The July amendments to the Companies Act, which laid out punitive penal provisions for non-compliance with corporate social responsibility (CSR) spending norms, had India Inc plenty worried. Following days of intense lobbying by the stakeholders and the recommendations of the high-level committee on CSR to de-criminalise non-compliance, the government has reportedly done away with plans to jail officials caught flouting norms.
Under the Companies Act, certain classes of profitable companies are required to shell out at least two per cent of their three-year annual average net profit towards CSR activities in a particular financial year and the requirement came into force from April 1, 2014. Companies with a net worth of Rs 500 crore or more, turnover of at least Rs 1,000 crore and net profit of Rs 5 crore for the preceding year come into the purview of this law. The recently amended Section 135 stated that every defaulting officer flouting these norms in such companies would be punishable with a jail term of up to three years and/or a fine ranging from Rs 50,000 to Rs 5 lakh.
The government-constituted panel headed by Corporate Affairs Secretary Injeti Srinivas submitted its much-debated report to Finance Minister Nirmala Sitharaman on Tuesday in which it suggested making non-compliance with CSR norms a civil offence, attracting a penalty of two to three times the default amount going up to Rs 1 crore, but "there be no imprisonment", because "such penal provisions are not in harmony with the spirit of CSR".
A senior government official told The Economic Times that in light of the panel's recommendations, the government won't proceed with the changes and will not issue followup rules required to implement the much-criticised penal provisions. The Srinivas panel was constituted in October 2018 to review the existing CSR framework and make recommendations on strengthening its ecosystem, including monitoring implementation and evaluation of outcomes.
The members of the committee included included Tata Sons chairman N Chandrasekaran, Bain Capital Private Equity managing director Amit Chandra, former additional solicitor general BS Narasimha, Luthra and Luthra Law Office founder Rajeev Luthra, Apollo Hospitals Enterprise Ltd executive vice chairperson Shobana Kamineni, Indian Institute of Management-Ahmedabad professor Anil Gupta, Indian Institute of Corporate Affairs director general Sameer Sharma, former NBCC chairman and managing director AK Mittal, Indian Olympic Association president Narinder Batra, chartered accountant S. Santhanakrishnan and Helpage India CEO Mathew Cherian.
"The Committee has made far reaching recommendations," the Ministry of Corporate Affairs said in a statement yesterday. It added that the main recommendations include making CSR expenditure tax deductible, introducing a provision for carry forward of unspent balance for a period of 3-5 years, aligning CSR activities with Sustainable Development Goals (SGDs), registration of implementation agencies on the ministry's portal, developing a CSR exchange portal to connect contributors, beneficiaries and agencies, allowing CSR in social benefit bonds and impact assessment studies for CSR obligation of Rs 5 crore or more, among others.
In a significant suggestion, the panel said that CSR could be brought within the purview of statutory financial audit by making relevant spending details a part of the financial statement of a company. Furthermore, mere disbursal of funds to implementing agencies should not be construed as CSR spending. "Regulatory oversight be exercised through enhanced and granular reporting wherever CSR funds are used for creation of capital assets," the report stated, adding that companies should be encouraged to forge partnerships when creating assets for public purpose. The ownership shall rest with the public and "the company may act as a custodian to operate it and make it self-sustaining".
The panel wants banks, limited liability partnerships and "similarly placed entities" to also come under a mandatory CSR expenditure framework. It further noted that approximately 80 per cent of companies eligible for CSR prescribed CSR amount of less than Rs 50 lakh between FY15 and FY18. Hence the committee suggested that companies falling under this threshold (Rs 50 lakh) be exempt from constituting a separate CSR committee and instead have their boards carry out such functions.