Failure to follow CSR norms may lead to jail

Corporate Affairs Ministry will now be able to give directions to companies to ensure compliance with CSR norms

The Parliament has passed amendments to the Companies Act, advocating for stricter laws governing corporate social responsibility (CSR). 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, July 30, 2019.

All companies with a net worth of Rs 500 crore or more, or a 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. 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.

On July 31st, Economic Times reported a statement from Finance Minister Nirmala Sitharaman: “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 provisions in case of non-compliance.” Sitharaman added that the corporate affairs ministry will now be able to give directions to companies to ensure compliance with CSR norms.

For corporate India, the mandatory spending on CSR and the imprisonment penalty if the new norms are not followed, makes it clear that the government is looking at CSR seriously and will not take any violations in the rules lightly.

A Business Standard report (August 1, 2019) quoted Rumjhum Chatterjee, chairperson-national committee of CSR, Confederation of Indian Industry, as saying: “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.”

In case the money remains unspent in three years, it will be transferred to any fund specified in Schedule VII of the Act, the Business Standard report mentioned, adding that experts felt that this “over-regulation” may not go down well with the industry and that the government may enforce its agenda through CSR obligations of corporates.