Column : A mixed bag of company law reforms

Nov 10 2012, 03:03 IST
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SummaryMandatory CSR is debatable, discretionary rotation of auditors is helpful.

The relative lull within the corporate circles in recent months has been countered by a strong impetus, with the government seemingly determined to get started with major reforms while simultaneously quieting the critics who had been accusing it of ‘policy paralysis’. Arguably, one of the most awaited reforms in many years is the new company law, which is set to replace the Companies Act, 1956. To add to the list of its reforms, the Union Cabinet recently announced certain amendments to the originally introduced (and later withdrawn) Companies Bill, 2011, a move which shows that reforms are being pushed ahead and that there should surely be light at the end of the tunnel for the new company law. Expectations are high that it would be introduced and passed in the winter session of Parliament.

One of the proposed landmark changes is to make corporate social responsibility or CSR, as is its popular moniker, mandatory for all corporations with (a) R500 crore of net worth or (b) R1,000 crore of turnover or (c) R5 crore of net profit. If any one of the aforesaid limits is crossed, then that corporation must be compulsorily ready to part with 2% of average profits earned in the last three years, towards one of the listed CSR activities. These activities include both social and environmental activities, ranging across eradicating extreme hunger and poverty, promoting education, empowering women, combating diseases, and ensuring environmental sustainability. This will mean that even a loss-making company will have to contribute towards CSR activities provided it meets any of the other two tests.

Interestingly, the amendment proposed by the Union Cabinet omits the words “make every endeavour” from the original clause relating to CSR as provided in the Companies Bill, 2011. This effectively ends the debate as to whether CSR initiatives are mandatory or voluntary. Now, the board of directors has to ensure (and not just to make every endeavour) that the corporation contributes a portion of its profit towards CSR activities. If the board fails to comply, it will have to give reasons for non-implementation or non-compliance. Further, it has been provided that the company, for its CSR activities, should give preference to the areas where it operates, meaning richer states with more corporate houses will get more benefits than those which lack them.

This amendment will not make much difference to iconic corporations such as Tata, Infosys, Vedanta, Bharti and Reliance since

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