The much awaited Companies bill has been passed by both the houses of parliament. Now it requires the assent of President to become an Act and to replace the old Companies Act, 1956.
History of Companies Bills:
It is a rocky road for the Companies Bill 2012. Companies Act being one of the voluminous Act containing 658 sections and 14 schedules, aligning it with current economic scenario and global changes is a huge task. Companies Bill 2008 was introduced in 2008 but due to dissolution of the Lok Sabha, it had to be reintroduced as companies Bill 2009. This bill was referred to standing committee for its recommendations and in view of suggested changes; it was reintroduced as a fresh Companies Bill 2011. Finally it took the form of Companies Bill 2012. After incorporating the recommendation of standing committee, the Companies Bill 2012 was passed by the Lok Sabha on 18.12.2012 and by Rajya Sabha on 08.08.2013.
Main thrust of the Companies bill 2012:
The thrust of new companies Bill was to enhance Corporate Governance, accountability and responsibility of directors; independent directors by clearly defining the duties of directors, key managerial persons and ensuring independence independent directors and auditors. Further it introduced new concepts such as One Man Company and dormant company and mandatory corporate social responsibility (CSR) in the interest of stakeholders. It also provided for establishment of Serious Fraud Investigation Office, for investor protection, special courts for speedy mergers/amalgamation/winding up and for dealing with frauds in a quick and efficient manner
The focus of this article is on provisions relating Corporate Social Responsibilities (CSR) in the new Companies Bill.
What is CSR?
CSR is all about how companies run their business to produce an overall positive impact on society on a continuous basis to contribute for the economic development and betterment of quality of life of all stakeholders. Many companies have realized that if they want to survive or sustainability in the long run, they have to adopt themselves to play an active role in the welfare of community and care for environment. Companies of Tatas, Birlas, ITC, Hind Lever, even public sector companies such as ONGC have made a name for themselves in CSR activities by adopting villages, running institutions or extending help in the field of education, health care. Thus many companies have been taking CSR activities seriously.
Let us now explore the connection between CSR and companies. Many companies run their businesses for earning profits for its owners/ shareholders. Although profit earning is the main objective, Companies cannot ignore interest of other stakeholders such as employees, suppliers, customers, society and its surroundings. They have to pay attention to the welfare of employees and their families to retain good talent. Similarly by producing good quality of products at reasonable prices interests of both company and its consumers can be balanced. By contributing to the Government in the form of taxes on its sales/ profits and caring for the environment, it takes care of the Society directly or indirectly.
What are the efforts of Government in this direction?
CSR Voluntary Guidelines 2009:
Ministry of Corporate Affairs has introduced CSR voluntary guidelines in 2009 as the passing of Companies’ bill was delayed. MCA was expecting many companies to comply with these guidelines. MCA expected that feed back it receives from the compliance of these guidelines will help it in improving the same. These guidelines required companies to frame CSR policy constitute CSR Committee, set apart funds for identified CSR activities and finally execute the CSR projects .the new bill provides for the following
Provisions in New Companies bill:
Clause no.135 of the Bill deals with CSR provisions. This clause states that compliance of CSR is mandatory, if company meets any one the following criteria
-Net worth of Rs.500 crore or more, or
-Turnover of Rs.1000 crore or more or
-Net profit of Rs.5 crore or more during any financial year.
The CSR requirements to be complied with can be summarized as follows:-
1. Companies which meet the criteria (any one of 3) as mentioned above are required to constitute a CSR committee with 3 or more directors (at least one of them to be independent director).
2. The functions of the Committee are as follows:-
- It shall formulate a CSR Policy and recommend to board and indicate CSR activities to be undertaken. CSR activities may include eradication of hunger and poverty, promotion of education, gender equality, reducing child mortality and improving maternal health, environment sustainability, social business projects or any other matters as may be specified.(Readers may refer to schedule VII)
- It shall recommend to the Board amount of expenditure to be spent for identified CSR activities and
- Monitor the CSR policy and review it from time to time.
3. Responsibility of the Board:
- The Board of directors of company must approve the CSR policy recommended by CSR committee and disclose the same in the Directors report.
- Further it should ensure that the CSR policy is displayed on the company’s web site in such manner as may be prescribed.
- It should ensure that the company spends at least 2% of the average net profits made during the 3 financial years immediately preceding in pursuance of the policy(net profits to be calculated as per Clause 198)
- While spending the committed CSR funds, preference must be given to local areas around which the company operates.
- If the company fails to spend, the company must specify the reasons for not spending the amount in its Directors report.
- General instructions to the statement of profit and loss require the companies to which CSR clause is applicable should give following note.
In case of Companies covered under section 135, amount of expenditure incurred on corporate social responsibility activities.
Areas of concern:
There is a concern whether the amounts spent on CSR will be allowed as business expenditure under Income Tax Act,1961. Many Companies will come forward to spend voluntarily, if such income tax deductions/ exemptions are allowed. There is no need for mandatory provision. Moreover, it is not clear whether companies can get away with the requirement by simply disclosing the reasons for not spending mandatory amount. Some guidelines should be framed to give more clarity to deal with unusual situations such as absence of adequate profits or bad economic scenario to make the mandatory spend provision meaningful. Odisha government is contemplating to pass Odisha (Scheduled Areas) Development of Mining Bearing Area Regulation, 2013 empowering it to levy a sum equal to the mineral royalty on mining lessees for peripheral development. This action will certainly put companies which have mines into financial difficulty.
India Inc. is unhappy with the requirement of mandatory spend on CSR activities as they strongly felt that it is a matter to be left to shareholders and Board of directors. If CSR is seen as a philanthropic act, this argument sounds good and in the short term. The horizon of CSR is not so narrow. Neglecting environment may expose the company to the risk of business closure. Similarly, if welfare of workforce is ignored, the resultant labour unrest, may force closure of plant operations. The company which takes CSR as an inevitable part of its business process not only earns a goodwill and image but also attracts all stakeholders. Let us hope India Inc will for a change commit itself to the mandatory spend barring exceptional circumstances. CSR should lead Companies to the slogan “Live and let others Live”
G S Rao,
DGM(Legal),OCL India Limited
Tags: CSR, Companies Bill,2012