Since Corporate Social Responsibility (“CSR”) was mandated by legislation, the business landscape of our country has witnessed a change. Body corporates are now carrying the mandate of responsibly conducting their business and also contributing towards the social development of the country. Given the dynamic social landscape of India, it becomes critical that the legislations dealing with CSR also constantly evolve to align themselves with the social and economic developments taking place in India and to ensure effective implementation of such provisions.

The Companies (Amendment) Act, 2019

The Companies (Amendment) Act, 2019 (“2019 Amendment Act”) received the assent of the President on July 31, 2019.[1]  Section 21 of the 2019 Amendment Act seeks to amend Section 135 of the Companies Act, 2013 (“Act”) with respect to CSR. Section 21 of the 2019 Amendment Act seeks to make the following amendments to Section 135 of the Act[2]:

(i) For the purposes of calculation of the CSR funding amount in accordance with the Act, the average net profit of the 3 immediately preceding financial years was to be considered. However, there were concerns with respect to calculation of this CSR funding amount for a newly incorporated company which had not completed 3 years of operations. The 2019 Amendment Act clarifies that any company which has not completed a period of 3 financial years since its incorporation shall consider the average net profits made during such immediately preceding financial years for calculation of the CSR funding amount. This amendment clarified the ambiguity surrounding the eligibility and quantification of the CSR funding amount to be set aside by companies who have not completed more than 3 years of operations since incorporation vis-à-vis companies who have been in operation for more than 3 years.

(ii) If a company had not spent the earmarked CSR funding amount as per the Act, it had to disclose such reasons in its board report at the annual general meeting of the company. As per the 2019 Amendment Act, any unspent amount relating to an ongoing CSR project would have to be transferred to a fund specified in Schedule VII of the Act, within a period of 6 months of the expiry of that financial year. This ensures that: (i) all companies have to mandatorily reserve the CSR funding amount prescribed under the Act and if a company is unable to create such a reserve, it needs to provide substantive justification for such failure; and (ii) a company can utilize the transferred CSR funding amount for CSR activities post the financial year end as well.

(iii) The 2019 Amendment Act introduced penal provisions for non-compliance with the provisions of Section 135 of the Act relating to the reporting, utilization and transfer of the unspent CSR funding amount. Companies found to be non-compliant would be punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 25,00,000 and every such officer of the company found to be in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000, or with both. Earlier, companies could cite their reasons for not complying with the said provisions of Section 135 in their board meetings and, other than an adverse reputational impact, there were no penal consequences. However with the 2019 Amendment Act, the legislature now ensures stricter compliance as well as accountability for such non-compliance resulting in payment of fine by the company and potential risk of imprisonment of the officers found to be in default.

While majority of these amendments received the positive feedback of the stakeholders, the imposition of criminal liability on account on non-compliance with the provisions of Section 135 did not. The amendments brought about by Section 21 of the 2019 Amendment Act (resulting in corresponding amendments in Section 135 of the Act) have also found support in the recommendations made in the report of the High Level Committee on Corporate Social Responsibility, 2018 dated August 07, 2019 (“Committee”). However, the Committee has recommended for removal of any criminal penalty on non-compliance with Section 135 of the Act stating that CSR, by its very fundamental nature, should serve as a means for corporates to partner for the sustainable development of the society and imposition of such penal provisions does not go in harmony with this spirit of CSR. Further, the Committee has stressed upon the need for advocacy and sensitization towards the other aspects of society to achieve the overall objective of CSR and proposed the de-criminalization of the offence. To assuage the concerns of the stakeholders and the industry, the Finance Minister of India, Nirmala Sitharaman has stated that violations of the CSR norms under the Act will be treated as civil liability only and not as a criminal offence and that the Ministry of Corporate Affairs would review the concerned sections under the Act.

With India being the first country to introduce mandatory CSR spending provisions, the Act provides for a robust mechanism to ensure compliance with the CSR provisions. In comparison, other developed nations have not made CSR a mandatory spending and have only enacted policies encouraging corporations to contribute to CSR. Nations such as the United States of America, have separate organizations to assist corporations with the promotion and implementation of responsible and ethical business practices. United Kingdom requires the directors of the company to have regard to the community and environmental issues when considering their duty to promote the success of their company.

Amendments in light of COVID-19:

(i) In light of the spread of COVID-19 in India and the decision of the Government of India (“GoI”) to treat the same as a notified disaster, GoI on March 23, 2020 issued a circular stating the eligibility of funds spent for COVID-19 as eligible CSR funding under the Act.

(ii) Additionally, with the primary objective of dealing with any emergency or distress situation such as that posed by COVID-19, the GoI set up the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (“PM-CARES Fund”) with the intention of providing relief to those affected by any emergency or distress situation. Accordingly, on March 28, 2020 the GoI issued a circular stipulating that any contribution made to the PM-CARES Fund would now qualify as CSR expenditure under the Act.

Authors:
Ananya Sharma, Partner
Shubhangi Tewari, Associate

Footnotes:
[1] Sections 6, 7, 8, 14(i), (iii) and (iv), 20, 21, 31, 33, 34, 35, 37 and 38 of the 2019 Amendment Act are to come into effect on a date yet to be notified by the Central Government.
[2] This Section has not yet been notified by the Central Government. Therefore, these amendments are not effective as of date.