MCA proposing ‘Enforcement’ & ‘Prosecution’ to ensure CSR compliance
- From the ‘Show or Shame’ policy of 2014, the
Ministry of Corporate Affairs (MCA) seems to be moving towards ‘Spend or get
Spanked’ policy in the year 2018, barely four years after CSR was made
mandatory for companies having either Net-worth of INR 500/- crore or more or
Turnover of INR 1,000/- crore or more or Net Profit of INR 5 crore or more. - It would appear that merely providing explanation
for not undertaking expenditure on CSR activities would not be considered as
adequate compliance of law and the Government seems intent on strictly dealing
with issues encompassing CSR and its compliance.
Stricter
Enforcement & Prosecution
Enforcement & Prosecution
The Ministry of Corporate Affairs (MCA) has commenced
review of the functioning of CSR implementation and this exercise has been
initiated to recommend a uniform approach for its enforcement amongst
corporates.
review of the functioning of CSR implementation and this exercise has been
initiated to recommend a uniform approach for its enforcement amongst
corporates.
Government is also revisiting the guidelines
for enforcement of CSR provisions, including:
for enforcement of CSR provisions, including:
- structure of Centralized Scrutiny
and Prosecution Mechanism;
- methodologies for monitoring compliance;
- criteria to
identify responsibility for non-compliance;
- draft standard Show Cause Notice,
- standard sanction letter for prosecutions,
- power to withdraw prosecutions, etc.
CSR was
practiced even before legislative mandate
practiced even before legislative mandate
Several companies have been involved in CSR
related activities long before the Indian Companies Act 2013 made it mandatory
for certain companies and such companies have been undertaking such activities because
they genuinely believed and still believe that they have a social obligation
towards society.
related activities long before the Indian Companies Act 2013 made it mandatory
for certain companies and such companies have been undertaking such activities because
they genuinely believed and still believe that they have a social obligation
towards society.
To the best of our knowledge and belief
nowhere in world is CSR mandated under law and yet, companies in large
economies like the USA and the UK as also smaller economies like the
Philippines and Singapore voluntarily practice CSR.
nowhere in world is CSR mandated under law and yet, companies in large
economies like the USA and the UK as also smaller economies like the
Philippines and Singapore voluntarily practice CSR.
Rationale
behind Section 135(5)
behind Section 135(5)
When CSR became mandatory for certain
companies from the fiscal year 2014-15 the assurance given was that companies
will be allowed to undertake CSR activities as per their own policies.
companies from the fiscal year 2014-15 the assurance given was that companies
will be allowed to undertake CSR activities as per their own policies.
Sub-section (5) of Section 135 was clearly
drafted so as not to put undue pressure on companies.
drafted so as not to put undue pressure on companies.
The second proviso of sub-section 5 of Section
135 of the Indian Companies Act 2013 states: “Provided further that if the
company fails to spend such amount, the Board shall, in its report made under
clause (o) of sub-section (3) of section 134, specify the reasons for not
spending the amount.”
135 of the Indian Companies Act 2013 states: “Provided further that if the
company fails to spend such amount, the Board shall, in its report made under
clause (o) of sub-section (3) of section 134, specify the reasons for not
spending the amount.”
This provision was specifically inserted in the Act
to allow companies to follow the ‘Comply or Explain’ philosophy on CSR. The
company and its officers were liable to be penalized only in case of
non-disclosures of CSR.
to allow companies to follow the ‘Comply or Explain’ philosophy on CSR. The
company and its officers were liable to be penalized only in case of
non-disclosures of CSR.
Regulatory
excesses will kill the voluntary spirit of CSR
excesses will kill the voluntary spirit of CSR
In our view what MCA is contemplating now is
regulatory excesses which will kill the very spirit of voluntary CSR which has
and should stem from the heart of corporate India.
regulatory excesses which will kill the very spirit of voluntary CSR which has
and should stem from the heart of corporate India.
The role of the regulator should be restricted
to regulating and not control.
to regulating and not control.
Statistics reveal that CSR spend by companies
is growing and far from diminishing. Why then should there be CSR “enforcement”?
is growing and far from diminishing. Why then should there be CSR “enforcement”?
CSR as the name itself
suggests, is a ‘social responsibility’ which is a voluntary corporate value and
MCA should refrain from creating an enforcement and prosecution regime.
suggests, is a ‘social responsibility’ which is a voluntary corporate value and
MCA should refrain from creating an enforcement and prosecution regime.
Law should create
an enabling environment
an enabling environment
The law should create an “enabling
environment” for CSR and not one of “enforcement”.
environment” for CSR and not one of “enforcement”.
CSR spend is not even allowed as a business
expenditure under section 37 of the Income tax Act and thus smaller companies
do not even see any incentive for spending on CSR. In fact, some even see this
as an additional “charity tax” over and above corporate taxes.
expenditure under section 37 of the Income tax Act and thus smaller companies
do not even see any incentive for spending on CSR. In fact, some even see this
as an additional “charity tax” over and above corporate taxes.
Insisting that two percent of the net profits
should be utilized fully will create unnecessary pressure on companies to spend
only in order to meet compliance requirement. This sort of pressure will lead to
giving to easy causes, thus defeating the very essence of strategic and
sustainable CSR.
should be utilized fully will create unnecessary pressure on companies to spend
only in order to meet compliance requirement. This sort of pressure will lead to
giving to easy causes, thus defeating the very essence of strategic and
sustainable CSR.
In our opinion, government should allow CSR to
take root and grow at its own natural pace without threats of ‘enforcement’ and
‘prosecution’. There is significant growth in CSR spending over the last four
years and in our opinion, additional controls and enforcement will prove
detrimental to the essence of CSR.
take root and grow at its own natural pace without threats of ‘enforcement’ and
‘prosecution’. There is significant growth in CSR spending over the last four
years and in our opinion, additional controls and enforcement will prove
detrimental to the essence of CSR.
Noshir H.
Dadrawala
Dadrawala