Gujarat state-owned companies told to pay for poor

September 20th, 2008 - 5:39 pm ICT by IANS  

Ahmedabad, Sep 20 (IANS) In compliance with a Gujarat government directive, four state-owned companies will contribute Rs.5 billion to the newly formed Gujarat Socio Economic Development Society (GSEDS) which will spend the money on programmes for the poor.The companies will contribute the money from their gross profits to comply with a state government directive to state-owned units in the state to make available 30 percent of their gross profits for spending on programmes for the poor.

The funds will come from the two fertiliser majors — Gujarat State Fertiliser Corporation (GSFC) and the Gujarat Narmada Valley Fertiliser Company limited (GNFC), the chemical company Gujarat Alkali and Chemicals Limited (GACL) and the Gujarat Mineral Development Corporation (GMDC), the sole mineral developer in the state.

Their total gross profits for the year ended 2007-08 add up to nearly Rs.16.8 billion.

Both GSFC and GNFC, whose annual general meetings (AGMs) are scheduled for next week, are seeking shareholders’ approval for the proposed fund transfer to comply with the controversial government directive.

There are about 13 profit-making public sector units in Gujarat which have reported a collective profit before tax of over Rs.20 billion for the year ended March 31, 2008. Not all undertakings, however, are listed on the stock exchange.

At the recent annual general meeting of the GMDC, individual shareholders protested against the move giving rise to a controversy whether such transfer of funds for financing social welfare programmes for the poor was permissible.

Since the funds cannot be transferred to the state exchequer directly, the state government had requested undertakings to provide them to the GSEDS, which is headed by chief minister Narendra Modi. GSEDS is registered under the Societies Registration and the Bombay Trusts Acts.

The resolution to come up before the GSFC AGM said the state government’s directive was aimed at integrating the corporate social responsibility efforts of the board, corporations, companies and societies promoted by the state government and to channelise their contributions or donations for implementing schemes meant for economically weaker sections.

The approval of shareholders was necessary because of Section 293 (1) (e) of the Companies Act.

Under this provision “a public company cannot, except with the consent of its members, contribute to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed Rs 50,000/- (Rupees Fifty Thousand only) or 5 percent of the company’s average net profit, determined in accordance with Sections 349 and 350 during the three financial years immediately preceding, whichever is greater.”

When contacted Saurab Soparkar, a leading legal eagle on corporate affairs said there is no bar or any prohibition under the companies law or any other law that disallows companies from making “contributions” or “donations”.

He, however, did not like to say any thing on the purposes for which the funds may be utilised.

Gujarat’s foremost tax practitioner Mukesh Patel also observed there is no bar. “But one needs to have full details on the issue before making any value judgement,” he said.

N.M. Venkiteswaran, a faculty member of the business policies department at the Indian Institute of Management-Ahmedabad opined that the move was not in the interest of shareholders.

The proposal was like a private sector company transferring funds after obtaining shareholders’ approval to private trusts.

Former chief vigilance commissioner, N. Vittal, who is also a former industry secretary, declined to comment saying that one has to study all the issues involved.

Some other experts desiring to be anonymous stated that such a move was not in the long term interest of the organizations.

They said that the resources of companies were not idle funds but were often ploughed back for expansion, diversification or for setting up new projects. For financing such projects, it was necessary to have a healthy balance sheet.

To the extent an organization marshalled resources internally; it would be easier to raise resources for implementing projects.

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