Continued Uncertainties in the CSR Regime

[Roshni Menon is a an Associate at Samvad Partners, Bangalore]

On July 31, 2019, the Parliament passed several amendments to the Companies Act, 2013 .The amendments were brought in to reduce cumbersome compliance, rationalise penalties, and crack the whip on shell companies. They also introduced several revisions to the existing outline of corporate social responsibility (CSR) by inserting penal provisions for cases of non-compliance. Through the amendments, the Government hoped to ensure more accountability and better enforcement to strengthen corporate governance norms and compliance management in the corporate sector and financial allocations.

CSR was ushered in through section 135 of the Act, which aimed to compel large companies to spend at least two percent of its average net profit for the three immediately preceding financial years in pursuance of specified activities. CSR is applicable to companies having a net profit of Rs. 5 crore or more, or turnover of Rs. 1,000 crore or more, or a net worth of Rs. 500 crore or more, in a financial year. Such companies are required to create a CSR committee, which would in turn formulate a CSR policy and establish a fund for disbursing its earmarked money towards social projects.

The erstwhile CSR framework was built on the principle of “comply” or “explain” – companies that failed to meet their CSR obligations were allowed to disclose reasons for not spending such funds in the directors’ report. Since its enactment, the industry’s implementation of CSR initiatives has been lax and companies insufficiently pay heed to it. The National CSR Data Portal reveals that almost half of the applicable companies resort to disclosing reasons for non-compliance and thereby deem themselves to be compliant. In response, the Government sanctioned for prosecution of nearly a thousand cases for non-compliance in the last five years. Several companies have also received show cause notices, requiring explanations for its lack of spending. The Ministry of Corporate Affairs opined that legitimate profit earning cannot be devoid of social responsibility.

Through the recent amendment to the Act, the CSR provisions have been overhauled with heavy penal actions. It requires companies to spend the funds that have been reserved by it for CSR related activities in every financial year. Further, at the end of a financial year, if there are any unspent amounts in the CSR fund in respect of an ongoing project, the company must transfer such unspent funds into a special account within 30 days from the end of such financial year. The special account shall be known as ‘Unspent Corporate Social Responsibility Account’ and must be opened with a scheduled bank. A company’s obligation thereafter continues as it must spend the transferred money in pursuance of its goals according to its CSR Policy, within 3 years from the date of transfer.

In case the company fails to spend the same, it will be required to transfer such accumulated money to a government-run fund, such as the Prime Minister’s National Relief Fund or any other fund set up by the Central Government. These funds must be set up for socio-economic development and relief and welfare of the scheduled castes or tribes, other backward classes, minorities and women. However, if there are any unspent amounts in the CSR fund at the end of a financial year but there are no ongoing CSR projects undertaken by the company, then such funds should be directly transferred to the government-run fund within six months from the end of that financial year.

The amendment also introduces penal consequences for a company’s inability to actively spend or contribute, by imposing a fine not less than Rs. 50,000 but which may extend to Rs. 25,00,000; and imprisoning every defaulting officer of the company for a maximum term of three years, who may alternatively be fined or both.

Since the amendment, many stakeholders have vehemently resisted it due to the stringent penalties that have been imposed and the manner of effecting corporate social awareness. A high-level committee on CSR also submitted to the Finance Minister that any CSR violation should be regarded as a civil offence that is liable to monetary penalties and make the provision less burdensome for companies. In light of the recommendations by the committee, the Government has rightly decided that it will not give effect to the amendment to section 135 of the Act, which will remain unnotified, and that it will instead take stock of the situation in a review. Whilst rethinking its earlier decision, the Government should also look into the other recommendations given by the CSR committee, such as making CSR spending eligible for tax deductions, carry forward the unspent amounts up to three financial years and the creation of a CSR exchange portal. They have also recommended that the horizon of CSR activities be broadened to include sports promotion, senior citizens’ welfare, welfare of differently-abled persons, disaster management and heritage protection.

Furthermore, the Company Law Committee in its November 2019 Report to the Ministry of Corporate Affairs has recommended an alternative amendment to section 135, such that companies defaulting with their CSR obligations be levied a penalty equal to twice the unspent CSR amount which is required to be transferred to the Unspent Corporate Social Responsibility Account or Rs. 1 crore, whichever is lower, whereas the officer in default shall be levied a penalty equal to 1/10th of the unspent CSR amount which is required to be transferred to the Unspent Corporate Social Responsibility Account or Rs. 2 lakh, which is lower.

While companies have certainly not pulled their weight when it comes to actually developing social projects under CSR, the compulsion to contribute to a government fund for non-compliance is akin to a corporate tax and imprisonment of individual officers seems rather excessive for what is a civil default. Further, it may be worthy to note that mere monetary allocations need not result in social responsibility.

Roshni Menon

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