earthglobe

“Gandhi’s trusteeship principle is with which profit-making cannot be devoid of social responsibility”, said the country’s Corporate Affairs Minister, Nirmala Sitharaman during the session in Rajya Sabha for the passing of the Companies (Amendment) Act, 2019.

The Companies (Amendment) Bill, 2019 was passed by the Lok Sabha on 26th July 2019 and by the Rajya Sabha on 30th July 2019. The Bill aims to bring about changes in the Companies Act, 2013. Changes brought in through the amendment Bill include the transfer of certain responsibilities to the National Company Law Tribunal, the re-categorization of specific offences as civil offences and the tightening of Corporate Social Responsibility (hereinafter referred to as CSR) compliance.

What seems a bit ironical is the fact that while the Bill has sought to recategorize 16 offences of the then 81 penal offences as civil offences, it has added one more to the list of criminal offences. The new amendment adds three new sub-sections along with other changes to Section 135 of the Companies Act, 2013, which deals with CSR. Of this, the seventh sub-section provides for imprisonment for a period of three years for failure to comply with specific provisions under the section.

Further, the amendment to Section 135 with respect to CSR also makes new stipulations on the spending of the CSR money. As till now, if a company was unable to fully utilize the CSR money as required by the Companies Act, 2013, it could carry forward this amount to the next year and spent it within that year, along with the money already allotted for that particular year. But as per the new amendment, the unspent amount will have to be deposited into an escrow, if there is any ongoing project for which the amount is allocated to be spent. The deposition of the money must take place within 30 days of the end of that fiscal. Additionally, the amount so deposited, will have to be spent within three years from the date of its transfer, failing of which it will be put in funds as specified under Schedule VII of the Companies Act, 2013, which includes the Prime Minister’s Relief Fund.

While our Corporate Affairs Minister, Ms. Sitharaman, assures that the Bill was being brought in to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in the corporate sector, the corporate sector has its reservations on the new amendment. Of the concerns they pose on the amendments made to section 135, the one that is most glaring is regarding the penal sanction imposed for non-compliance.

In order to analyze whether the penal provisions were uncalled for, we need to understand _____

Corporate Social Responsibility is essentially a business model that helps a company to be socially accountable. The accountability can be to itself, its stakeholders or to the public. Such a business model can be self-regulated or regulated by the state. In India, we largely rely on the government regulation for implementation of CSR.

The concept of CSR, as it stands now, has been introduced through section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility) Rules, 2014. Even when the concept was introduced as a legal mandate, the government had stipulations on where the CSR money can be utilized. As per the circular issued by the Government of India[1] the 2014 rules were made to ensure that the CSR activities of the companies, that fall under this provision, are relatable to Schedule VII of the Companies Act, 2013. Thus, it can be seen that the new amendment which requires the funds to be transferred to funds specified under Schedule VII of the Act, does not walk very far from this. What can be seen as unfair is the restriction of its utilization to the ‘funds’ specified in the Schedule. The items listed in Schedule VII are broad-based and are intended to cover a wide range of activities.[2] Thus the companies have the innovative space to come up with creative ways in which the money can be utilized for the various needs under the provision. When given to a particular fund, this independence is lost. An argument that can be posed against this apprehension is that the ‘freedom’ is lost only on the failure of utilizing the money within a span of a year. However, this also comes with the counter argument that even if the money is set to be utilized for a particular project, the very nature of the project or extraneous factors, could cause the project to extend beyond two-year span (as required under Section 135(6)). Making laws stringent and government driven to the extend of limiting the time span over which the money can be spent may take away the incentive from the companies altogether. While regulations set by the government do play an important role in providing guidelines on where the CSR money should be invested in, it is advisable that the companies are given some amount of levy and space in the way the CSR money is spent. This is also important to not pressurize the companies into feeling that CSR is just another form of tax.

An argument that exists against making CSR legally mandatory on companies was that forcing companies to spend money on CSR need not ensure that the society benefits from it the way legislators have in mind. It is argued that mandating CSR is like levying an additional tax and asking the companies to spend the proceeds themselves. Companies and economists feel that there is a lot of waste and scale diseconomies.[3]

[1] General Circular No. 21/2014, available at: http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf, last visited on: 03-07-2019

[2] General Circular No. 21/2014, available at: http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf, last visited on: 03-07-2019

[3] CSR Should Not Be Source of Harassment, Economic Times, Aug. 4, 2019, Available at: https://economictimes.indiatimes.com/blogs/et-editorials/csr-should-not-be-source-of-harassment/, last visited on: 06-08-2019.