Need for decriminalization of non-compliance of stringent CSR norms

CSR Provisions under the Companies Act, 2013
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1. The enactment of the Companies Act, 2013 (in short "the Act") and enforcement of most of the provisions of the said Act with effect from 1st April, 2014 brought about significant changes in the way business was being conducted by the corporate India. The Act stipulated stricter penal provisions for non-compliance of the provisions of the Act by companies and many provisions of the Act prescribed penalty, including imprisonment, for the persons responsible for the conduct of the day to day management of the companies.

Section 135 of the Act, for the first time in India, introduced the provision for Corporate Social Responsibility (CSR) for certain specified profitable companies and the Schedule attached to the Act stipulated the areas where the companies could spend the CSR funds. The CSR provisions of the Act, when initially implemented w.e.f. 1.4.2014 mandated that any company having net worth of Rs. 500 crore and more; or having a turnover of Rs. 1000 crore or more; or a net profit of Rs. 5 crore or more, will have to constitute its CSR Committee of its Board of Directors (BoD) and was required to spend in each financial year 2% of its average net profits that the company made during the three immediately preceding financial years. The concerned company was required to disclose in its report prepared under Section 134(3) of the Act, the fact about the composition of its CSR Committee.

Even though many corporate leaders and researchers voiced that since CSR spend is basically a voluntary activity and being philanthropic in nature, yet why does the Government have to step in by enacting a law mandating CSR spend. Yet, the seriousness attached by the Government to CSR activities of companies can be appreciated from the fact that said section 135 also mandated that the CSR Committee formed by the company shall formulate and recommend to its Board of Directors, a CSR Policy which shall include the activities to be undertaken by such a company as specified in Schedule VII to the Act; and also recommend the amount of expenditure to be incurred on the activities referred to by the CSR Committee. The law also mandated that the CSR Committee is required to monitor the CSR Policy of the company from time to time.

Further, the second proviso to section 135(5) initially stipulated that if the company fails to spend such amount, the Board of Directors of the concerned company will have to include in its report prepared under section 134(3)(o) of the Act the reasons for not spending the amount and place before the general meeting a report on the details of the policy developed and implemented by the company on CSR initiatives and also report the reasons for such non-compliance of the mandated CSR provisions.

Challenges Faced by Industry in Complying with CSR Laws

2. Many teething problems were being faced by the concerned companies and from time to time, necessary clarifications were issued by the nodal regulatory agency, viz., the Ministry of Corporate Affairs (MCA) to help the companies by answering their queries and towards this, expert committees were also formed by the MCA. One of the problems being faced by the companies mandated to spend CSR funds was with regard to the interpretation of the provisions of average net profits in the three preceding financial years and another problem was what would happen if the company could not discharge its mandated obligation of CSR spend fully and further, how the non-spent balance amount was to be treated/carried forward.
Of course, the Government had been taking a very pragmatic view to ameliorate the difficulties being faced by the corporate sector and was quick to address their grievances so as to advance the concept of "ease in doing business". The Companies (Amendment) Ordinance, 2018 was promulgated on 2.11.2018 and it addressed several issues raised by the corporate sector. However, since this could not be converted into Act, the Companies (Amendment) Ordinance, 2019 was issued on 12.1.2019, but that Ordinance also could not be converted into Act. Hence, the Companies (Second Amendment) Ordinance, 2019 was issued on 21.2.2019. Thereafter, the Companies (Amendment) Act, 2019 was passed and it received the assent of the President of India on 31.7.2019 and it incorporated all provisions of the Companies (Second Amendment) Ordinance, 2019 and in addition thereto, some new provisions were added in the Companies (Amendment) Act, 2019.

Amendments of the Act with Regard to CSR provisions

3. Even though several amendments and changes were made in the Act through the aforesaid Ordinances and the Companies (Amendment) Act, 2019, yet, for the purposes of this article, only those provisions which impact the CSR provisions of the Act are highlighted here:

(i)For example, the difficulties faced by the companies with regard to the interpretation of the ambiguity in sub-section (1) of section 135 of the Act to the applicability of the CSR provisions were addressed and vide amendment with effect from 19.9.2018 in sub-section (1) of section 135 the term "any financial year" is substituted with "immediately preceding financial year";
 
(ii)Initially, the law mandated (in sub-section (5) of section 135) that the BoD of the concerned company shall ensure that the company spends in every financial year at least two per cent of average netprofits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy. The difficulty faced by the companies in adhering to this legal mandate was addressed by the Government and the Companies Amendment Act, 2019, thus, added the words "or where the company has not completed the period of three financial years, since its incorporation, during such immediately preceding financial years" in sub-section (5) of section 135. This amendment, as and when enforced by the Government, will clear the doubts which surfaced in interpreting the said provision;
 
(iii)With regard to unspent CSR amount and its reporting in the Director's Report under section 134, the Companies Amendment Act, 2019, has inserted the words "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 6 months of the expiry of the financial year." This change will clear the doubts being faced by the companies about the treatment to be given to the unspent CSR amount.
 
(iv)To further amplify how the unspent CSR amount is to be treated, an altogether new provision, namely, sub-section (6) has been added to section 135 of the Act which reads as under:
  
"(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 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."
  
