INTRODUCTION
On 31 July 2019, the Companies (Amendment) Act 2019 (hereinafter referred to as amendment) received the assent of the President of India. This amendment has brought many changes but the crackdown provision is the revision of Corporate Social Responsibility (hereinafter referred to as CSR) framework, thus causing a shift from “comply or explain” to “comply or imprisonment” which has invoked debate regarding its consequences. The amendments brought under CSR regime includes profit-making companies have to mandatorily spend at least 2% of their average net profits, made during the three immediately preceding financial years. If there is any amount unspent for undertaking CSR activities by the companies during a financial year, then it is to be transferred within 30 days from the end of the financial year to a special account called the “Unspent CSR Account”. And this unspent amount is to be spent by the company in pursuance of its CSR activities within three financial years from the date of such transfer, failing which the same is to be transferred to a fund specified in Schedule VII of the Companies Act within 30 days from the date of completion of the third financial year. But if this unspent amount does not relate to any ongoing CSR activity, then the company is required to transfer such unspent amount to a fund specified in Schedule VII, within six months of the expiry of the financial year. Among these, the most contentious change which irked many companies is adding a penal provision for non-compliance of requirement abovementioned under section 135 of Companies Act, 2013. Thus non-compliance of abovementioned provisions can lead to penal sanctions for the company (fine of Rs. 50,000 to Rs. 25 lakh), as well as penalties for every officer of the company who is in default (imprisonment for up to three years or fine of Rs. 50,000 to Rs. 5 lakh, or both). Also, it has been clarified in the Amendment that if the company has not completed 3 (three) years from incorporation, the amount to be spent on a CSR fund will be equivalent to 2 percent of the net profits made by the company in the previous financial year.[i]
“COMPLY OR EXPLAIN” REGIME
Mr Sachin Pilot, the then Minister for Corporate Affairs even emphasised during the debate in the Rajya Sabha (the upper house of the Parliament of India) that the aim of the proposed CSR provisions was to encourage firms to undertake social welfare voluntarily instead of imposing it through the fabled ‘inspector raj’.[ii] Initially companies have to follow “comply or explain” concept under section 135 under which every company having net worth of rupees five hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during every financial year, shall spend at least two percent of the average net profits of the company made during the three immediately preceding financial years.[iii] In case if the company fails to spend this amount during the financial year then, it must in its report made under clause (o) of sub-section (3) of section 134 specify the reasons for not spending the amount. Thus erstwhile CSR framework follow “comply or explain concept” thus having flexibility in its compliance. But with this amendment CSR framework is no longer flexible but has become rigid in its compliance thus adding to many hardships being faced by the companies.
MOVING AWAY FROM “COMPLY OR EXPLAIN” REGIME
According to this new amendment, companies are mandatorily required to undertake CSR spending, hence have to set aside two percent of the profits towards the activity. The amendment provides that if a company has unspent CSR amounts in any financial year, it must transfer such amounts within six months of the end of such financial year to certain specified government funds under Schedule VII, including the Prime Minister’s Relief Fund or other funds for socio-economic development and relief and welfare of certain categories of the population. The only latitude given to companies is that if they have already allocated unspent CSR funds to specific projects, they must transfer such funds into an escrow account known as the “Unspent Corporate Social Responsibility Account” for three years, after which remaining amounts must be transferred to the government-specified funds.[iv] This requirement is reasonable from practical aspect as the companies can transfer the unspent money for ongoing CSR activity to CSR account and this amount can later be spent within next three financial years and even after three years if some amount remained unspent then that can be transferred to any fund specified under Schedule VII of Companies Act. But adding a penal provision for non- spending on CSR activities seems unreasonable. According to the amendment, the officer or the officers concerned with CSR will be liable for non-compliance with the minimum CSR spending. But there is a lot of grey area under this provision as to whether all the person of the CSR committee will be responsible or the director who has approved the policy or those who have implemented it and now a days many big companies are outsourcing their CSR activities through other companies whose main work is to look after CSR funding of their clients, will they be held liable.
Although the changes brought by this new amendment bring many material changes but apart from these, there are other important issues under section 135 which need clarification from legislature like the Companies Act only imposes CSR obligations on companies incorporated in India, but the Companies (CSR Policy) Rules, 2014 expands the applicability of Section 135 to a foreign company having its branch or project office in India, which meets the specified profit thresholds.[v] Thus, the CSR Rules that are meant to be supplementary to the Companies Act seem to have an overreaching effect well beyond the scope of Section 135 and can be challenged on the grounds that the CSR Rules are ultra vires the enabling Act.[vi] These kinds of issues add to confusion amongst the companies. Therefore instead of adding penal provision, removing these flaws under the act by the government on primarily could be more fruitful thus incentivizing ease of doing business.
CONCLUSION
CSR can be termed as corporate philanthropy which is done voluntarily and cannot be forcefully imposed on someone. If CSR spending is made compulsory then it will simply be considered as corporate tax after having penal provision attached to it which act as a coercive force, thus binding companies to mandatorily spend a minimum specific amount for the social development which essentially forms part of main responsibilities of government. This is because it is not the fund but responsible behaviour which is most important and which could be shown by the government only. Although some provisions are reasonable but adding penal provision seems unreasonable as this may create sense of fear in the companies for its compliance and instead of thinking about where the fund is to be spend they will think of its proper compliance so as to get saved from its penal provision. Therefore instead of imposing penalty it would be better to incentivize the companies for CSR spending which could lead to more fruitful results and thus helps in achieving desirable results.
[i] Section 21, The Companies (Amendment) Act, 2019.
[ii] Apresh Mishra, Now CSR Spending Mandatory in India, Companies Bill Passed by Rajya Sabha, India CSR, August 2018,https://indiacsr.in/now-csr-spending-mandatory-in-india-companies-bill-passed-by-rajya-sabha/
[iii] Section 135, The Companies Act, 2013.
[iv]Umakanth Varottil, New CSR Rules: The Risks Of Greater Rigidity, Aug 01 2019, https://www.bloombergquint.com/amp/opinion/new-csr-rules-the-risks-of-greater-rigidity
[v] Rule 3(1) of the Companies (Corporate Social Rc.ponsibility Policyl Rules, 20 I 4.
[vi] Bharat Vasani, Ramgovind Kuruppath, Megha Krishnamurthi & Anushka Jain, Corporate Social Responsibility – Less Carrot More Stick, August 7, 2019, https://corporate.cyrilamarchandblogs.com/2019/08/corporate-social-responsibility-less-carrot-more-stick/
This article is written by Devansh Bhargava of UPES, Dehradun.
Disclaimer: This article is an original submission of the Author. Lex Insight does not hold any liability arising out of this article. Kindly refer to our Terms of use or write to us in case of any concerns.
Shop your favorite products! Sale in LIVE
