The amendment to the Companies Act, introducing harsh penalties including jail term for non-compliance on CSR (corporate social responsibility), comes at a time when firms have been successively improving their record on the front. Data sourced from Prime Database (a leading provider of data on capital market), shows that in the last five years, the total CSR spend of companies has progressively jumped from 70% to over 90% now.
According to the data available for 224 companies for the year 2018-19, against a required CSR spend of Rs 4,366.8 crore, the firms spent an aggregate of Rs 3,994 crore or 91.5% of the requirement. The percentage stood at 79% in FY’16, 83.8% in FY’17 and 83.2% in FY’18.
While some call the mandatory CSR spend clause itself regressive, there is no impact assessment either on whether the sums spend under it are actually effective. Penal provisions on top of it, despite improvement as shown by this data come as a surprise.
Data further shows that both the number of companies eligible for mandatory CSR spending and their total spend have shown a significant rise. While the amount stood at Rs 6,446 crore in FY’15 for 849 companies, it was Rs 10,115 crore in FY’18 for 1,077 companies. While data is available only for 224 companies as of now for 2018-19, they have spent 4,525 crore.
India Inc has termed the government’s decision to impose prison sentence over CSR as retrograde and sought a relook. Industry participants say the move is also strange given the improved compliance.
“I think in the first couple of years several companies struggled to spend as they did not have a mechanism in place. However, over the last couple of years, most large companies that are profitable have beaten the requirement of 2% of average net profit of last three years for CSR spend. I am not sure what motivated the government, but such moves take us behind,” said Naushad Forbes, co-chairman of Forbes Marshall.
The data also shows that the number of companies spending their full CSR funds has also been improving. While nearly 62%, or 526 companies out of 849 in its study, had unspent CSR amounts in 2014-15, this number had come down to 50% in 2015-16, further falling to 45% and 39% in FY’17 and FY’18 respectively. In 2017-18, 422 companies out of the 1,077 companies under study had unspent CSR funds.
Pranav Haldea, Managing Director, Prime Database, admitted that the data had to be taken with some scepticism as no one knows how most of the companies were doing CSR, and there was no impact assessment. While top 50-100 companies have set up foundations for CSR spending, many smaller companies are not receptive to the idea, he said.
But, he added, “these things can’t be mandated and it has to come from your own social commitment”. Calling the amendment a step in the wrong direction, he said, “The move to impose prison term is ridiculous. We can’t have these things as mandatory and if the companies pay their tax dues, that is good enough. While there are groups and companies that have been doing CSR work through their foundations even before the law came in, those who don’t want to do it will not do it and somehow manage to show the numbers.”
The amendment to the Companies Act, passed last week, specified among other provisions that unspent CSR funds by companies should be transferred into an escrow account called the Unspent Corporate Social Responsibility Account, with the corpus to be utilised within three years of transfer. It also said that any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Companies Act such as the Prime Minister’s Relief Fund, within six months of the financial-year end.
The amendment to Section 135 of the Companies Act adds, “If a company contravenes the provisions of sub-section (5) or sub-section (6), the company 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.”
Till now, the Act required that “if the company fails to spend such amount, the Board shall, in its report (annual report), specify the reasons for not spending the amount.”