The parliament recently passed amendments to the Companies Act that aim to strengthen laws that govern corporate social responsibility (CSR). It is now not only mandatory, like tax, there is also a regulator that will arm twist companies in case of non-compliance and penalise them, taking us back to inspector raj.
Now, unspent CSR funds of that fiscal have to be transferred to an escrow account to be spent within the next three financial years. Any unutilised amount in the account will be transferred to a government fund. There are penal provisions for non-compliance of CSR provisions. Violation will lead to fines for the company and defaulting officers ranging from Rs 50,000 to Rs 25 lakh. Officers can also be imprisoned for up to three years.
Such an approach will hamper companies trying to do good work. The extra burden of compliance and reporting will force CSR leaders to take a short-term view of projects and focus on 'spends' instead of looking at societal problems holistically. What was needed was a system of positive reinforcement for firms doing good work so that it builds pressure on others to follow suit. Companies with profits of Rs 5 crore or a turnover of Rs 1,000 crore or a net worth of Rs 500 crore are mandated to spend 2 per cent of their three-year annual average net profit towards CSR activities.