Companies Bill 2011 Proposes to Make CSR Mandatory

6 February 2012

Update provided by Noshir Dadrawala of the Centre for Advancement of Philanthropy.*

On 15 December 2011 the Ministry of Corporate Affairs introduced the Companies Bill 2011in the Lok Sabha (House of Commons in Parliament). The new Bill seeks to replace the 55 year old Indian Companies Act.

Apart from reducing the number of sections as is the case in the current Act, some of the other changes are:

  • A more extensive range of activities will now be possible online;
  • The inclusion of the expression ‘Corporation Sole' within the definition of Company;
  • The changing role of Company Secretaries;
  • The Mandatory Rotation of Auditors every five years;
  • The changes in provisions relating to ‘Independent directors';
  • Bringing in the concept of a ‘One Man Company' to India;
  • Corporate social responsibility has been made mandatory;
  • Substantial judicial powers will be given to the National Company Law Tribunal;
  • Increase in the powers of the executive to legislate through notifications;
  • Changes relating to managerial remuneration;
  • The change in the legal position with regard to Oppression and Mismanagement

According to Section 135, of this Bill: “Every company with a net worth of Rs. 500 crore or more, or turnover of Rs. 1,000 crore or more, or net profit of Rs. 5 crore or more in a financial year will have to form a corporate social responsibility (CSR) committee, consisting of three or more directors, of which at least one would be an independent director. This committee will have to ensure that the company spends, in every financial year, at least two per cent of the average net profits made during the three immediately preceding years, towards CSR activities. The bill also makes it compulsory for the company to specify reasons if it fails to spend the amount.

The Companies Bill proposes to institutionalize CSR but, Mr. J. J. Irani, former director of Tata Sons who led a panel to draft the Bill in 2005 opposes such mandatory provisions. “People will find ways to skirt anything that is mandated,” he told Financial Express in an exclusive interview, referring to the provision mandating companies to aside 2% of profits for CSR. Making companies spend on the basis of the profits is not a good idea, feels Irani. “My objection is that the percentage is wrong, because profits fluctuate. So, should a company spend more on CSR when it is making good profits, and spend nothing when down in the dumps?”

Addressing a question on how intensely the new Section 135, which is part of Companies Bill 201, will affect management of companies, Union Corporate Affairs Minister, Veerappa Moily has said, “We are not interested in micro-management of a company. Section 135 is just an oversight clause.” He said that his ministry would remain the sole regulator of companies. Section 135 of the bill has led to some concern among the corporate houses, as it intends to make CSR obligatory.

However, according to Business Standard (9-1-2012) “The government is going mysteriously slow on pressing for the passage of the Companies Bill, 2011. Business and political observers are flummoxed over what transpired in the past day or two that has led to the stalling of what looked like a done deal just a couple of days ago.”

The sudden turn of events has mystified even members of the Parliament's Standing Committee on Finance, which deliberated on the Bill. “We had made 172 recommendations, of which 165 have been accepted by the government. We don’t know why there is a delay. The only reason could be that some corporate houses want the bill delayed,” according to a member of the Committee on Finance. But, such is the sensitivity around the issue that no one is willing to come on the record.

Having introduced the Bill in Parliament in December 2011, the government cannot pull it out unless it gets leave of the House to withdraw it. The Bill has neither been withdrawn nor pressed for passage.

* The Author is Chief Executive of the Centre for Advancement of Philanthropy (CAP). This is a matter that has affected scores of charities all across India and requires advocacy at the highest level with the Ministry of Finance. CAP is mobilizing the opinion and support of both tax experts and those affected.