[By Jayesh Karnawat]
The author is a fourth year student of National Law University, Jodhpur and can be reached at firstname.lastname@example.org.
Prime Minister Narendra Modi in his speech on the 73rd Independence Day of India asserted that wealth creators of the nation must be respected. He further said that these wealth creators must not be eyed with suspicion as they play a pivotal role in building that nation’s economy. However, the recent amendments in the Companies Act, 2013 (hereinafter “the Act”) do not reflect this approach. Through the recent Companies (Amendment) Act, 2019 (hereinafter “2019 Amendment”), a stricter regime for complying with Corporate Social Responsibility (“CSR”) obligations have been put in place. In this backdrop, a Committee headed by Mr Injeti Srinivas, Secretary, Corporate affairs submitted a report on August 14, 2019[i], highlighting the much-needed changes in the CSR regime. However, due to a severe backlash from the big corporations including India Inc.,[ii] the government has decided to take a few steps back and not to proceed with some of the clauses of the CSR amendment [iii] as introduced in the Amending Act.
The Recent 2019 Amendment
The newly passed 2019 Amendment compels companies to mandatorily spend the CSR funds within 3 years. In case the fund is not spent, the Companies have to mandatorily transfer the unspent funds in an account called “Unspent CSR Funds Account” post which, it will be spent on Schedule VII funds including Prime Minister’s Relief Fund. The Amendment also provides for penalty consequences in form of imprisonment of company officials up to three years and fine ranging from Rs 50,000 up to Rs 25 lakh for non-compliance of its CSR. In the backdrop of the recent 2019 Amendment, the Committee, which was set up to review the existing framework pertaining to CSR and further boosting its objectives, made several recommendations to the Central Government enumerated below.
Some Important Recommendations Made by the Committee Are [iv]
- The Committee suggested that the obligation to comply with CSR norms should include within its ambit, apart from companies, Limited Liability Partnerships (which are also within the purview of MCA) along with Banks registered under the Banking Regulation Act, 1949. Moreover, the Committee mooted for including all the other profit-making entities operating under other specific statutes on mutatis mutandis If this proposal is accepted, it will reduce CSR obligation to be akin to a tax obligation.
- The Committee also recommended that clarification must be issued for the applicability of CSR obligation on newly incorporated companies. According to the Committee, rule of harmonious construction should be applied while reading sections 135(1) & 135(2) of the Act and therefore the obligation for the company should commence after it has been incorporated for a minimum of three years, which would also be in line with Ease of Doing Business objective of the government. This will give the Companies some breathing space to establish itself in the market. Otherwise, mandatory CSR obligation for new companies will act as a burden on them and hampers their growth.
- Once again, the Committee stressed on the need of making tax treatment for different activities uniform. It proposed allowing CSR expenditure as a tax-deductible expenditure. This would act as an incentive for the companies to undertake such activities. If this long-awaited recommendation-cum-demand is accepted, it would reduce the outgo on CSR from 2% to 0.67%. [v]
- Since most of the companies eligible for contributing to CSR activities have a threshold of Rs 50 lakhs, the Committee suggested that in order to reduce operational cost, the mandatory requirement of constituting a CSR committee must be done away with for such companies. The function of the CSR Committee can be performed by the Board itself. This will prove to be a major relief for small companies which do not have large quantum of funds to have a specialized committee to advise and assist in this expenditure. This move would not only save the expenditure incurred by the company on such committees, but also prove to be efficient.
- The Committee adopted a balanced approach while deliberating upon adequate punishment for non-compliance of CSR provisions. The Committee acknowledged that a mere statement of the reason for non-compliance is not enough, and there must be a substantive justification for the same. However, there must not be any imprisonment for the non-compliance. There can be a penalty which is twice or thrice the amount of default with a maximum cap of Rs 1 crore. In simple words, the offence shall be de-criminalized and shall be made a civil offence. Recently the government had planned to criminalise any default in complying with the provisions of CSR. This approach came in the backdrop of certain statistics which showed that company have slowly started to improve its CSR spending records. Statistics reveal that in last five years, CSE expenditure has increased from 70% to 90%.[vi] However, as stated above, this step of the government faced severe backlash from market players and forced the government to do away with this plan.
- Discussing the issue of time limit for the completion of the project, the Committee believed that mandating a company to incur CSR expenditure within a year without even considering the financial and technical challenges will not lead to desirable outcomes. It should be based on the nature of projects, gestation period, flexibility of the project. Considering this, the Committee suggested that the unspent amount and the interest thereon be spent within 3-5 years.
- The Committee recommended that the practice of contributing the amount mandated by CSR obligation to Central Government funds as specified in Schedule VII of the Companies Act be discontinued since it undermines the entire objective of CSR which is to ensure that business efficiencies and innovation could be used to the best interest of the society.
- The Committee suggested that it should be made mandatory for companies having a CSR obligation of Rs 5 crore or more for a period of 3 preceding financial years to undertake need and impact studies for their CSR activities. It also suggested that such studies then should be disclosed in their board reports. This will help in deepening the impact of CSR in society.
- One of the most significant recommendations of the Committee was that CSR spending must now be subject it to statutory financial audit. It must be done by incorporating the details of the CSR expenditure as part of the financial statements of the company. This will help in keeping a check on the sources and utilization of CSR funds.
- The Committee suggested that it must be clarified to the companies that mere disbursal of funds to the implementing agencies by the company is not enough. The companies must ensure that the fund is spent as well.
- Another significant recommendation by the Committee is to reduce information asymmetry by launching a CSR exchange portal wherein all the stakeholders can leverage the benefits of the technology. This would provide companies with information relating to other companies’ spending and assist in systematic sharing by all the stakeholders of models, frameworks and best practices.
- Moreover, in order to evaluate the actual expenditure and its impact, the Committee mooted for an annual CSR survey. This would enable the government to get a bird’s eye view of the CSR spending by some company and its non-compliance by some.
- The Committee suggested that in order to achieve the goal of sustainable development, expenditure on activities like sports promotion, senior citizens’ welfare, the welfare of differently abled persons, disaster management and heritage protection must be included. This would provide companies some flexibility in choosing from a wide range of activities, its area of interest and spend accordingly.
From the recent trends, it can be identified that the government is portraying dual faces. On one hand, it aims to come under top 50 ranks in terms of Ease of Doing Business Index. The approach adopted by the government is not in alignment with its recent measures to decriminalize non-compliance. Recently the government has taken a few steps including re-categorization of 16 ‘criminal’ offences under the Companies Act including the issuance of shares at a discount, failure to file annual returns to offences having civil liabilities. On the other hand, it is mandating the companies to spend in CSR activities, which is now more or less of an taxation-approach. After this, constantly laying down stricter CSR norms brings down the entire focus of CSR activity to spending rather than the outcome. What can be seen from the recommendations is that the approach suggested by the Committee is ‘comply-or-explain’ with a higher monetary penalty. The Committee seeks to ensure that the CSR expenditure no longer remains an involuntary obligation on the companies. In order to improve the involvement of the stakeholders and achieve the objectives with which CSR was initially introduced, it is necessary for the government to implement some of the important recommendations of the Committee.