CSR Becomes Stringent, With Penal Consequences

The concept of corporate social responsibility (CSR) took on a different hue in India with the enactment of the Companies Act, 2013. Section 135 of the legislation introduced a requirement on large companies to spend two percent of their average profits over the preceding three years towards certain statutorily defined causes. Although often mistakenly considered to be mandatory, the statutory provision has operated on a “comply or explain” basis. Companies that failed to spend the two percent have been allowed to make disclosures regarding their reasons for non-compliance.

However, the Companies (Amendment) Act, 2019, which has been notified on 31 July 2019, substantially moves the goal posts. It not only forces companies to spend two percent of their profits within a three-year period, as it requires unspent funds to then be transferred into Government-run funds, but it also introduces stringent penal consequences for failure to spend or transfer, which includes corporeal punishment for defaulting officers. This takes CSR in India to an extreme level, which deviates considerably from the concept (embedded in voluntarism) as it is understood globally.

Understandably, there is considerable resistance from industry and commentators. I have shared some thoughts in my BloombergQuint column. There is a scathing video commentary from leading journalist Shekhar Gupta.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.



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