The Union cabinet has approved changes to the Companies Act that make it mandatory for companies to create a ring-fenced escrow account for corporate social responsibility expenditure and transfer unused funds to the National CSR Fund. Sources said a bill would be introduced in Parliament to carry out the 43 amendments to the Companies Act and the bill would replace an ordinance issued this year.
A key change pertains to Corporate Social Responsibility (CSR) norms, wherein companies will be penalised if they fail to meet the mandated 2% spending requirement towards corporate social responsibility (CSR) and “fit and proper” criteria for debarring directors from holding board positions. For companies that are not able to spend their full amount for CSR activities in ongoing projects within a particular financial year, the money can be transferred to a CSR account. The latter amount has to be spent within the next three financial years, sources said.
Sources said the move to introduce a penalty on companies not meeting the CSR obligation was inserted as over 40% of the entities were not complying with the requirement, with close to a fifth not spending any money. “Companies have been given five years now. It is high time they start complying with the rules,” sources said.
Companies with a net worth of £50 million or more, or turnover of over £100 million, or net profit of over £500,000 have to spend at least 2% of the average net profit made during the three immediately preceding financial years on CSR activity. So far, they were only required to report it to shareholders. But the government has now decided to crack the whip.
Similarly, companies now have to disclose the details of significant beneficial ownership, an obligation that was so far cast on shareholders. The government saw it as a loophole and has sought to plug it. The rules mandate that details of all shareholders with interest of 10% or more in a company, either direct or indirect, have to be disclosed. Further, the government has sought powers to mandate dematerialisation of shares for all category of companies, a move that was recently extended to public unlisted companies.
