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No penal action on firms violating CSR provisions

Companies have now been allowed to spend 2% of their profit on social welfare activities in subsequent years until 2019

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No penal action on firms violating CSR provisions
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In a relief to the companies which were given notices for Corporate Social Responsibility (CSR) violations, the government has decided not to proceed with the penal action against them. The companies have been allowed to spend 2% of their profit on social welfare activities in subsequent years, though the original law stipulates they have to do it in the same year itself.

The Ministry of Corporate Affairs (MCA) has diluted its prosecution mechanism set up to deal with the violation of CSR norms.

It has issued a set of guidelines directing its officials not to initiate or proceed with penal action against the companies that have flouted CSR policy norms during 2014-15 to 2017-18. The new guidelines will apply to those firms which have not spent 2% of their profits on social welfare activities within the stipulated time or not made disclosure in the Board report as mandated under the Companies Act, 2013.

As many as 5,382 companies, including Oil and Natural Gas Corporation (ONGC), Infosys, HDFC, Bharti Airtel, ICICI Bank, Axis Bank and HDFC Bank, were sent preliminary notices over non-compliance of CSR norms during the last one year.

Under the Companies Act, all the firms having a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more have to spend 2% of their average three-year annual net profit towards CSR activities in a financial year.

According to the latest guidelines on non-compliance of CSR provisions, no prosecution can be initiated against a company if it has not spent the prescribed CSR amount within the same financial year but has done so in the subsequent years up to the financial year 2019. Similarly, non-disclosure of unspent funds in the annual Board report will not invite any action from the authorities. 

"If the company has spent the unspent CSR amount in subsequent years but no disclosures about these have been made in the Board report, no prosecution may be initiated against such a company upon providing documentary evidence for spending the prescribed CSR amount…," according to the MCA. A set of nine guidelines have been prepared on the basis of which the cases pertaining to 2014-18 will be decided by the ministry. A circular in this regard has been sent to concerned officials, including Regional Directors and Registrars of Companies (RoCs).

As per Section 135 (5) of the Companies Act, "The Board of a company shall ensure that the company spends, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in pursuance of its CSR Policy... If the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount."

Meanwhile, the new guidelines suggest a departure from the strict stand taken by the ministry over non-compliance of CSR provisions of the Act.

In April 2018, the MCA had set up a Centralised Scrutiny Prosecution Mechanism (CSPM) on a pilot basis to examine the CSR expenditure of top 1,000 companies to start with, as per the announcement made by then interim finance and corporate affairs minister Piyush Goyal in the Parliament. Subsequently, to ensure strict compliance of the law, over 5,300 notices were sent to the companies that failed to spend the prescribed amount or had not given valid reasons in their Board reports for not undertaking CSR expenditure.

The waiver being given to the companies is likely to cause a loss of hundreds of crores to the government's exchequer. Section 134(8) of the Companies Act provides for imposing a minimum fine of Rs 50,000 and the amount may go up to Rs 25 lakh for certain violations. The penalty for the officer in default ranges between Rs 50,000 and Rs 5 lakh per person.

The new guidelines will apply mainly to cases where either the notices have been issued to the companies or field offices have moved to file sanctions for prosecution.

As far as unspent CSR funds for the current year are concerned, if the company has undertaken expenditure of the past years in the current year but has not spent the current year's funds, “it can either transfer the requisite unspent CSR amount in any of the funds provided under schedule VII or spend the unspent CSR amount as per its CSR policy within a period of one year," as per the guidelines. If a company did not make enough profit in 2014-15, the year the CSR law was implemented, but had made an adequate profit in the preceding three years, "it is under obligation to spend in the subsequent years. A timeline of one year should be given from the date of issuance of notice by the ministry," according to the guidelines.

In case the company has not framed its CSR policy or not disclosed the composition of its CSR Committee in line with Section 135(4) and 135(2) respectively, an advisory letter would be issued to be careful about CSR compliance, as per the guidelines issued with the approval of the minister of finance and corporate affairs.

If any waiver is required to be given for compliance of CSR rules, the matter would need to be placed before the minister, the circular said.

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