What is Issue of CSR spending in Companies Bill?

  • The Companies Bill 2009 has been pending for last few sessions of parliament.
  • It will replace the Companies Act of 1956.

The new bill, which was tabled in the backdrop of Satyam fraud, promises greater shareholder democracy and stricter corporate governance norms. This Bill had embodied a mandate on CSR (Corporate Social Responsibility) spending for the companies. According to the draft Bill, the companies were expected to earmark two per cent of their net profits towards CSR activities every year.

The law was meant to be applicable for all companies with

  1. a net worth of ` 500 crore or more, or
  2. a turnover of ` 1,000 crore or more, or
  3. a net profit of Rs 5 crore or more.

It was expected that the government may allow more flexibilities in this threshold, as the companies expressed concerns about this mandatory provision.

Recently, the centre has decided to take a middle path in enforcing corporate social responsibility (CSR) by giving companies the option to

  • either spend 2% of their net profits on philanthropic activities, or
  • mandatorily explain why they could not.

Thus the Government has decided to dilute the proposed mandatory CSR spending provision due of the corporate sector’s serious objections to it. The new provisions say that if a company fails to spend such amount, the board shall specify reasons for not spending the amount in its report. Bill devised a detailed method and identified areas to enable companies fulfil their CSR obligations.

The new provisions also mandate for creation of CSR Committee
(CSRC) in the company. The company, liable to spend 2% of its net profits on philanthropy, “shall constitute a corporate social responsibility committee (CSRC) of the board consisting of three or more directors, out of which at least one shall be an independent director”. The CSRC would formulate and recommend to the board a CSR policy, indicating the activities which are to be undertaken by the company, the amount of expenditure to be incurred on them and monitor the entire policy implementation, the new bill provided. Please note that at present , the CSR is voluntary.

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