MCA introduces Limited Purpose Independent Director in private companies

An amendment rules notified by MCA introduces concept of limited purpose independent director in private companies. Government is amending existing Companies (Corporate Social Responsibility Policy) Rules, 2014. These rules are being criticised by various eminent jurist for trying to undermine authority of Section 135 of the Companies Act, 2013. Sub – Section (1) of Section 135 mandate for at least one independent director in every company whether it is private or public company. Existing Rule 5 of CSR rules tries to undermine this provision of Section 135 by saying “an unlisted public company or a private company covered under sub-section (1) of section 135 which is not required to appoint an independent director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without such director”. A rule being subordinate legislation has no constitutional authority to change a provision of the Act.

Amended Clause (i) of Sub – Rule (1) of Rule 5 reads, “an unlisted public company or a private company covered under sub-section (1) of section 135 shall have an independent director for being member of its CSR Committee and such independent director shall have no other duty, obligation and responsibility under the Act.” Consequently, Clause (i) of Sub – Rule (1) of Rule 5 also been deleted.

Simultaneously, Ministry has issued a circular, clarifying that any amount unspent during the year shall  form corpus of CSR of the company and shall carried forward to next year it has been actually spent by the company on CSR. Such CSR fund and/or corpus may not be used by the company for any other purpose including setting off any present or future loss. Interestingly, Ministry has not amended Annexure to the CSR Rules for reporting any such fund or corpus.

I have my criticism against such move completely evolving CSR as new form of corporate taxation. This may be noted that jurist from time to time criticised legally mandated CSR as forced delegation of sovereign duty of public welfare by the government to the private hands.

These rules are effective already from today April 1, 2015.