The new companies law passed by Parliament last week seeks to make investment and growth easier and transparent. The law also makes it must for companies to give a portion of their profits for corporate social responsibility (CSR) projects.
Firms with net worth of Rs. 500 crore or a turnover of more than Rs. 1,000 crore or a net profit of more than Rs. 5 crore will have to spend 2% profit on CSR.
“This will eliminate the trust deficit between companies and the communities among whom they operate,” says Sachin Pilot, corporate affairs minister. Excerpts:
How will this law improve corporate governance?
It combines the best global practices derived from the UK, US and several other countries. It is the second companies law in a century. The first one was made in 1913, and was changed in 1956.
By providing for self regulation, disclosures, enhanced role of independent directors and defined role for auditors, the new law will make occurrence of corporate frauds difficult. Technology will be used to ensure strict compliance.
Did you face any resistance from the corporate sector or were they welcoming?
We made the widest possible consultation — with corporates, consumers and shareholders. The response we got from the companies is exceedingly supportive.
Mandatory CSR is a key provision of the law. Will it lead to the return of the inspector raj?
This is the only law in the world that makes CSR a statutory requirement, but it will operate on self-implementation and self-regulation basis. It is not a government tax or a cess. The onus is on the conscience of the companies. Companies have been doing it for years, but now it will become more structured and transparent.
Companies can spend on skill development, education, healthcare, which will help them survive in the long run. For instance, skill upgrade will be counted as CSR spending. The government is not going to wield to big stick.
Critics have pointed out that this may lead to corporates and politicians entering into quid pro quo. For instance, a company owner may spend only in his favourite politician’s constituency.
Let’s not be so cynical. The companies are required to spend in their area of operation. So, essentially it will help the communities and companies develop a mutually beneficial relationship rather than a conformational one. Companies will make CSR boards that will administer these projects with the involvement of independent directors. Religious donations will not be covered under CSR.
In the current slowdown, will this law make companies wary of investments?
On the contrary, the law will make business more easier and transparent. Starting, running and even winding up a company will become easier. The new law will set up tribunals that will allow that process much faster and one need not approach a court to shut a company.
It gives protection to investors and consumers. On the question of CSR, only those companies that have the capability to spend it will require to do that. And that will make growth more sustainable — both socially and politically.