Rajya Sabha has passed the Companies Bill, 2012, on Thursday, August 8, 2013. We are now an inch away from getting a modern companies' law. It now requires Presidential assent, finalisation of rules and a notification from the Ministry of Corporate Affairs (MCA). The whole process may take another few months.
Earlier, whenever I wanted to celebrate the introduction of the Companies Bill, 2009, (now Companies Bill, 2012), my friends thought that I was emotionally charged like a child who gets excited whenever he/she is promised something new, which is tagged as modern.
They had the apprehension that the proposal would never become a law. They understood well that the journey from conception to the birth of a new law, which will impact the corporate sector significantly and change the process of enforcing corporate democracy, is long and full of hurdles. I have waited for this day for four long years. No more wait. We are going to have a corporate law that is modern, not because it is tagged so (of course, not officially), but because it incorporates modern thoughts on corporate governance.
It is unlikely that everyone who has something to do with corporate affairs is celebrating the arrival of the new and modern corporate law. Reasons might be varied. One may be that he/she might not agree with all the new provisions, for example the rotation of auditors. Some may feel that too much power has been given to the bureaucracy and are apprehensive about how those will be used.
Some might be keeping their fingers crossed for the rules to be framed by the MCA. I believe that with little reasoning one may get back the celebratory mood. The Bill has gone through the scrutiny of the Parliamentary Committee twice. There are many issues that are being debated globally for long but no consensus could be reached.
Presumably, the committee had considered all the views before deciding in favour of the one that is translated into a provision in the Bill. MCA has decided to frame the rules in consultation with stakeholders and the consultative process is in progress.
The robust consultative process adopted by lawmakers has given a new meaning to the concept of 'engagement' with stakeholders.
Countries that bring out a policy change much after implementation of a similar policy in other countries get the benefit of others' experience. Even then, it cannot be said with confidence that the outcome will be similar because it depends on the history, culture, demography and other similar factors unique to a particular country.
It is not unusual that emerging economies like India look at the experience of the West while deciding in favour of or against a proposed policy. Many new provisions in the new Companies Bill, 2012, capture contemporary thoughts in the West. However, there are certain provisions, which are yet to find place in the corporate law or related regulations in advanced economies. The impact of those provisions can only be assessed after few years of implementation. We should be happy that the political parties in India have shown the courage to experiment with new ideas. The provision related to corporate social responsibility (CSR) is an example. Perhaps, India is the first to incorporate a provision on CSR in the corporate law. What are the social responsibilities of business is an age-old question.
In 1946, Fortune magazine (USA) asked business executives whether they were responsible for the consequences of their actions in a sphere somewhat wider than that covered by their profit and loss account, 95.5 per cent of respondents answered in the affirmative. However, even after 70 years of the Fortune poll, CSR has mostly remained a public relations (PR) exercise.
The Bill requires large (net worth Rs 500 crore or turnover Rs 1,000 crore) and profitable (profit of Rs 5 crore) companies to spend two per cent of average net profits made during three immediately preceding financial year on CSR activities. By stipulating two per cent of average net profit, the government has ensured that companies are not burdened with CSR expenditure when the going is bad.
It has accepted the conventional wisdom that the primary responsibility of a company is to make adequate profit and only a healthy company is capable of addressing social problems. The Bill has not made the expenditure mandatory. It has made disclosure of reasons for not spending mandatory.
This is a commendable balancing law. Bringing CSR from purely voluntary to quasi-mandatory sphere is a bold experiment. It is expected that CSR will not remain merely a PR exercise. It will come on the strategist's table.
Let us usher in the new regime with optimism.
Affiliations: Professor and Head of the School of Corporate governance and Public Policy in the Indian Institute of Corporate Affairs; Advisor (Advanced Studies), the Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited
E-mail: asish.bhattacharyya@gmail.com
