CSR the best amendment : Companies to face penal action for not meeting CSR rules

The Parliament has passed amendments to Companies Act. The bill now advocates for stricter laws for corporate social responsibility (CSR) spending by corporations.

After the amendment, violation of the CSR rules could land company officials in jail for up to 3 years. Companies violating the rules will face a penalty of Rs 50,000 to Rs 25 lakh .

Companies will have to give details about the spending of money and they have been given a three-year window to adhere.

Earlier, finance minister Nirmala Sitharaman has said legitimate profit earning cannot be devoid of social responsibility, and that companies cannot get away without meeting corporate social responsibility requirements.

“It was easy for people to interpret that either we comply or we give an explanation and get away with it. Now that is not happening because Section 135 (of the Companies Act) is being amended to provide specific penal provision in case of non-compliance,” said Sitharaman, adding that the corporate affairs ministry will now be able to give directions to companies to ensure compliance with CSR norms.

Violation of CSR norms will attract fines for both the company and defaulting officers ranging from Rs 50,000 to Rs 25 lakh, with officers also liable for imprisonment of up to three years, as per the provisions in the Companies Amendment Bill, 2019 that received Parliament’s nod on Tuesday.

“Gandhiji’s trusteeship principle is that legitimate profit-earning cannot be devoid of social responsibility,” she said, replying to the debate on the bill in the Rajya Sabha. The amendments are only to sharpen the focus on that and make the Companies Act far more effective, she added.

The bill includes an amendment that mandates that companies transfer unspent CSR money in a financial year to an escrow account meant for CSR for three years, after which any unspent amount must be transferred to a fund specified by the government.

All companies with a net worth of Rs 500 crore or more, turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more are required to spend 2% of their average profit of the previous three years on CSR activities every year.

Sitharaman said the government is also strengthening enforcement provisions.

“We are strengthening the enforcement provisions that enable the SFIO (serious Fraud Investigation Office) to ensure speedy and more effective enforcement, including actions of disgorgement,” she said.

The minister also pointed out the importance of companies having verifiable registered physical addresses. “Physical verification of an office is necessary, otherwise there have been several companies operating from one room. So now it has become mandatory that companies have a physical address,” the minister said.

The bill seeks to replace the ordinance that was issued earlier.

Another key amendment is aimed at declogging the National Company Law Tribunals (NCLTs) through the shifting of routine matters, including change in financial year for a company and conversion of a public company to a private company, from the NCLT to the central government.

The bill also recategorised 16 compoundable offences, such as failure to file returns and issuance of shares at a discount, as civil defaults where adjudicating officers of the central government may levy penalties.