By Charles Ostertag
Over the past several years, India has been updating its corporate law and legal framework to increase transparency, accountability, and align with international business standards. The primary focus of these efforts has been the revision of the Companies Act of 1956.
On December 18, 2012, the Lok Sabha (India’s lower house of parliament) approved the Companies Bill, which, when finally approved, will replace the Companies Act of 1956. Currently, the Companies Bill awaits approval by the Rajya Sabha (India’s upper house of parliament) and will thereafter likely receive assent by the President of India.
The Bill, as approved by the Lok Sabha, consists of 470 sections and contains new provisions dealing with insider trading, independent directors, class actions, a one person company, “sick” companies, fraud, officers in default, and mandatory corporate social responsibility (“CSR”).
MANDATORY CSR CLAUSE
Clause 135 of the Companies Bill (the “CSR Clause”) requires a qualifying corporation to spend on CSR at least 2 percent of its average net profits made in the preceding three financial years (the “2 Percent Formula”).
Recognized CSR activities are list in Schedule VII of the Companies Bill (outlined below). A qualifying company that fails to spend the required amount will have to explain that failure in the report of the board of directors.
FINES AND/OR IMPRISONMENT FOR FAILURE TO COMPLY AND REPORT
While a company is not subject to liability for failing to spend on CSR under the 2 Percent Formula, a company and its officers are subject to liability for not explaining such a failure in the report of the board of directors.
Failure to explain is punishable by a fine on the company of not less than 50,000 rupees (about U.S. $900) and up to 25 lakh rupees (about U.S. $46,000). Further, officers who default on the reporting provision could be subject to up to three years in prison and/or fines of not less than 50,000 rupees (about U.S. $900) and as high as 5 lakh rupees (about U.S. $9,200).
The CSR Clause of the Companies Bill is applicable to any company with:
(1) A net worth of rupees 500 crore (about U.S. $90 million) or more;
(2) A turnover of rupees 1000 crore (about U.S. $180 million) or more; or
(3) A net profit of rupees 5 crore (about U.S. $900,000) or more in any fiscal year.
REQUIRED ACTIVITIES FOR QUALIFYING COMPANIES
A qualifying company under the CSR Clause must perform the following activities:
- Create a CSR committee on the board of directors with the committee consisting of three or more directors of which at least one has to be an independent director
- The committee is required to formulate and monitor the company’s CSR policy and recommend the expenditure to be incurred on such activities
- The CSR activities may comprise any number of activities listed in Schedule VII of the Companies Bill (outlined below)
- The board report will require the disclosure of the CSR committee and the contents of the CSR policy
- The board is required to ensure that the activities provided under the CSR policy are undertaken and that the company spends at least 2% of the average net profits made by the company in the preceding three financial years in accordance with the policy
- Where the board fails to spend such an amount, it is required to provide the reasons for such failure in the report of the board of directors
PERMISSIBLE CSR ACTIVITIES
The CSR Clause leaves it to the discretion of the company’s board to determine the exact manner in which the CSR amounts are spent. However, Schedule VII of the Companies Bill requires the CSR policy created by the CSR committee involve at least one of the following focus areas:
1) Eradicating extreme hunger and poverty;
2) Promotion of education;
3) Promoting gender equality and empowering women;
4) Reducing child mortality and improving maternal health;
5) Combating [HIV], [AIDS], malaria and other diseases;
6) Ensuring environmental sustainability;
7) Employment-enhancing vocational skills;
8) Social business projects;
9) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the state governments for socioeconomic development, and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
10) Such other matters as may be prescribed.
QUESTIONS AND ANSWERS
Q: Can a U.S. foundation make grants to satisfy the 2% requirement?
A: Possibly. While the Companies Bill does not expressly prohibit it, when the Companies Bill becomes law, this issue could be litigated in Indian courts and could be held to be permissible. If profits under the 2 Percent Formula are funneled to a U.S. foundation and then granted back to India, this could satisfy the CSR Clause, but Indian courts have yet to decide the issue.
Q: When the Companies Bill becomes law, what regulatory authority will enforce the new act?
A: The Central Government Ministries (CGM) is responsible for administering India’s national and international affairs. When the Bill becomes an act, the Ministry of Corporate Affairs (www.mca.gov.in), organized under the CGM, will administer and enforce the act. The Ministry of Corporate Affairs currently administers the Companies Act of 1956.
- Companies Bill 2012, as passed by the Lok Sabha, 295 pages
- A comparison of the Companies Act of 1956 with the new Companies Bill
LEGAL ADVICE RECOMMENDED
This document does not provide donors or grantee organizations with legal advice. This information has been compiled from various third-party sources, which Give2Asia has gathered as part of its grantmaking to India. We recommend that you seek professional legal advice on any and all issues related to the Companies Bill or the Companies Act of 1956.