Impact of ‘The Companies (Amendment) Bill, 2020’ on CSR – Some reliefs & some anxieties!

The Companies (Amendment) Bill, 2020 has been passed by the Lok Sabha on September 19, 2020 and the Rajya Sabha on September 22, 2020. This Bill has done away with some of the draconian changes proposed earlier under clause 21 of the Indian Companies (Amendment) Act 2019 ‘criminalizing’ certain defaults in compliance under the Indian Companies Act 2013. At the same time, it has made spending two per cent of the average net profits of the company during the three immediately preceding financial years mandatory, albeit with certain relaxations.

The Bill can be read at:

https://www.prsindia.org/sites/default/files/bill_files/Companies%20%28Amendment%29%20Bill%2C%202020.pdf

Key highlights

Setting off excess CSR expenditure

Currently, excess CSR spend cannot be carried forward. Therefore, a third proviso has been added to sub-section 5 of Section 135 whereby:  if the company spends an amount in excess of two per cent of the average net profits of the company made during the three immediately preceding financial years, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.

In other words, companies that spend more than the mandatory two per cent on CSR in a particular financial year may carry it forward as credit for fulfillment of CSR obligations for the next few years.

Amendment’s link to Social Stock Exchange

This amendment also appears to tie-in with the vision of the proposed new Social Stock Exchange in India.

Companies which are spending more than the mandatory two percent of their pre-tax profits on Corporate Social Responsibility (CSR) may soon be able to trade this excess CSR expenditure. This has also been recommended by market watchdog SEBI’s High-Powered Committee on Social Stock Exchange (SSE).

Under this allowance, companies that are spending more than the limit of two per cent set under Section 135(5) of the Indian Companies Act 2013 can sell or trade this surplus to those companies which have failed to meet their annual quota.

Managing unspent CSR expenditure

Sub-section 6 to Section 135 which was proposed earlier under clause 21 of the Indian Companies (Amendment) Act 2019 appears to have been left unchanged.

Accordingly, any amount remaining unspent under sub-section (5) of Section 135, 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 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 One Crore Rupees during the fiscal year 2020-21, however, as on 31st March 2021 it is discovered that the company has spent only Ninety Lakhs Rupees 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 2021) transfer the unspent Ten Lakhs Rupees to a fund specified in Schedule VII (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 Ten Lakhs Rupees within a period of thirty days from the end of the financial year (i.e. by 30th April 2021) 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 Ten Lakhs Rupees 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.

Penalty for non-compliance

According to the new sub-section 7 to Section 135: “If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.”

Earlier under Article 21 of The Companies (Amendment) Act 2019 it was proposed 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.

Now under the new sub-clause 7 to Section 135 of the Indian Companies Act 2013, the penalty for non-compliance is twice the unspent amount required to be transferred by the company. However, the maximum penalty that can be imposed for default is a sum of one crore rupees.

The penalty for every officer of the company who is in default shall be one-tenth of the amount required to be transferred by the company. However, the maximum penalty that can be imposed for default on each officer is a sum of two lakh rupees.

CSR Committee

Under the new sub-clause 9: “Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.”

In other words, smaller companies who have less than fifty lakh rupees to spend on CSR activities need not constitute a CSR committee and the CSR obligations may be fulfilled by the Board of Directors of such company.

Uncertainty still looms for Trusts & Societies

While the uncertainly looming over Article 21 of the Indian Companies (Amendment) Act 2019 ‘criminalizing’ certain defaults in compliance under the Indian Companies Act 2013 have been put to rest under the Indian Companies (Amendment) Bill, 2020, the amendments proposed under the Indian Companies (CSR Policy) Rules 2020 remain unresolved.

One of the proposals under the Indian Companies (CSR Policy) Rules 2020 was regarding implementation of CSR activities only by the company itself or through a company established under section 8 of the Act, or any entity established under an Act of Parliament or a State legislature. This, proposed amendment, by inference, eliminated public charitable trusts and societies registered under the Act of 1860 as CSR implementing agencies.

One hopes this particular proposal under the Indian Companies (CSR Policy) Rules 2020 will not be implemented. Afterall, most charitable, welfare and developmental organisations, including several Indian Corporate Foundations are registered as trusts. What’s more even the recently established PM CARES Fund is established as a Trust.

Noshir H. Dadrawala

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