With Parliament passing the Companies Bill last week, the country will finally have a contemporary legislation to regulate the corporate sector. The existing Companies Act dates back to 1956, since when the corporate landscape has dramatically changed. While the new Companies Act takes into account the present environment by overhauling several provisions of the existing Act, such as, for example, the one pertaining to auditor appointments, a lot will depend on the subordinate rules under the different provisions that will framed by the executive. Even so, one particular provision — on corporate social responsibility (CSR) — has attracted a lot of attention and comment. The new law stipulates that companies above a certain size have to spend two per cent of their average net profit of the last three years on CSR. This is the first time that CSR has been mandated by law in any country in the world and that the government means business is evident from the fact that the company’s board has to create a committee to oversee CSR activities and the company’s policy in this regard has to be posted on its website. The board is also answerable if it fails to spend the mandated sum on CSR in a particular year.
The intent behind the provision is obviously noble and meant to nudge companies to give back to society a little of what they take from it. Yet, there are a few dangers of mandating CSR on companies which are basically profit-seeking enterprises answerable to their shareholders. There are companies and industry houses such as the Tatas that are known to spend liberally on CSR but on activities that are carefully chosen by them or their trusts established specifically for this purpose. What happens if the activities under the CSR rules to be framed now do not fit into the existing programmes which benefit society anyway? There is a danger here that the best will turn an enemy of the good. Second, there is genuine concern that companies will now be open to arm-twisting by local politicians seeking funds for activities that further their own interests. What protection do companies have in such an event? Third, to cut down on compliance costs, companies may well opt to mark the required contribution to the Prime Minister’s National Relief Fund or similar such schemes recognised by the Act as CSR spending. Given that these contributions also offer tax-breaks, the temptation will be tremendous indeed. In such an event, the larger purpose of the provision will obviously be defeated. The rules governing the provision to be framed in the next few months will, therefore, be crucial to the success of this initiative. It is important that the government involves industry associations such as CII and FICCI in this matter.