MUMBAI: A harassment tool or a better performance enabler? Indian companies are mostly anxious about recent changes in Companies Act making compliance with corporate social responsibility (CSR) norms more stringent. Some see more positive than negative.
CSR norms violations now may attract fines ranging between Rs 50,000 and Rs 25 lakh, and even imprisonment of up to three years for defaulting executives after Parliament amended the Companies Act, 2013, on Wednesday.
Describing the government’s decision to impose a monetary penalty and prison sentence of up to three years on executives of companies that fail to comply with the mandated corporate social responsibility (CSR) expenditure as “retrograde”, sections of India Inc are learnt to have communicated their concerns to decision-makers in the government.
In amendments moved to the Companies Act, the Rajya Sabha Tuesday passed the Bill that specified, among other provisions, that unspent CSR funds by companies should be transferred into an escrow account called Unspent Corporate Social Responsibility Account, with the corpus to be utilised within three years of transfer. It also said that any unspent annual CSR fund must be transferred to one of the funds under Schedule 7 of the Companies Act, such as the Prime Minister’s Relief Fund, within six months of the financial-year end.
However, the provision in the legislation that has raised concerns among corporates is the stipulation of penal provisions for firms that are not able to meet the requirements.
The amendment to Section 135 of the Companies Act now states, “If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with fine which shall not be less than Rs 50,000 but which may extend to Rs 25 lakh and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs 50,000 but which may extend to Rs 5 lakh, or with both.”
Until now, the Bill required that “if the company fails to spend such amount, the Board shall, in its report (annual report). specify the reasons for not spending the amount.”
An industry source confirmed that the Confederation of Indian Industry (CII) has taken up this amendment with the government and has requested it to have a relook. Speaking to The Indian Express, Naushad Forbes, co-chairman of Forbes Marshall, termed the move “retrograde” and said that “it violates the principle of minimum government and maximum governance.”
Sandeep Parekh, founder of Finsec Law Advisors, said that with this move, “It (CSR spend) has become a tax and is no longer good behaviour and CSR.”
Forbes added that when the move was brought in, it was a sensible decision and was well thought-out law that provided a guideline to companies on social commitment. However, “introduction of penal provisions makes no sense. You can’t punish the entire industry for a few bad eggs,” he said, as he called India Inc to come out strongly and publicly.
Rumjhum Chatterjee, co-chair, CII National Committee on CSR and group managing director of Feedback Infra, said that while the introduction of penal provisions has hurt sentiments, it is not going to have an immediate impact. “What caught us all by surprise was the penal provisions. It looks a little too harsh if you look at the headlines but it will kick in only when you are allowed a rollover and you have not been able to utilise the rollover within three years and don’t put it in a government fund specified in Schedule 7,” she said. She pointed out that “it is not something will happen for everybody starting tomorrow.”
Stating that when the regulations came into being in 2013, the idea was to ask the corporates to chip in and assist the government in whatever it was doing, “But here we seem to be saying that whatever money it is, you spend it, tell us how you’re spending it and we are going to be monitoring it.”
She further pointed that as of now there are only three countries where CSR spending is mandatory – Indonesia, Mauritius and Nepal — but even in their regulations “penal provisions do not appear”.
Data sourced from Prime Database shows that the compliance on the CSR front has been improving over the years.
According to the data, while nearly 62 per cent or 526 companies out of the 849 in its study had unspent CSR amount in 2014-15, this reduced to 50 per cent in 2015-16. The percentage of companies with unspent CSR fund reduced to 45 per cent and 39 per cent in FY’17 and FY’18 respectively. In 2017-18, 422 companies out of the 1077 companies under study had unspent CSR funds