For many of us, it is no news that the Companies Bill 2012 is yet to be mentioned in the parliament. The killing of Indian Army soldiers on the border diverted attention of the members of both houses and at this point even Food Security Bill and the Telengana issue seem to have lost immediate importance.
Meanwhile, until the government shifts focus to the bill, here is an attempt at decoding some significant facts of the bill for easy understanding by businesses.
A new Companies Act has been in the pipeline for several years in India. The Companies Bill 2012 (the Bill) was finally passed on 18 December 2012 by the Lok Sabha, and is required to be passed by the Rajya Sabha and receive the assent of the President before it can come into effect.
The Bill revolutionises several aspects of corporate governance including policies related to audit, transparency and requirement for independence of directors. One such pertinent change is the introduction of a mandatory corporate social responsibility (CSR) investment of two per cent provided in Section 135.
While the concept of CSR is centuries-old in India, there has been little legislation to enforce this responsibility. The only prominent CSR legislation India has seen prior to this Bill is the Corporate Social Responsibility Voluntary Guidelines 2009.
In 2009, when the compulsion of CSR investment was proposed, the hesitation of the legislature was evident in the way the ‘voluntary’ section was framed. Now it imposes a compulsory measure, yet the liability of the company is only to make ‘best endeavour’ to comply and then report.
How the Bill defines CSR
CSR has many interpretations from a global perspective. However, as per the Bill it is understood to impose a liability on the Company to contribute to the society (whether towards environmental causes, educational promotion, or social causes; Part III of this article will underline all areas with examples of programmes to be undertaken) along with the reinforced duty to conduct the business in an ethical manner.
As per Section 135 (Section) of the Companies Bill, the following companies will have to abide by this requirement:
- Companies having a net worth of rupees five hundred crore or more
- Companies having a turnover of rupees one thousand crore or more
- Companies having a net profit of rupees five crore or more
Implementation: Committee and policy
- To ensure that the company is setting off this requirement as per the rules framed in this Section, the companies will have to constitute a committee consisting of at least three directors, one of whom shall be an independent director.
- The committee shall also initiate a CSR Policy (Policy) that shall stipulate how, where and when they want to invest their funds with respect to this requirement. If the company does not abide by this stipulation, the board directors (Governing Board) must provide an explanation for the same.
Given that this is the first time that the Indian corporate sector is seeing such a requirement, Schedule VII (Schedule) provides some direction on what will constitute as valid expenditure under this Section.
As per this Schedule of the Bill, social causes such as promotion of education and welfare funds such as the Prime Minister’s National Relief Fund may be included in the Policy of the Company. This Schedule aims only to give examples of options companies can pursue under this Section. (read What is Schedule VII? in part III of this series with examples of doable and impactful CSR programmes)
Will companies benefit too?
Although a few Indian companies seem wary of this new regulation, neither wanting to be forced to spend on social initiatives nor very equipped to deal with the implementation of such a policy, there are numerous positives to this coin:
- Development of ‘reputation capital’ for capturing and sustaining markets. Therefore, corporate social responsibility has developed as a new business strategy to reduce investment risks and maximise profits by taking all the key stakeholders into confidence
- Long-term gains as opposed to short term profits, which are the outcome of good CSR policies
- Environmental stability and sustainability – being an important resource for companies – is ensured
- Social stability
- With globalisation, the negative aspects of businesses have been intensified, and exploitation is widespread – CSR policies may work to counter this effect
- Lastly, a successful company cannot exist in a society that fails, and therefore a company being a member of the society is required to contribute
CauseBecause has developed a CSR Kit that brings together the process of ideating, implementing and reporting CSR on automation. The Kit is at implementation stage at various corporate groups as well as at a few small and medium enterprises (SMEs) in manufacturing, entertainment and services sectors.
Interestingly, the Kit does not cost companies anything – rather, it channelizes funds from public relations (PR) and branding departments towards CSR without compromising on the value of either.
- Decoding the CSR clause in Companies Bill 2012 – Part 2
- Decoding the CSR clause in Companies Bill 2012 – Part 3