New Companies Bill mandates CSR spending

Updated - December 04, 2021 11:15 pm IST

Published - December 19, 2012 08:27 pm IST - NEW DELHI

With the Lok Sabha giving its approval for the Companies Bill, 2011, Minister of State for Corporate Affairs Sachin Pilot said the aim of the legislation was to make India a safe and attractive destination for investment and to do away with ‘inspector raj’ on companies.

“The aim is to protect the interests of employees and small investors while encouraging firms to undertake social welfare voluntarily instead of imposing that through ‘inspector raj’ and make India an attractive and safe investment destination,” Mr. Pilot, who put up a spirited show during the passage of the Bill, said. The passage of the Bill is another important part of the reforms process being undertaken by the UPA II government.

Highlighting the features of the Bill, he said special courts would be set up for speedy trials, an assurance to investors that cases would not linger on. Underlining the need for such a law, Mr. Pilot said India would become the first country to mandate corporate social responsibility (CSR) through a statutory provision. “While framing rules for the legislation, the government will take in to confidence MPs and other stakeholders, like NGOs. It’s an evolving idea. We will make compliance easy,” he said.

Mr. Pilot said companies should voluntarily engage in CSR and not fear that the legislation amounted to return of ‘inspector raj’. Under the new legislation, companies will be encouraged to create employees’ welfare fund. “Severity of law is not deterrent; it is surety which is deterrent. The companies may engage in promoting education, reducing child mortality and any other matter they feel can contribute for social welfare,” he added.

Disapproving of vulgar display of wealth, Mr. Pilot said the law provided that remuneration of a director of a company should not be more than 5 per cent of the net profit. Under the new law, the CSR spending would be the responsibility of companies like their tax liabilities. The Bill, with 470 clauses, seeks to make CSR spending compulsory for companies that meet certain criteria. Firms having Rs.5 crore or more profits in the last three years have to spend on CSR activities. One of the major proposals is that companies have to mandatorily spend 2 per cent of their average net profit for CSR activities. The changes, once in place, would amend the Companies Law that has been in force since 1956.

If companies are unable to meet the CSR norms, they will have to give explanations. In case, the companies are not able to do the same, they have to disclose reasons in their books. Otherwise, they would face action, including penalty. The new legislation also limits the number of companies an auditor can serve to 20 besides bringing more clarity on criminal liability of auditors. There are proposals for annual ratification of appointment of auditors for five years and introduction of a new Clause related to offence of falsely inducing banks for obtaining credit. The legislation mandates payment of two years’ salary to employees in companies which wind up. This liability would be overriding.

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