Impact of Companies (Amendment) Bill, 2019 on CSR Compliance
The Government has introduced the Companies (Amendment) Bill, 2019, in the Lok Sabha on Thursday 25th July 2019. Among other changes, the Bill seeks to tighten Corporate Social Responsibility (CSR) compliance and reduce the load of cases on the National Company Law Tribunal (NCLT).
Aim of the proposed amendments to Section 135
The Bill seeks to amend sub-section (5) of Section 135 so as to:
a) Ensure that any company having Net Worth of Rs. 500/- Crore or more or Turnover of Rs. 1,000/- crore or more or Net Profit of Rs. 5 Crore or more during the immediately preceding financial year and which has not completed the period of three financial years since its incorporation, also spends at least two per cent of the average net profits of the company made during such immediately preceding financial years in pursuance of its CSR Policy;
b) Ensure that every company having Net Worth of Rs. 500/- Crore or more or Turnover of Rs. 1,000/- crore or more or Net Profit of Rs. 5 Crore or more during the immediately preceding financial year fully spends at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy.
The proposed amendments
Highlighted in bold font are the supplementary provisions sought to be added to sub-section (5) of Section 135 of the Indian Companies Act 2013.
Sub-section 5 of Section 135: The Board of every company shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years in pursuance of its CSR Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities:
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 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.
Analysis
This means the full two per cent must be utilized during the fiscal year and only if it is an on-going project (i.e. a project or program spread out over a period of more than a year) can the unspent amount be carried forward to the next fiscal year.
If there is no on-going project the unspent amount must be transferred within a period of six months of the expiry of the previous financial year (i.e. by 30th September) to a fund specified in Schedule VII (e.g. Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women, etc.)
New sub-sections 6, 7 & 8
The Bill also proposes to insert the following three new sub-sections to Section 135 of the Indian Companies Act 2013.
New sub-section 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 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.
Analysis
This sub-section will require companies having ongoing projects to transfer unspent CSR funds 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 CSR 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.
Take for example, Company ABC Ltd., was required to spend a sum of Rs. One Crore during the fiscal year 2019-20, however, as on 31st March 2020 it is discovered that the company has spent only Rs. 90 Lakhs on CSR activities.
Now, if ABC Ltd., does not have any ongoing project it must within a period of six months of the expiry of the previous financial year (i.e. by 30th September 2020) transfer the unspent Rs. 10 Lakhs to a fund specified in Schedule VII (e.g. Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women, etc.)
In case ABC Ltd., has ongoing projects it must transfer the unspent Rs. 10 lakhs within a period of thirty days from the end of the financial year (i.e. by 30th April 2020) 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 “ABC Ltd. Unspent Corporate Social Responsibility Account”, and this sum of Rs. 10 Lakhs must be spent by ABC Ltd. in pursuance of its obligation towards CSR within a period of three financial years from the date of such transfer, failing which, the company must 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.
New sub-section 7: 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.
Analysis
In our opinion, CSR should be voluntary and not mandatory. However, making it mandatory and also imposing hefty penalties and possible imprisonment for non-compliance is detrimental to the very essence and spirit of what CSR truly is.
New sub-section 8: The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.
Analysis
This provision is ambiguous and potentially dangerous. Would this mean Central Government could give general or special directions to a company or class of companies (e.g. Public Sector Undertakings) to contribute towards a specific government program or project?
As we all know by now, the Comptroller & Auditor General (CAG) in its Compliance Audit on General Purpose Financial Reports 2018 of Central Public Sector Enterprises of Union Government had rapped PSU firms for spending CSR funds on the construction of the statue of unity. The CAG report had stated that a total of Rs 146.83 Crore was spent by five PSU firms namely ONGC, IOCL, BPCL, HPCL and OIL for the statue. Certain sections of the press had pegged the figure at Rs. 2,525 Crores.
The Bottom line is mandating CSR under law has reduced this fine universal and voluntary concept to yet another compliance function. What’s worse, some companies see it as a charity tax in addition to corporate tax.
The proposed amendments could also be a bonanza for various funds set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women, etc.
Noshir H. Dadrawala