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Companies will have to necessarily spend two per cent of their average net profits in previous three preceding financial years towards corporate social responsibility (CSR).
The Government on Tuesday moved amendments to the Companies Bill 2011 to make CSR spend mandatory for most profit-making companies.
Also, companies will have to give preference to local area and areas around which they operate for spending the amount earmarked for CSR activities, according to an amendment moved by the Government.
The Bill in the original form had provided that CSR spend would be optional, but specified that companies should make every endeavour to undertake such expenditure.
The Companies Bill 2011 was passed by the Lok Sabha through voice vote on Tuesday night after a marathon sitting that lasted nearly four hours.
Corporate Affairs Minister Sachin Pilot moved 122 amendments to the original Bill.
The CSR spend would be mandatory for companies that have a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more in a financial year.
India has been looking to enact a new company law for over a decade now.
The proposed legislation will replace the existing Companies Act 1956.
The Bill also seeks to make independent directors more accountable and brought in certain steps to improve corporate governance practices
Replying to the discussions on the Bill, Pilot said that companies should not see the CSR spend requirement as a return of the “inspector raj”.
Welcoming the proposed changes to the CSR provisions, Nesar Ahmad, President of Institute of Company Secretaries of India (ICSI) said India is the only country that has mandated CSR spend through statutory route.
“It is a win-win move. It is also in line with the Government’s agenda of achieving inclusive growth,” Ahmad said.
Lalit Kumar, Partner, J Sagar Associates, said that provisions relating to CSR initiatives further emphasise that preference should be given to local areas where the company operates.
“In effect, it could generate more benefits to Indian States with a larger number of companies. Ideally, the location of CSR activities should have been left to the company’s discretion,” Kumar told Business Line .
srivats.kr@thehindu.co.in
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