nikhil Kenjale is Manager, Deloitte Haskins & Sells