On 31st July 2019, Ministry of Law and Justice, Government of India notified the Companies (Amendment) Act, 2019. Contravention of the section 135 of the Companies Act 2013 (sec 135 hereinafter) has been made a punishable offence.
What is the change exactly?
Prior to the July 2019 amendment, less or no spend towards the Corporate Social Responsibility (CSR) was not a contravention of the law. However, not constituting a CSR Committee of the Board and not reporting the reasons for less or no expenditure towards CSR in the ‘Board’s Report’ were considered to be in contravention of the law.
Under the Companies Act, 2013, the CSR Committee had to formulate a CSR Policy and recommend to the Board of Directors, inter-alia, the activities to be undertaken by the company as specified in Schedule VII of the Companies Act. Responsibility of the Board of Directors of the company was to approve the CSR policy and disclose the content in Board’s Report and to ensure that activities included in the policy were undertaken by the company. Sec 135 (5), as amended in July 2019, reads that “the Board of every company shall ensure that company spends, in every financial year, at least 2% of the average net profit made during the 3 immediately preceding financial years or in immediately preceding year where the company has not completed 3 financial years since its incorporation”. The amendment further mentions that if the company fails to spend such amount, the Board shall in its report specify the reasons for not spending the amount, and unless unspent amount relates to any ongoing project, transfer such unspent amount to a Fund specified in Schedule VII, ….”. The funds specified in Schedule VII are “Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women”.
Elucidating further on the time frame for transfer of the unspent amount to the funds specified in Schedule VII, the newly inserted Sub-sec 6 Sec 135 articulates a process – “….any unspent amount shall be transferred by the company within 30 days from the end of the FY to a special account to be opened by the company as Unspent CSR Amount for that FY and such amount to be spent by the company towards CSR as per policy within a period of three FYs from the date of such transfer, failing which the company shall transfer the same to the Funds specified in Schedule VII within a period of 30 days from the completion of the third FY”.
When the Board is responsible for ensuring the CSR activities, in case there is a contravention of the law, who will be held accountable and punished?
Newly inserted Sub-sec 7 of the Sec 135 reads that “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 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”.
It can be understood that in case of the contravention of the law, it is not the Board but officers responsible in the company that shall bear the brunt. The immediate responsibility comes on those who are signing the Board’s Report for CSR as provided in the format notified by the Ministry of Corporate Affairs in the Companies (CSR Policy) Rules, vide G.S.R 129 (E) dated 27th February 2014. Board’s Report is to be signed by the Chief Executive Officer or Managing Director, Chairperson of the CSR Committee and the Person specified under Clause (d) of the Sub-sec (1) of Section 380 of the Companies Act. Sec 380 of the Act provides the requirements for a foreign company and requires the nomination of the “person resident in India authorized to accept on behalf of the company service of process and any notices or other documents required to be served on the company”.
Immediately after the amendment in the Act on 31st July 2019, there was news that CSR-related violations will now be considered a ‘civil liability’ instead of being treated as a ‘criminal offence’. However, any changes in the provisions will require further amendments to the Companies Act, which has not come yet (i.e till 12th Nov 2019).
The current law for CSR in India also makes a question when the state carries the fundamental responsibility to provide good governance and basic infrastructure for public welfare, what is the rationale behind the approach of making companies accountable for something beyond their responsibility of generating wealth in a sustainable way for their shareholders and paying taxes to the state for the purpose of undertaking non-commercial but socially beneficial activities?
The rationale behind the legal approach for CSR in India is based on the premise that the responsibility of a company is to generate wealth for stakeholders, of which shareholders are a subset. And besides the legal license to do business which is granted by the state, companies also need a social license to do business, which is granted by society. A legal license to a company only sanctifies its activities of producing goods and services for society to be sold in markets for a profit. Since a company is a legal person, which exists in society, the social licence to do business is challenging to be ensured for the company only by the state’s actions for public welfare. Hence, this concept is imbibed in law for CSR in India by replacing the Companies Act, 1956 with the Companies Act, 2013 and having provision for “Stakeholders Relationship Committee” instead of “Shareholders Committee” at the board level.
Another question that surfaces is: Instead of making CSR mandatory, such that a contravention of the law is tantamount to a criminal offence punishable with imprisonment for the officer responsible, could there be any other way of promoting CSR?
A possible way could have been introducing tax deductions for certain activities that the Government wishes to promote through the companies.
I am wondering what could have been another approach by the Government to promote CSR without any vigilance or monitoring by Government and make a self-sustaining system.
If you think that tax deductions could have been a better approach to promote CSR, share your comment on this article in your network. Hope you will also not stop yourself from sharing thoughts on other better approaches which can work in India.