In case, a company fails to spend the 2% prescribed, it would have to explain to the shareholders the reason for such a failure
NEW DELHI: A Parliamentary panel has suggested that 2% spending by corporates on CSR activities in the new Companies Bill should be made mandatory to prevent them from escaping the liability by citing one reason or the other.
“The clause seems to provide a security valve for companies by stating… That if a company fails to meet the desired standard, it may get away by providing the reason. Such a statement may, in practice, defeat the very purpose of clause 135,” the Parliamentary Standing Committee on Finance said in its report on Companies Bill 2011.
Clause 135 of the Bill prescribes that every company with a networth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore and above in a fiscal will have to spend 2% of three years’ average profit towards CSR activities.
In case, a company fails to spend the 2% prescribed, it would have to explain to the shareholders the reason for such a failure.
However, the Ministry of Corporate Affairs seemed in no mood to make the clause mandatory and said it would only discourage companies.
“Keeping in view the need for balancing of various interests involved, the provisions on CSR as provided in clause 135 of the Bill…Appear to be reasonable… The broad objective is to instill the spirit of CSR amongst corporate sector. The provisions, therefore, may be retained as proposed,” the MCA said.
It added that the provisions would be reviewed after enactment of the legislation and watching the experience of companies covered under the clause.
Also, to make sure that there are not loose ends in the clause, the Committee has suggested that “Clause 135(5) of the Bill mandating Corporate Social Responsibility (CSR) be modified by substituting the words ‘shall make every endeavour to ensure’ with the words ‘shall ensure'”.
The Committee recommended that it should also be provided CSR activities of the companies are directed in and around the area they operate.
In his dissent note, Member of Parliament Gurudas Kamat said: “It is a well-perpetuated fallacy that corporate are run on the promoters’ or shareholders’ funds alone. The fact of the matter is that most of the capital required by corporate both long-term and medium-term is provided by the banking/financial system, which is operated out of the public funds”.
Therefore, he said if corporates are mandated to undertake CSR, it is very fair and logical and a natural corollary of the nature of capital invested in them and it need not be over-stated that the corporate owe it to the people and the society to pay them back.
This is the second time the Standing Committee has given its observations on the Companies Bill after opposition in the Lok Sabha over substantial changes.
The Parliamentary Standing Committee on Finance had given its observations on the Bill first time in August 2010. The new Companies Bill, which was tabled in the backdrop of the Rs 14,000-crore Satyam fraud, promises greater shareholder democracy and stricter corporate governance norms.
It is expected to be presented in Parliament for consideration passage in the forthcoming monsoon session.