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CSR: CII to approach govt on penal provisions; Ficci says changes to encourage tick-box compliance

Amid concerns in various quarters, industry body CII plans to approach the government seeking reconsideration of penal provisions with respect to non-compliance with CSR spending norms under the companies law. Industry grouping Ficci on Friday said the changes would only encourage tick-box compliance. With the latest amendments to the companies law, there would be penal action for non-compliance besides provision for carrying forward unspent amount with respect to Corporate Social Responsibility (CSR).
Rumjhum Chatterjee, co-chair of CII (Confederation of Indian Industry) CSR Committee, on Friday said the penal action provision is a harsh step, adding that at this time, there is a requirement to work with the industry and help them in kind of complying with regulatory framework rather than announce penal action.
“We are going to give a representation… we will request the government to reconsider the penal provision,” she told PTI. In case of non-compliance with CSR spending requirement, the company could face a fine of at least INR 50,000 and the quantum could go up to INR 25 lakh.
Besides, 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 INR 50,000 but which may extend to INR 5 lakh, or with both, as per the amended Act.
According to Chatterjee, there are many small and medium industries that do not have the capacity to implement CSR projects on their own and they need hand holding, capacity building and incentivisation, among others. The penal provision has come like a harsh step and “we hope the government will reconsider it”, she said.
“The focus seems to be more on spending the money, irrespective of where it is spent and the outcomes of that. That worries us a lot. The thing is on spending the money and not so much on the social outcome for which it was mandated,” Chatterjee noted. Referring to new requirement of transferring unspent CSR amounts to government-specified funds and introduction of penalties for non-compliance, Ficci President Sandip Somany said it would only encourage tick-box compliance. “CSR is not just about spending but making an impact and finding sustainable solutions. The recent amendment will only encourage tick-box compliance. “It is also not aligned with the government’s recent measures to decriminalise non-compliance,” he said in a statement.
Under the Companies Act, 2013, certain class of profitable entities are required to shell out at least two per cent of their three-year annual average net profit towards Corporate Social Responsibility (CSR) activities in a particular fiscal. In 2017-18, as many as 3,117 companies spent Rs 8,365.35 crore towards CSR activities, as per data up to October 20, 2018. The CSR provisions came into force from April 1, 2014. Sai Venkateshwaran, Partner and Head, CFO Advisory at KPMG in India, said latest amendments to the companies law essentially make a voluntary social initiative a mandatory spend under law, akin to a social commitment levy.
“As a concept, CSR is meant to be voluntary and making it mandatory itself is a big change. However, the recent amendments have taken an unexpected turn with regards to penal provisions, for non-compliance with CSR requirements,” he said. About the amendments related to CSR, Madhu Sudan Kankani, Partner at Deloitte India, said there was enough encouragement to nudge companies to spend that much money.
“In my view a lot of companies have taken it in a positive way to identify the projects… in some ways, it becomes mandatory but I think then spending that money was considered mandatory except that there was no penal provision…,” he noted. Chatterjee also said the CSR is now like a mandatory spend. “There are three countries where we have found that there are mandatory provisions like this. Indonesia, Mauritius and Nepal. Whether penal provisions also apply there, we don’t know…,” she added.
Noting that it has been a long-standing industry demand to make CSR expenditure tax-deductible, Somany said since it is given that the CSR obligation has become mandatory, the amount needs to be treated like any other business expenditure. Piloting the bill to amend companies law in Rajya Sabha on July 30, Corporate Affairs Minister Nirmala Sitharaman said that any amount, remaining unutilised in such CSR account, shall thereafter be transferred to any fund specified in Schedule VII.
The schedule pertains to CSR. “Section 135 is also to be amended to provide for specific penal provisions in case of non-compliance. I mentioned earlier, that it was easy for the people to interpret, saying either we comply with it or else we will give an explanation and get away with it.
“Now, that is not happening because Section 135 is also being amended to provide for a specific penal provision in case of non-compliance and authorise the central government, the Ministry of Corporate Affairs, to give directions to the companies or any class of them for ensuring compliance with the provisions of the CSR,” she had said.