India Inc worried over three-year jail provision for violation of CSR norms

According to new CSR norms, a company has to earmark a part of its profit towards social activities and transfer all unspent amount into an escrow account (if it is an ongoing project)

Corporate India is worried over mandatory spending on corporate social responsibility (CSR) under the new amendments to the Companies Act, which now provides for a three-year jail term if the new CSR norms are not followed.

“We had not anticipated penal provisions. Equating unspent amount to a criminal offence is a harsh step. This is an indication that we are focusing on spending rather than the outcome,” Rumjhum Chatterjee, chairperson-national committee of CSR, Confederation of Indian Industry, told Business Standard.

According to the new CSR norms under Section 135 of the Companies Act, a company has to earmark a part of its profit towards social activities and transfer all unspent amount into an escrow account (if it is an ongoing project). This account will be opened by the company concerned in a bank and be called the ‘unspent CSR account’.  

In case the money remains unspent in three years, it will be transferred to any fund specified in Schedule VII of the Act. Experts feel this ‘over-regulation’ may not go down well with the industry and that the government may enforce its agenda through CSR obligations of corporates.

“India is moving back to Inspector Raj. By making CSR spending mandatory, the government has made it into a statutory due like tax but with none of its democratic quality,” said a corporate law expert.

Funds, which are available to companies under this Schedule, include the Swachh Bharat Kosh, Clean Ganga Fund, and the Prime Minister’s National Relief Fund, among others. In case the project concerned is not ongoing, the unspent amount will go to the funds cited earlier.

Corporate Affairs Minister Nirmala Sitharaman said the Bill is being brought in to “ensure more accountability and better enforcement to strengthen corporate governance norms and compliance management in the corporate sector”.

“Gandhi’s trusteeship principle is with which profit-making cannot be devoid of social responsibility. The amendments we are bringing now are only to sharpen focus and make it far more effective,” Sitharaman told the Rajya Sabha on Tuesday.

The amendment mentions that if a company fails to comply with the norms stated above, it will be punishable with a fine between Rs 50,000 and Rs 25 lakh, 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 or both”.

“The industry seems a bit startled with the imposition of penalty for non-compliance with CSR provisions, especially when one of the objectives of the Bill was rationalisation of offences under the Companies Act,” said Atul Pandey, partner, Khaitan & Co.

Companies also said that social sector capacity needs to be built up in order to absorb higher CSR spending. “There can be a delay in spending if the project is designed in such a way or due to extraneous reasons like natural disasters. This area has to be self-regulated and incentivised,” said an industry expert.

The Companies (Amendment) Bill has been passed in both Houses of Parliament and is awaiting the President’s nod to come into effect. The Bill also seeks to empower the Centre to debar directors of companies responsible for mismanagement for five years after approval from the National Company Law Tribunal.