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The New Companies Bill on CSR

The New Companies Bill was finally passed in Rajya Sabha on 8th August 2013, making it mandatory for profit making companies to spend on activities related to Corporate Social Responsibility (CSR). With the new legislation, India would possibly become the first country to have Corporate Social Responsibility (CSR) spending through a statutory provision.

The new Bill mandates that every company having a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more during any financial year must constitute a CSR committee consisting of three or more directors, with at least one independent director.  This committee will formulate a CSR policy for the company and recommend the expenditure to be incurred on CSR activities. At least 2% of the average net profit of the company made during three previous financial years must be spent on CSR activities.

Presenting the bill in Parliament, Corporate Affairs Minister Sachin Pilot termed the passage of the Bill as a “new era for corporate law and regulation in Indian economy” and said “this is a ‘historic moment for the country. After 100 years, this is the second time that a new company law has been legislated. ”

The Lok Sabha already cleared the bill on December 18 last year. The Bill, aimed at enhancing corporate governance, also contains provisions to strengthen regulations for corporates as well as auditing firms and promises  to ensure  an equitable and sustainable growth of the country. The new Bill has introduced numerous changes and concepts which should simplify regulations and bring greater clarity and transparency in managing businesses.  The new Companies Bill has had a tumultuous journey lasting the entire term of the UPA government. It awaits Presidential assent to be promulgated as law.

Now that the Bill is in place, it will be interesting to see how effective and useful or antonymous to these adjectives it would be, in times to come.  Until then let’s take a look at some of the highlights of this Bill.

  • The new law would require companies that meet certain set of criteria, to spend at least two percent of their average profits in the last three years towards Corporate Social Responsibility (CSR) activities. But only companies reporting Rs 5 crore or more profits in the last three years have to make the CSR spend.
  • Around 193 recommendations have been included in the Companies Bill by the Parliamentary Standing Committee and with passing of this Bill, the Companies Act of 1956 will be replaced.ot
  • The amended legislation also limits the number of companies an auditor can serve to 20 besides bringing more clarity on criminal liability of auditors.
  • The proposed legislation would ensure setting up of special courts for speedy trial and stronger steps for transparent corporate governance practices and curb corporate misdoings.
  • The bill provides for class action suit, which is key weapon for individual shareholders to take collective action against errant companies. The move is being seen as a positive  as it empowers small shareholders to seek answers in case they feel that a company’s management or its conduct of affairs is prejudicial to its interests or its members or depositors.
  • The Companies Bill also states that corporates must disclose the difference in salaries of the directors and that of the average employee. This will protect the interest of shareholders as well as employees.
  • The Bill allows companies the freedom to choose areas of work for CSR and the mandate of a rotation in auditors every 5 years gives the process added credibility.
  • In case, entities are unable to comply with the CSR rules, they would be needed to give explanations. Otherwise, they would face action, including penalty.
  • The new bill also says the rotation of audtiors will take place every five years, , while an audit firm cannot have more than two terms of five consecutive years.It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.
  • The term for independent directors have been fixed for five years too. The maximum number of directors in a private company has been increased from 12 to 15, which can be increased further by special resolution.
  • The new law also makes its mandatory for companies that one-third of their board comprises independent directors to ensure transparency. Also, at least one of the board members should be a woman.
  • The new bill will speed amalgamations and mergers
  • The  new law mandates payment of two years’ salary to employees in companies which wind up operations.
  • The law also gives more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.

 

But, the provisions of this Bill have had their own concerns as echoed by some of the entrepreneurs.  Such as, the definition and role of independent directors is raising concerns within the corporate sector.  A sense of wariness and unease has crept in with the new code of accountability laid out in the Bill, as it is at present silent on any tax benefit to the corporates.  Then, so far CSR was the prerogative of company management.  But now this is being seen as an unnecessary burden by some industrialists on their shoulders.  And then a question by the common man, “what are the consequences of not complying with the CSR provisions of the Bill?”, gets an unsatisfactory answer that “the Bill only provides  that sufficient reasons need to be provided for not making the requisite CSR spend.  While there are no specific penalties are contemplated in the Bill with respect to CSR, Chapter XXIX, Sections 450 and 451 of the Bill  provide for general penalties for contravention and repeat offences.”