Almost three weeks after the government amended the Companies Act to introduce provision for imprisonment of up to 3 years for officials of companies that fail to comply with the specified corporate social responsibility (CSR) expenditure, Finance Minister Nirmala Sitharaman announced to roll it back.
Stating that Ministry of Corporate Affairs will review sections under Companies Act, the minister said, “CSR Violations not to be treated as criminal offence and would instead be civil liability.” She further added that the government has provided companies through revised orders, time for completing ongoing projects towards fulfilling their CSR violations. The government’s decision to introduce provision for imprisonment attracted a lot of criticism from corporates and experts. While several of them termed it as “retrograde” they questioned the government’s decision as the compliance rate of CSR expenditure by corporates was on a rise. The industry body CII had immediately requested the government to have a relook into the provision.
The industry welcomed the ministers decision to roll it back. Rajiv Singh, CEO, Karvy Stock Broking said, “The symbolic measure of withdrawing imprisonment clause for CSR violations will help sentiment of industry & wealth creators.” On July 31, 2019, the Parliament passed amendments to the Companies Act that specified that unspent CSR funds by companies should be transferred into an escrow account called Unspent Corporate Social Responsibility Account to be utilised within three years of transfer. It also said that any unspent annual CSR fund must be transferred to one of the funds under Schedule 7 of the Companies Act like Prime Minister’s Relief Fund within six months of the financial-year end.
However, in a move that has raised concerns among corporates, the new Bill now specifies penal provisions for firms that are not able to meet the same. The amendment to the Section 135 of the Companies Act now states, “If a company contravenes the provisions of sub-section (5) or sub-section (6), the firm shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees 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 which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.”
While the government brought in stringent provisions for non-compliance of CSR expenditure, data shows that the compliance has been improving over the years. According to the data from Prime Database, while nearly 62 per cent or 526 companies out of the 849 in its study had unspent CSR in 2014-15, this reduced to 50 per cent in 2015-16. The percentage of companies with unspent CSR fund reduced to 45 per cent and 39 per cent in FY’17 and FY’18 respectively. In 2017-18, 422 companies out of the 1077 companies under study has unspent CSR fund left with them.