After getting delayed for several years, the Companies Bill has been finally passed by the Parliament of India. The Bill 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 Companies Bill that has been passed by the Lok Sabha has many important features including those relating to independent directors and auditors. However, the most noteworthy and new feature of the Bill makes every corporate that meets certain criteria, liable to spend 2% of the average net profit of the last 3 years on Corporate Social Responsibility (CSR)activities or explain why it has not been done so. Such a provision probably does not exist in Companies Act of any major economy of the world.
However India Inc has expressed its concerns regarding mandatory CSR. Every company having a net worth of Rs 5 bn or turnover of Rs 10 bn has to constitute a "CSR Committee of the Board" consisting of at least 3 directors and out of these 3 directors, one has to be an independent director.
This is a foolproof provision ensuring that the committee is not just a quasi committee addressing the whims of the board but is in fact taking up an initiative. This provision has come in for some serious criticism. First, it has been said that this provision is very taxing. Adding another committee to an already complex set of requirements is not going to make life any easier for companies.
Secondly, there is no clarity on the taxation angle. Will this amount (invested towards CSR) be eligible for tax deduction?
The best criticism is that there were simpler ways to incentivize Companies to contribute to CSR than to add bureaucratic mechanisms like CSR Committees and mandatory CSR. A simple tax based incentive scheme might have worked much better.
Martin Luther King said that there was never a wrong time to do a right thing. As India Inc. is finally finding its feet, this is a classic case of the wrong thing being done at the wrong time.