CSR: Corporate Social Responsibility or Corporate Social Compulsion?
India is probably the only country to have enacted corporate social responsibility (CSR) into a law. The world over CSR is all about business models and not philanthropy. It is internal and not external. It is only in India that it has been made external. Section 135 of the Companies Act, 2013 (“Act, 2013”) talks about spending 2% of the average net profits of the company in social activities as mentioned in Schedule VII of the Act, 2013. Earlier the Section was a “comply or explain” (COREX) provision, wherein non-spending of the CSR amount was required to be reported by the company in the board’s report of the company. 
 
In the United Nations and Europe, much attention has been devoted to defining CSR. The definition of CSR includes the following: guidelines, codes of conduct, or pledges encompassing positive corporate action across dimensions such as economic, social and environmental value creation, stakeholder relations and voluntariness). Among the most globally influential CSR guidelines or standards are the Organisation for Economic Co-operation and Development (OECD) Guidelines for multinational enterprises and the goals embodied in the United Nations Global Compact. 
 
The OECD Guidelines, though intended to provide voluntary principles and standards, have been recognized by OECD “adhering countries” as well as other countries, as “recommendations jointly addressed by governments to multinational enterprises”. However, the guidelines are not intended to be legally binding or enforceable. The provisions of CSR have developed in the United Nations and Europe as a concept that is aimed at “business beyond compliance with the law and beyond shareholder wealth maximization”, which means that it is a voluntary compliance by businesses.
 
With the Companies (Amendment) Act, 2019, (Act 2019) enacted on 31 July 2019, the amendments have gone to the extent of converting a corex provision into a punishable obligation. 
 
Not only this, while the rest of the law has removed custodial punishment and replaced the same with penalties, Section 135 provides for 3 years’ imprisonment or with rigorous fine or both
 
Although the provisions have not been enforced currently, there are grey areas which are worth discussion by the ministry in due course of time. 
 
Requirement under the Law after the Amendment
 
The revised Section 135 of the Act, 2013 requires the following:
 
a) Transfer of the unspent CSR amount to a Fund as specified in Schedule VII --Such as the Prime Minister’s National Relief Fund, Clean Ganga Fund etc. where it does not relate to any on-going projects within 6 months from the end of the financial year.
 
b) Transfer of the unspent CSR amount to Unspent Corporate Social Responsibility Account where it belongs to an on-going project, within 30 days of the end of the financial year.
 
Further, such amount is to be spent in the next 3 financial years, failing which the same shall be transferred to a Fund as mentioned in Schedule VII of the Act, 2013 after the end of the 3 financial years.
 
Transfer of Unspent CSR Amount to a Fund
 
The recent amendment to Section 135(5) of the Act, 2013 incorporating the “comply or be penalized” rule that requires the company to transfer the entire unspent CSR amount to a specified fund, means that once the financial year has ended, the company is straightaway  obligated to transfer all the unspent CSR amount, except the ones which are being utilized for ongoing projects, to the Fund. Naturally, that would mean that all unspent CSR amount will switch from the company’s control to the Fund’s control which will be then utilized by the government in a centralized manner. 
 
Transfer of the Amount Getting Utilized in On-going Projects to Unspent CSR Account 
 
Section 135(6) of the Act, 2013 has been newly inserted to provide that where there are on-going projects in the company as per the conditions specified, the company needs to transfer the unspent amount in a special account to be opened by the company, named as “unspent corporate social responsibility account” within 30 days from the end of the financial year. Further, even after transferring the amount to the unspent corporate social responsibility account, the company needs to make sure about its spending within a period of 3 financial years, failing which it will be transferred to a fund as mentioned in Schedule VII of the Act, 2013 within the next 30 days from the date of completion of the 3rd financial year.
 
Impact of the Amendment and Grey Areas Left
 
The amended section says that there will be certain conditions prescribed, on the fulfilment of which a project shall be regarded as an on-going project. One will be able to determine a project as an on-going project, only once the rules are in place. Further, since the company is anyway required to spend the unspent amount in the next three financial years, whether that would mean that the maximum period for an on-going project will be 3 financial years upon which the amount will be transferred to the specified fund? Here, we may take an example of real estate projects such as building of a hospital or a school, where the expected time for completion of the project might be beyond 3 years depending on its size and the project cost. 
 
