Government To Amend Companies Act In Order To Penalise Companies Not Meeting Mandated 2% CSR Spending Norm

The government has recommended several amendments to the Companies Act including provisions to penalise companies which do not meet the mandated 2% spending on corporate social responsibility (CSR).

Incidentally, the development has come as a fall out of the recent IL&FS scandal.

After the scandal broke, the government was forced to supersede its board and take control, only to realise that it could do little to bar disqualified directors from holding board positions, since the new Companies Act did not provide for such an action.

The government has effectively decided to to go back to the Companies Act 1956, which allowed it to not only seek removal of those concerned with the management of a company but also bar them from being appointed board members for five years from the date of removal.

Under the new law, the government would also have to move an application before the National Company Law Tribunal.

However, it is unclear if a case can be made out against the IL&FS directors, who were sacked, although the new rule is expected to be applied with prospective effect.

The move to introduce a penalty on companies not meeting CSR norms was inserted because more than 40% of them have failed to comply with the requirement, with close to a fifth of them not spending any money on CSR at all.

So far, companies were merely required to report the lack of spending to their shareholders but the government has now decided to crack the whip.

As per the new law, companies would also have to disclose details of significant beneficial ownership, which was an obligation that was so far cast on shareholders.

The government has identified 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.