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India might be among the first in the world to make social welfare spending by companies part of the law but new norms would be applicable only on about 1% of total active companies in the country.
The new Companies Bill, which was approved by Parliament after a long wait on August 8, requires companies to shell out 2% of three-year average annual profit towards Corporate Social Responsibility (CSR) activities.
The CSR norms, that would come into effect once the President gives his assent, would be applicable to companies having either net worth of Rs 500 crore or more; turnover of Rs 1,000 crore or more; or net profit of Rs 5 crore or more.
"... It is estimated that around 8,000 companies would fall under the ambit of the clause 135 of the Companies Bill, 2012," consultancy Ernst & Young's Executive Director and Leader (Development Advisory Services) Parul Soni told PTI.
Even though there are more than 13.29 lakh companies registered in the country, only nearly 9 lakh entities are active.
Going by the numbers, it would imply that only around one% of companies would be required to follow the CSR norms.
The Bill, which would replace the nearly six-decade old Companies Act, 1956, was cleared by the Rajya Sabha on August 8 while it had received the Lok Sabha nod in December last year.
As per the new norms, the two% spending on CSR is not mandatory but reporting about it is mandatory. In case, a company is unable to spend the required amount, then it has to give an explanation for the same.
Going by estimates, two% CSR expenditure would translate to companies' spending around Rs 12,000 crore to 15,000 crore annually.
Meanwhile, Soni said that apart from India, "Mauritius has mandated the spend of 2% PAT (Profit After Tax) towards CSR".
"... The policy and rules in India are much more comprehensive. In addition, there are other countries like Sweden, Norway, the Netherlands, Denmark and France have mandatory CSR reporting just like India," Soni noted.
Besides, the new legislation requires companies to set up a board-level CSR committee that has three or more directors including at least one independent director.
On the other hand, the rule-making activities for the new legislation -- that aims to strength corporate governance and bring in more transparency -- are progressing.