However, this may not be surely the intent as the law cannot compel to complete projects within 3 years where the expected time for completing it goes beyond 3 years. 
 
Whether Committed Disbursement Would Mean the Project Is ‘On-Going’?
 
There might be situations where a company has agreed for disbursement of an amount before the end of the financial year; however, due to practical difficulties, the actual disbursement has not been made or the project for which the disbursement has been committed has not started or initiated. In the former case, companies might be in a hassle-free situation as all they will be required to do is to identify projects and fix up an amount for spending towards it. On the contrary, where the latter is the case, and the project has not started, it will not be correct to regard the same as “on-going”. So, there might be several situations for considering a project as “on-going”, some of the illustrative ones are the following:
 
a. Where the company has identified projects and has committed a disbursement towards it but the actual disbursement is not made.
 
b. Where the company has identified projects and made the disbursement but the project has not started.
 
c. Where the company has identified projects, made the disbursement and the project has just commenced.
 
However, the actual meaning of “on-going” will be clear only once the rules are in place.
 
Difficulties In Case of Implementation through Trust or Implementing Agencies 
 
Another major issue which the companies will face is companies spending the CSR amount through trusts or implementing agencies. Several companies have group-wide channelizing agencies where all the group companies transfer a lump-sum amount to the trust which in turn spend the amount into different CSR activities. Generally, the funds are co-mingled. Since, a trust is nothing but a conduit of channelizing funds, merely transferring the money to the trust is surely not the intent of law. Accordingly, any amount remaining unspent with the trust should be transferred either to the unspent corporate social responsibility account or to the Fund. Further, where the company does not have group-wise conduit in the form of a trust, the company makes CSR spending through implementing agencies, for example, the non-government organisations (NGOs). In case of spending through implementing agencies, companies do not have any control over the implementing agency. All that is required by the companies is to periodically monitor the spending by the implementing agency. 
 
With the implementation of the new provision, such practice also needs to be reviewed.   
 
Opening of Unspent Corporate Social Responsibility Account
 
The new provision provides no clarity on whether a company is required to open “Unspent Corporate Social Responsibility Account” project-wise or whether there will be a single account managed for all on-going projects. 
 
Penal Provisions
 
With the switch from the corex to a “comply or be penalized” provision, any non-compliance with the new requirements of law would invite the following penalties: 
i. Company to pay a fine of Rs50,000 - Rs25 lakh 
 
ii. Every officer to pay a fine of Rs50,000- Rs5 lakh or imprisonment of up to 3 years, or both.
 
Conclusion
 
The provisions seem to be strictly levied on all companies but shall require a lot of clarity for its practical implementation. Till such time as the rules are in place and the amendment is made effective, the companies may plan accordingly in order to comply with the provision.
  
To read the highlights on Companies (Amendment) Act, 2019, click here

To read our other articles on corporate laws, click here
 
(The writer is manager in corporate law division at Vinod Kothari & Co)
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    User

    COMMENTS

    Rajneesh Agarwal

    1 month ago

    in the era of globalisation and stiff competition the cos should focus on their business and csr should be done by the govt which is collecting full taxes anyway

    Bhushan Dewan

    1 month ago

    India's tax to GDP ratio is a pitiable [email protected]% while it's [email protected]% in Europe and about 40% in USA. Also significant chunk of tax collections are on account of indirect taxes from common man. So businesses need not complain if they have to spend 2% on socioeconomic development of the society. Businesses have to disabuse their minds of the idea that they exist only for maximizing profits for promoters & shareholders, and for paying obscene annual salary like Rs 60 crores per year to the top boss.

    Bhushan Dewan

    1 month ago

    Ko

    Ramesh Poapt

    1 month ago

    without any law, co.s should contribute more.
    there are co.s where they spend a lot- in India and globally.
    blessings/pleasure recd will be much more than the amt spent.

    Arumugaraja

    1 month ago

    Forcing someone to donate is immoral.

    Govt Removes Requirement of Debenture Redemption Reserve Norm for listed companies, NBFCs
    The government on Monday removed the requirement of 'Debenture Redemption Reserve' (DRR) for listed companies, non-banking financial companies (NBFCs) and housing finance companies (HFCs).
     
