Companies Bill : CSR made mandatory

Companies Bill : CSR made mandatory

The new Companies Bill, which was passed in Rajya Sabha on Thursday, made Corporate Social Responsibility (CSR) as mandatory for all profit making...

The new Companies Bill, which was passed in Rajya Sabha on Thursday, made Corporate Social Responsibility (CSR) as mandatory for all profit making companies. Once the bill gets President’s assent, India may become the first country to have such a provision. The new bill, which will replace over 50 years old legislation, has introduced numerous changes and concepts, besides simplifying regulations that bring clarity and transparency in doing business.

Around 193 recommendations have been included in the Bill by the PSC, and would ensure setting up of special courts for speedy trial and stronger steps for transparent corporate governance practices and curb corporate misdoings. The new concept introduced in the bill, Corporate Social Responsibility (CSR) activity, the companies have to meet the criteria and spend 2 per cent of their average profits in the last three years. However, those companies reporting Rs 5 crore or more in the last three years have to spend under this provision.

While the companies are allowed to choose the areas of work under CSR, and if the companies failed to spend on CSR projects, they are expected to give explanation, or else, they have to face action including penalty. CSR activities allowed under the Bill includes: Eradicating extreme hunger and poverty; Promotion of education; Promoting gender equality and empowering women; Reducing child mortality and improving maternal health; Combating HIV, AIDS, Malaria and other diseases; Ensuring environmental sustainability; Imparting employment enhancing vocational skills; Social business projects; and Contribution to certain funds. Further, the company is to give preference to local areas when formulating its CSR policy.

The new provisions gain credibility as the time line for the auditors has fixed at five years on a rotation basis. Besides the proposed legislation also limits to 20 companies an auditor can serve and more clarity on criminal liability of auditors, if they knowingly or recklessly omit certain information from their reports.

On the independent directors, the Bill has fixed term for five years and the maximum number of directors in a private company is increased to 15 from 12 and it can be further increased through a special resolution. And it is mandatory to have one-third of the board comprises independent directors and one of the board members must be a woman. On amalgamations and mergers, the Bill has borrowed class action suit, which help the individual shareholders to take collective action against the companies, if they feel that the company’s management is prejudicial to the interest of members or depositors.

The company has to disclose, under the new Bill, the difference in salaries of directors and that of the average employee.
And it mandates payment of two years’ salary to employees in the case of winding up. Further, the new Bill also extends statutory power to Serious Fraud Investigation Office (SFIO) to tackle the growing corporate frauds.

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