Companies Bill: CSR spending sounds good, but has problems

The tabling of the new Companies Bill will bring in the much needed focus on corporate governance and corporate social responsibility (CSR) initiatives as it would make it mandatory for companies to spend 2 percent of their profits on social welfare.

Under the Companies Bill, corporates that make an average profit of at least Rs 5 crore or have a worth exceeding Rs 500 crore, or their turnover exceeds Rs 1,000 crore in the last three years will have to allocate funds. Under this proposal, both private and public companies will be treated alike.

[caption id=“attachment_562806” align=“alignleft” width=“380”] Moving the bill for the consideration of the Lok Sabha, Corporate Affairs Minister Sachin Pilot, said private companies while maximising their growth, have responsibility towards society[/caption]

Moving the bill for the consideration of the Lok Sabha, Corporate Affairs Minister Sachin Pilot, said private companies while maximising their growth, have responsibility towards society besides equitable and sustainable growth of the country, adding that CSR would be mandatory for companies like their tax liabilities.

Pilot also said that companies should voluntarily undertake CSR activities and not fear that the legislation amounts to return of “inspector raj”.

Corporates are not likely to take this well since 2 percent of a company’s average profits is a significant chunk especially when there is no clarity on whether such spending will be eligible for tax deduction from the income of the company.

“It should be ensured that the CSR initiatives in the Bill do not get bogged down in complicity between companies or lead to too much government intervention,” Zia Mody, founder, AZB and Partners told CNBC-TV18 in an interview.

If companies are unable to meet 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 legislation also seeks to improve corporate governance norms, make boardroom decisions transparent and hold auditors and directors more accountable, while it ushers in enhanced shareholder participation and provides for a single forum to approve mergers and acquisitions.

The Bill will also provide the serious fraud investigation office (SFIO) with powers to conduct searches and seizures on the premise of a fraudulent company.There will be better co-ordination between investigative agencies at the State and Centre, I-T Department and the Information Technology Ministry with SFIO.

The amended legislation says an auditor cannot auditor more than 20 companies and also clearly spells out the criminal liability of auditors. Auditors can be appointed for five years but the appointment has to be ratified every year.

Disapproving of “vulgar display of wealth”, Pilot said the law provides that remuneration of a director of a company should not be more than 5% of the net profit.

With inputs from PTI