Why companies can no longer get away with ignoring CSR

Modi govt has passed amendments to the Companies Act, 2013, to ensure that firms that don’t spend 2% of their net profits on CSR are penalised.

Representional image | Dhiraj Singh | Bloomberg

New Delhi: Parliament Wednesday cleared amendments to the Companies Act of 2013 that sought to tighten loopholes that let firms get away with not spending the mandatory 2 per cent of net profits on corporate social responsibility (CSR).

The amendments, proposed by Finance Minister Nirmala Sitharaman, have predictably upset many companies as non-compliance with CSR spending rules will also attract penal provisions, including fines and imprisonment.

The amendments also look to crack down on errant directors and companies for not following Companies Act provisions. The bill will soon become an Act, once the President gives his assent.

Indian companies, both private and state-owned, had spent Rs 14,242 crore towards their CSR obligations in 2016-17, a marginal fall from the Rs 14,527 crore spent in 2015-16. In 2017-18, they had spent Rs 8,365 crore, the data available with the government until October 2018 showed.

Existing CSR norms

At present, companies with a net profit of Rs 5 crore or a net worth of Rs 500 crore or a turnover of Rs 1,000 crore have to spend 2 per cent of their average net profits of the last three years as CSR.

This could be spent on various social causes such as promoting education and skill development, helping eradicate poverty and hunger, improving child and maternal mortality rate or in disaster relief.

If companies fail to meet the CSR spend targets, they can get away with it by providing a reason for not spending the amount.

The amendments

The amendments to Section 135 of the Companies Act, 2013, are aimed at ensuring enforcement and compliance with the CSR norms. They propose that the unutilised portion of the CSR funds should be transferred to an escrow account called the ‘Unspent Corporate Social Responsibility Account’ within six months of the end of the financial year.

The company has to then utilise these funds for CSR activity within three years from the date of transfer. At the end of the three years, the unutilised portion of these funds will be transferred to specified funds, like the Prime Minister’s National Relief Fund.

Sitharaman invoked Mahatma Gandhi’s trusteeship principle, wherein a profit-making entity cannot be devoid of social responsibility.

Interestingly, the government has inserted a provision giving it the right to give “general or special directions to a company” it considers necessary to ensure compliance.

This has raised questions about whether the dreaded ‘Inspector Raj’ will return in India.

Proposed penalties

In case a company fails to comply with the requirement of opening an escrow account and the subsequent transferring of the unutilised funds, the bill proposes a penalty ranging from Rs 5,000 to Rs 25 lakh.

It also provides that every officer of the company held in default will be liable to imprisonment of up to three years, as well as a fine up to Rs 5 lakh.