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LS approves amendments to Companies Bill

New law after 56 years, aims at improving corporate governance

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The today approved the much-awaited amendments to the Companies Bill, 2011, making it mandatory for profit-making companies to spend on activities related to Corporate Social Responsibility (CSR). In case, a company is not doing so, it will have to explain the reasons for shortfall.

The Bill, aimed at improving corporate governance, also contains provisions to strengthen regulations for corporates as well as auditing firms.

Moving the Bill for consideration, Minister of State (Independent Charge) for Corporate Affairs Sachin Pilot said private companies, while maximising their growth, also have responsibility towards society besides equitable and sustainable growth of the country. The changes in the Bill include provisions making it mandatory for companies to spend 2% of their average net profit on CSR activities. However, only companies reporting Rs 5 crore or more profits in the last three years have to make the CSR spend. Companies failing to meet the obligation will have to explain and disclose reasons in their annual books of account. Otherwise, companies would face action, including penalty.

Amendments
* Makes it mandatory for companies to spend 2% of average net profit on CSR
* Mandates payment of two years' salary to employees in companies which wind up operations
* Limits the number of companies an auditor can serve to 20
* More clarity on criminal liability of auditors
* Annual ratification of appointment of auditors for five years
* New clause related to offence of falsely inducing banks for obtaining credit
* Statutory powers to SFIO to tackle corporate fraud

Pilot emphasised that the Bill aims to encourage firms to undertake social welfare voluntarily instead of imposing that through "inspector raj".

Safeguarding workmen in the legislation, the new law mandates payment of two years' salary to employees in companies which wind up operations. This liability would be overriding, Pilot said.

The amended legislation, with 470 clauses, also limits the number of companies an auditor can serve to 20. It has also brought in more clarity on criminal liability of auditors. Besides, the approved amendments also include annual ratification of appointment of auditors for five years and introduction of a new clause related to offence of falsely inducing banks for obtaining credit.

Besides, the changed law allows more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.

The amendments, to the Bill that has been in force since 1956, were first introduced in August 2008. However, it was withdrawn as the Lok Sabha was dissolved. It was again introduced in Parliament in 2009 and sent to the Standing Committee, which presented its report in August 2010. Notably, unlike most Bills, the Bill was referred to the Standing Committee twice. The revised Bill 2011 was again referred to the committee as certain new provisions were included. The current amendments to the Bill are in line with the suggestions put forward by a Parliamentary Standing Committee on Finance.

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