The Lok Sabha on Tuesday approved the much-awaited Companies Bill, 2011, making it mandatory for profit-making companies to spend on activities related to corporate social responsibility.
If a company does not do so, it will have to explain the reasons for it.
The Bill, aimed at improving corporate governance, also contains provisions to strengthen regulations for companies and auditing firms.
Moving the Bill for consideration, Sachin Pilot, minister of state (independent charge) for corporate affairs, said private companies, while maximising their growth, also had some responsibility towards society and in the country's equitable and sustainable growth.
The changes in the Bill include provisions that make it mandatory for firms -- those that have reported profits of Rs 5 crore (Rs 50 million) or more in last three years -- to spend at least two per cent of their average net profit on CSR activities.
Companies failing to meet the obligation and not disclosing reasons for it in their books of account would face action, including penalty.
The Bill to amend the Companies Act, in force since 1956, had been hanging fire since August 2008, when it was first introduced.
It was withdrawn as the Lok Sabha was dissolved.
Pilot emphasised the Bill aimed to encourage firms to undertake social welfare voluntarily, instead of that being imposed through "inspector raj".
Safeguarding workmen in the legislation, the new law mandates that firms winding up operations have to pay their employees two years' salary.
This liability would be overriding, Pilot said.
The amended legislation, with 470 clauses, caps at 20 the number of companies an auditor can serve.
It also brings in more clarity on auditors' criminal liability, besides including annual ratification of their appointment for five years.
Also, a clause related to offence of falsely inducing banks for obtaining credit has been introduced.
The changed law gives more statutory powers to the Serious Fraud Investigation Office to better tackle corporate fraud.