On the 18th of December 2012, the Indian Legislature passed the Companies Bill 2012 and with this most would hope for significant positive changes in the operating and regulatory environment for Companies and Entrepreneurs working in India. The 35 year old Union Minister of State for Corporate Affairs, Sachin Pilot, has said that the aim of the legislation was to make India a safe and attractive destination for investment and to do away with ‘inspector raj’ on companies
One of the key changes in the new bill is the introduction of a Corporate Social Responsibility clause making India the first country to mandate CSR through a statutory provision. While CSR is not mandatory for Companies, the rules are in line with the ‘Comply or Explain’ principle with penalties applicable only if an explanation is not offered.
The new Act will significantly increase the pool of money available for social activities. While the Act provides guidance on the areas that a Company can contribute money to [in Schedule VII], it will most likely be the responsibility of social/ voluntary organisations to ensure that money received from Companies is spent effectively. A study of only the top 100 profitable companies registered on the Bombay Stock Exchange shows that they alone will release approximately INR 4,800 crores or USD 1 billion into the system for social spending. To put this in to perspective, we understand that there are approximately 36,000 registered public companies in India.
In this article, we discuss the applicability and consequences of the new provisions relating to CSR in the Companies Bill 2012 and its impact on you.
Who does it apply to?
This part is very simple and the law governing it is quite clear. This law applies to the following cases:
- A Company registered under the Companies Act, 1956 [and the new act to follow]; AND
- Where the Net Worth is greater than or equal to INR 500 crores [~USD 100mn]; OR
- Where the Turnover has been greater than or equal to INR 1,000 crores [~USD 200mn]; OR
- Where the Net Profit has been greater than or equal to INR 5 crore [~USD 1mn] in any financial year.
Any company registered in India that falls under the criteria described above, is required to create a Board Committee with at least three directors, of which at least one director should be an independent director. This committee shall be called the ‘Corporate Social Responsibility Committee’ and the composition and role of this committee shall be disclosed in the Directors’ report each year.
The Committee shall formulate the Company’s CSR policy, recommend the amount of expense to be incurred in each CSR activity and monitor CSR activities periodically. The Committee shall report to the Board.
The Board of Directors is responsible for ensuring that the Company’s CSR activities are disclosed in the Directors’ report, and that the policy is complied with. More importantly, the Board will ensure that at least 2 per cent of the average net profits of the Company in the three immediately preceding years is spent on CSR activities or provide an explanation as to why not.
A disclosure of the total expenses under the category – CSR must be made in the Notes to the Profit and Loss account.
We understand that the single largest impact of this act is the quantum of money that will be made available for social spending. How will this be spent, who will spend it and where will it be spent – three important questions. It is possible that we might see a huge rush from non-profit organisations to get access to this pool. While large corporations have the ability to establish their own social organisations and manage this CSR spend on their own, there will still be a large number of companies that would prefer to monitor this spend only at a policy level and outsource the rest. Directors of companies will need to create a CSR policy, implying the need to decide, on behalf of the investors, the primary focus areas of social spending.
Probably the first of its kind in India, the ‘comply or explain’ policy followed by the Government in this case, is an interesting development. This follows the strategies of the UK, Germany and the Netherlands governments in their Corporate Governance codes. The philosophy of this policy is that the Company is responsible to its shareholders and would need to explain to them why they perform or avoid an action – leaving it up to the shareholder/ potential investor to decide if his money is/ will be wisely invested or not. It is possible that the Government might extent this policy to other areas as well – such as the Indian Corporate Governance Code [Clause 49 of the listing agreement for example].
Interesting times ahead. Your thoughts?