The aforesaid amendment is significant because it amply clarifies the treatment to be given by the concerned company with regard to its unspent CSR fund and mandates that despite such transfers, if any balance amount still remains unspent, it shall be transferred to a Fund specified in Schedule VII of the Act.
 
(v)While, in its enthusiasm to ensure that the Parliament mandated CSR provisions in the Act are not taken lightly and are implemented in all seriousness by the industry concerned, the Government introduced through the Companies (Amendment) Act, 2019 stringent penal provisions including imprisonment for non-compliance of the CSR law. A new sub-section (7) was inserted to section 135, which reads as under:
  
"(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."
  
Since the terms "officer" defined in sub-section (59) of section 2 of the Act includes any Director or Key Managerial Personnel or any other person in accordance with whose directions or instructions the Board of Directors or any one or more of the Directors is or are accustomed to act, the aforesaid penal provision substantially affected the companies to which CSR provisions apply. Naturally, introduction of the stricter penal provisions were severely criticised and demands were made to decriminalise the said penal provisions and to make them civil in nature. In deference to the wishes of the corporate sector, the Government has not yet notified enforcement of the newly introduced penal provisions.
  
In this regard it is worthwhile to note that the MCA had set up a Company Law Committee (CLC) on 18.09.2019 to make recommendations to the Government to, inter alia, re-categorize certain criminal compoundable offences to civil wrongs, carrying civil liabilities, to facilitate and promote ease of doing business and ease of living. The excerpt of the said CLC report dated 14.11.2019 with regard to penal provision under sub-section (7) of section 135 of the Act reads as under:
 
"In case of default, the company shall be levied a penalty equal to twice the unspent CSR amount which is required to be transferred to the Account under sub-section (6) or one crore rupees, whichever is lower, whereas the officer in default shall be levied a penalty equal to one tenth of the unspent CSR amount which is required to be transferred to the Account under sub-section (6) or two lakh rupees, whichever is lower."
 
The aforesaid recommendation, if accepted and incorporated eventually into the Act, will definitely help the companies in promoting ease of doing business and the Damocles' Sword of imprisonment hanging over the directors and officers of the companies due to non-compliance of CSR laws and regulations will get removed and it will help not only in ease of doing business but also ease of living by the concerned Directors and officers of the companies. This appears to be a welcome move and requires urgent consideration by the MCA.
 

(vi) Further, another significant recommendation of the CLC is that a suitable provision be inserted in section 135(1) of the Act to enable the Central Government to enhance the threshold limits for triggering applicability of CSR provisions by way of Rules. However, critics point out that how such delegated legislation will go well with the principles enunciated in the Constitution of India needs to be seen, as such delegated legislation may be challenged in the Court.

Current Status of CSR provisions in India

4. As reported in The Economic Times on 20th November 2019, the Minister of State for Finance and Corporate Affairs, in reply to a question on 19th November 2019 in the Rajya Sabha has said that CSR expenditure by the private sector companies increased from Rs. 10,302.50 crore in 2015-16 to Rs. 11,067 crore in 2017-18. However, the CSR spend by Public Sector Undertakings (PSUs) was Rs. 3,296 crore in 2016-17 came down to Rs. 2,553.36 crore in 2017-18. The Minister further clarified that the companies could now count contribution towards designated technology incubators and contributions to public funded institutions like IITs, national laboratories and autonomous bodies engaged in research as part of company's CSR expenditure. It needs to be noted that vide Notification issue on 11th October 2019 and its corrigendum dated 19th November 2019, the Ministry of Corporate Affairs has amended Schedule VII of the Act which relates to activities which may be included by the companies in their CSR policies.

National CSR Awards

5. In this regard it is also pertinent to mention that National CSR awards have been instituted by the MCA to recognize corporate initiatives in the areas of CSR to achieve inclusive growth and sustainable development. The Indian Institute of Corporate Affairs, think-thank of the MCA, had rendered technical and logistics support for the conduct of the rigorous award process. At a function organized on 29th October 2019, the Hon'ble President of India observed that contribution through CSR is a true manifestation of the Trusteeship philosophy of the Father of the Nation. Awards were given under two categories, namely "Corporate Award for Excellence in CSR" and "Contribution of CSR in Challenging Circumstances". At the said award function, the Hon'ble Finance Minister also said that CSR is not merely contribution of funds by the corporate sector, but it is their contribution towards inclusive societies and this is a significant matter. Also, the Secretary, MCA, at the said function said CSR is no longer an act of philanthropy, rather it now flows out of business responsibility towards society and environment. This trend clearly indicates the positive manner in which the CSR activities are now being looked at by the Government.

Conclusion

6. The decision of the Government to keep in abeyance enforcement of the criminal prosecution provisions which were enacted by the Companies Amendment Act 2019 in sub-section (7) of the section 135 of the Act will in effect halt the move for criminalization of violations of the CSR laws. Further, once the Government enforces the provisions of sub-section (6) of section 135 of the Act which allows flexible treatment to unspent CSR funds, it is hoped that the companies will heave a sigh of relief and the 5,382 companies to whom show-cause notices were issued by the MCA for CSR violations, will get an opportunity to conform to the Governmental directions with regard to CSR spend. Hopefully, this pragmatic approach will definitely create a conducive atmosphere for such an important aspect in corporate functioning, namely, the corporate social responsibility.
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