In Companies Bill, CSR, other provisos pain

The revised draft of the Companies Bill 2011, which was approved by the Cabinet on Thursday, will have far reaching consequences. But not everyone’s convinced they would all be positive.

The revised draft was prepared based on recommendations of the Standing Committee and will now be introduced in the winter session of Parliament. If approved, it will replace the archaic Companies Act, 1956.

As per the government’s claim, the legislation will help make the corporate sector more transparent, efficient and responsible.

But some experts feel some of its provisions will hit corporates hard.

Like the mandatory expenditure of 2% of a company’s average profits in the three previous years on corporate social responsibility (CSR).

Also, the Bill proposes to control managerial compensation, make independent directors more accountable, give more teeth to the serious fraud investigation officer and ensure mandatory rotation of auditors every five years, besides introducing class action suits, which are lawsuits brought by a group of individuals, all having the same grievance.

“In general, it is a step in the right direction. The introduction of class action law suit was an important point in the Bill as it will help create deterrents for insiders to enter into illegal practices,” said Krishnamurthy Subramanian, assistant professor, Indian School of Business, Hyderabad.

However, he said, controlling managerial remuneration and making independent directors more accountable cannot completely be called as positive steps. “There is a market for talent and the regulator should not get into controlling the remunerations as this can hurt the companies more than benefit them,” he said, adding that even making independent directors more accountable could eventually deter them from joining company boards.

JJ Irani, former director of Tata Steel who once headed the expert group to draft the new Companies Act in 2005, said he was personally against the regulations of mandatory expenditure of 2% on CSR.

“This is an investment for a corporate and not expenditure, and I think it should be the sole authority of the shareholders and the company Board to decide how much a company should invest in CSR activities,” he said.