Companies Bill passed with mandate on CSR spending

Feb 22 2013, 11:36 IST
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Sachin Pilot (Reuters) Sachin Pilot (Reuters)
SummaryLok Sabha on Tuesday voted to replace India’s 56-year-old omnibus Companies Act.

Lok Sabha on Tuesday voted to replace India’s 56-year-old omnibus Companies Act with the Companies Bill, 2011, that brings the management of the corporate sector in line with global norms. It introduces concepts like responsible self-regulation with adequate disclosure and accountability, ushers in enhanced shareholders’ participation and provides for a single forum to approve mergers and acquisitions.

The Bill, which will now travel to the Rajya Sabha, has said companies must “ensure” they spend at least 2 per cent of their net profit towards corporate social responsibility (CSR) activities, a move that has drawn both criticism and appreciation from the stakeholders but one that promises to change the way CSR has been perceived so far. Corporate affairs minister Sachin Pilot said CSR would be mandatory for companies like their tax liabilities. “Severity of law is not deterrent, it is surety which is deterrent,” he said, adding the companies may engage in promoting education, reducing child mortality and any other matter they feel can contribute for social welfare.

The Bill has gone through several versions since 2008 when it was first introduced. It includes learnings from the Satyam fiasco in its investor protection clauses. The government has also introduced the concept of class action suit wherein depositors or a unit of shareholders can collectively sue the company committing fraud. 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. While steering the Bill, Pilot said when Companies Act, 1956, was promulgated there were only 30,000 companies in the country while in 2012, there are 8,50,000 firms in India.

Apart from introducing concepts like one person company and making independent directors and company auditors more accountable, the Bill also seeks to keep a tab on remunerations for the board of directors and other executives of the companies to protect the interest of shareholders and workmen. 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 per cent of the net profit.

The new legislation, which is a much shorter than the earlier one has also harmonised the company law framework with sectoral regulations. It has 480 sections compared to over 600 sections in the 1956 Act.

In line with global norms

The Bill, which will now travel to the Rajya Sabha, says companies must “ensure” they

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