    A statement by the Corporate Affairs Ministry said that the decision has been taken in pursuance of the budget announcements for 2019-20 by Finance and Corporate Affairs Minister Nirmala Sitharaman and the government's objectives of providing greater "ease of doing business" to companies in the country, as part of its 100 Days Action Plan.
     
    "The Ministry of Corporate Affairs has amended the Companies (Share Capital and Debentures) Rules by removing Debenture Redemption Reserve requirement for Listed Companies, NCFCs and HFCs," it said.
     
    Through the amendments, the provisions relating to creation of DRR have been revised with the objective of "removing the requirement for creation of a DRR of 25 per cent of the value of outstanding debentures in respect of listed companies, NBFCs registered with the RBI and for HFCs registered with National Housing Bank (NHB) both for public issue as well as private placements," said the statement.
     
    The amendment would also aims to reduce DRR for unlisted companies from the present level of 25 per cent to 10 per cent of the outstanding debentures.
     
    Earlier, listed companies had to create a DRR for both public issue as well as private placement of debentures, while NBFCs and HFCs had to create DRR only when they opted for public issue of debentures.
     
    "It (the latest amendment) is aimed at creating a level-playing field between NBFCs, HFCs and listed companies on the one hand and also between them and Banking Companies & All India Financial Institutions on the other, which are already exempted from DRR," it said.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Ramesh Poapt

    1 month ago

    bad one indeed!

    vikram chinmulgund

    1 month ago

    Debt without liability to pay - Awesome Idea of Chaiwalla. Modi govt. slogans / schemes have been gradually undoing all the reforms brought in by P.V. Narsimha rao + Manmohan Singh in the 90's. The effect on the economy is obvious now. India is now considering offering bonds internationally which is the same as begging other countries for money against an IOU. Instead of fixing the problem which means admitting policy errors the Modi govt. is just covering the issue with more paper money. First demonetization and now throw away the new currency into a black hole of debt without liability. Begging bowl to IMF is next.

    Ashit Kothi

    1 month ago

    WHAT IS 'EASE OF DOING BUSINESS' - RECKLESS BORROWING WITHOUT ANY REPAYMENT INTENTION. IT IS MISPLACED STEP.

    Ask Banking segment to pass on the benefit of reduction in rates to Corporate / Retail Borrowers. Bring down the actual (real) cost of capital. Delays in various permission, issue and renewal of various licenses, delay in resolving any financial disputes increase the cost of capital as resolution of issues take indefinate time.

    Balesh Sharma quits as Vodafone Idea CEO, Ravinder Takkar new chief
    In what is seen as a major casualty of the ongoing stress in the telecom sector, Vodafone Idea CEO Balesh Sharma has resigned with immediate effect.
     
    The company's board said on Monday that Sharma has resigned due to "personal reasons".
     
    The company has consequently appointed Ravinder Takkar as its MD and CEO.
     
    The board said that Sharma would take up a new role with the Vodafone Group, which will be announced in due course.
     
    Sharma's departure from the top post, however, is being seen as a casualty of the ongoing stress in the telecom sector. He was appointed the first CEO of merged entity Vodafone Idea less than a year ago. 
     
    The company is not doing well on the financial front and is also continuously losing subscribers.
     
    "The Board of Vodafone Idea Ltd today (Monday) announced that it has accepted Balesh Sharma's request for personal reasons to step down as CEO of Vodafone Idea," the company said in a statement.
     
    The statement noted that Sharma has overseen the successful integration of Vodafone Idea, resulting in the estimated timeframe to complete the integration falling from four to just two years. 
     
    "Balesh has driven the strategy of the combined business since its formation and he has also spearheaded the largest-ever equity raise in India," the company said.
     
    Takkar, who will takeover as MD and CEO with immediate effect, has been appointed for a three-year period.
     
    He is currently a Non-Executive Director on the board of the company and that of Indus Towers, where he is responsible for all Vodafone Group interests in India, the company said in a regulatory filing.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  • User

    COMMENTS

    Kshemendra Kumar Upadhyay

    1 month ago

    Excellent.

    Kshemendra Kumar Upadhyay

    1 month ago

    As per new law not spending 2% csr is a criminal offence, punishable with three years in jail, for big companies which fail to spend 2% of their profits on what the government defines as corporate social responsibility? Such spending was earlier voluntary. Making shortfalls a criminal offence will shift the emphasis from good outcomes to mere spending, with perverse results.

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