The pendulum in the hitherto Corporate Social responsibility “CSR” regime has swung to the other extreme with the passing of the recent Companies Amendment Act, 2019 by the parliament. The new provisions are not in force yet and applicable date will be notified soon. The rules governing CSR rules have yet to be issued.
The obligation on companies to spend on CSR was introduced under the New Companies Act, 2013 with the objective of voluntary asking corporates who cross a certain threshold to spend on CSR. It was a spend or explain with jurisdiction regime. Specified companies were mandated to spend 2% of the average net profits for last 3 years in the current year on identified CSR projects. Inability to spend could be explained in the director’s report with proper justification. Non spending did not attract fine or prosecution.
Non-compliance with amended CSR provisions will attract criminal liability. Section 135 has been amended and following has been added to sub-section (5)(a) in second proviso- after the words “reasons for not spending the amount” occurring at the end, the words, brackets, figure and letters “and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year” shall be inserted;
[ This in effect means that money related to a completed or not an on-going project- which is still unspent- has to be transferred to a fund specified in Schedule VII within a period of six months of the expiry of the financial year. For eg. Unspent money for FY 31 March 19 has to be deposited in a scheduled fund by 30th Sept 19]
(b) after sub-section (5), the following sub-sections shall be inserted, namely: —
“(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
[ This in effect means that any unspent amounts of on-going projects should be transferred to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account- within a period of 30 days from close of financial year. The amount transferred if not spent within a period of 3 years from transfer, shall be required to transferred to a fund specified in Schedule VII. Accordingly, companies have one plus three years to spend money for on-going project. Eg. The funds for Project conceptualized and initiated in FY 19 can be spent till FY 22]
(7) If a company contravenes the provisions of sub-section (5) or subsection (6), the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees 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 fifty thousand rupees but which may extend to five lakh rupees, or with both.
[ this in effect implies that default can lead to criminal prosecution for directors and officers in default which was not present in erstwhile provisions]
The rules governing CSR rules will also undergo a change and we will have to wait to see the fine print on the further changes brought under the same. Due to the hue and cry raised by the industry due to the new draconian provisions, there are news reports as this article is being written, that the government may consider following changes:
The Injeti Committee has also recommended other changes which will significantly impact the way CSR is perceived and implemented in India.
CSR projects are long term in nature and aim to bring significant societal impact- it may be worthwhile to allow companies for carry forward not only for on-going projects but for other “not started” projects or money which could not be spent due to justifiable reasons for a certain period of time.
The above are sea changes brought to the erstwhile CSR rules- the question is whether CSR is more effective being voluntary or making it binding will increase its effectiveness. Ultimately, the goal is for Corporates to fulfil their social responsibilities in the areas they operate- they should contribute in social welfare. Making it mandatory and non-compliance as a criminal offense, could result in companies paying lip service to the obligations instead of really driving it. With vigorous industry lobbying, the nature of offense could change from criminal to civil, nevertheless, the ground rules for CSR have substantially changed possibly for the better. Only time will tell the impact, CSR will make to the ecosystem with these dramatic twists and turns.
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