Parliament has passed amendments to the Companies Act to strengthen laws governing corporate social responsibility (CSR). Mint delves into the changes that have left Indian companies unamused as they face higher compliance and management costs.
What are the laws governing CSR?
The laws governing CSR come under the Companies Act, 2013, and became effective on 1 April 2014. These laws state that companies with a net worth of ₹500 crore or revenue of ₹1,000 crore or net profit of ₹5 crore during the immediately preceding fiscal should spend 2% of their average net profit in the last three years on activities related to social development such as sanitation, education, eradication of hunger, poverty and malnutrition, conservation of heritage, art and culture, and vocational training such as setting up grooming outlets or training centres for sewing.
What are the changes in the law?
Till now, if a company was unable to fully incur the CSR expenditure in a given year, it could carry this amount forward and spend it in the next 12 months, in addition to the money for that year. Under the new laws, any unspent amount will have to be deposited into an escrow account within 30 days of the end of that fiscal. This amount will have to be spent within three years from the date of its transfer, failing which it will be put into a fund, which could even be the Prime Minister’s Relief Fund. The government also plans to include a specific penal provision in the Companies Act in case of non-compliance with CSR.
What are the penalties?
Companies violating CSR norms will attract fines ranging from ₹50,000 to ₹25 lakh, with the officers concerned liable for imprisonment of up to three years, according to the Companies (Amendment) Bill, 2019.
What are the objections to the proposed amendments?
The proposed changes come in an environment where profit has become a dirty word. Starting from the budget, which increased taxes on the rich, this is seen as another move aimed at penalizing the private sector. There’s a sense that the government is unloading its responsibilities on the private sector. The new provisions are also tantamount to raising taxes on companies as they would be penalized for not spending the full CSR amount. The move will also increase costs for companies.
What paraphernalia do companies need to ensure CSR compliance?
Listed firms need to disclose their CSR activities, amount spent and framework created to ensure adherence to norms. They have a CSR team that provides a regular progress report and updates to the CSR committee of the board. The committee is also given a report of the activities undertaken each quarter, along with targets and reasons for variance, if any. All this needs to be submitted to the corporate affairs ministry. The list of activities constituting CSR and what does not is subjective.