CSR mandatory with passage of New Companies Bill: All you need to know

The New Companies Bill was finally passed in Rajya Sabha on Thursday, making it mandatory for profit making companies to spend on activities related to Corporate Social Responsibility (CSR).

With the new legislation, India would possibly become the first country to have Corporate Social Responsibility (CSR) spending through a statutory provision.

The bill will now go for presidential assent. The lower house of parliament Lok Sabha cleared the bill Dec 18 last year.

The Bill, aimed at enhancing corporate governance, also contains provisions to strengthen regulations for corporates as well as auditing firms and promises  to ensure  an equitable and sustainable growth of the country.

The new Bill has introduced numerous changes and concepts which should simplify regulations and bring greater clarity and transparency in managing businesses..

Presenting the bill in Parliament, Corporate Affairs Minister Sachin Pilot termed the passage of the Bill as a new era for corporate law and regulation in Indian economy and said this is a ‘historic moment for the country.”

“After 100 years, this is the second time that a new companies law has been legislated,” he said.

Industry body FICCI welcomed the passage of the Companies Bill and said this legislation is indeed a milestone in the history of company law and will revolutionize the administration and management of businesses in the times to come.

“Industry hopes that the Working Rules which are expected to be put out in the public domain before notification would provide greater clarity on the operative provisions in the Bill while taking into account legitimate concerns of India Inc,” said Naina Lal Kidwai, President, FICCI.

“FICCI hopes that there are no inconsistencies in various laws since consistency and certainty in laws helps in effective functioning of business, added Kidwai.

Following are the key highlights of the Bill:

Around 193 recommendations have been included in the Companies Bill by the Parliamentary Standing Committee and with passing of this Bill, the Companies Act of 1956 will be replaced.

Corporate Affairs Minister Sachin Pilot

The proposed legislation would ensure setting up of special courts for speedy trial and stronger steps for transparent corporate governance practices and curb corporate misdoings.

The new law would require companies that meet certain set of criteria, to spend at least two percent of their average profits in the last three years towards Corporate Social Responsibility (CSR) activities. But only companies reporting Rs 5 crore or more profits in the last three years have to make the CSR spend.

The Bill allows companies the freedom to choose areas of work for CSR and the mandate of a rotation in auditors every 5 years gives the process added credibility.

In case, entities are unable to comply with the CSR rules, they would be needed to give explanations. Otherwise, they would face action, including penalty.

The amended legislation also limits the number of companies an auditor can serve to 20 besides bringing more clarity on criminal liability of auditors.

The new bill also says the rotation of audtiors will take place every five years, , while an audit firm cannot have more than two terms of five consecutive years.It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.

The term for independent directors have been fixed for five years too. The maximum number of directors in a private company has been increased from 12 to 15, which can be increased further by special resolution.

The new law also makes its mandatory for companies that one-third of their board comprises independent directors to ensure transparency. Also, at least one of the board members should be a woman.

The new bill will speed amalgamations and mergers

The bill provides for class action suit, which is key weapon for individual shareholders to take collective action against errant companies. The move is being seen as a positive  as it empowers small shareholders to seek answers in case they feel that a company’s management or its conduct of affairs is prejudicial to its interests or its members or depositors.

The Companies Bill also states that corporates must disclose the difference in salaries of the directors and that of the average employee. This will protect the interest of shareholders as well as employees.

The  new law mandates payment of two years’ salary to employees in companies which wind up operations.

The law also gives more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.