NEWS

Stringent laws on unspent CSR funds

Stringent laws on unspent CSR funds

The Lok Sabha on July 26 unanimously approved the Companies Amendment Bill 2019 which the government says, aims at bringing more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector

Companies that are not able to spend their Corporate Social Responsibility (CSR) fund will soon face the consequences. The Lok Sabha on July 26 passed the Companies Amendment Bill 2019 which will make it mandatory for companies not spending 2 per cent profit on CSR activities for a total period of four years to deposit the amount in a special account. Finance and Corporate Affairs Minister Nirmala Sitharaman said the Bill seeks to tighten CSR compliance and ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector. The Minister informed the House that four lakh companies have been identified and de-registered. “Non-maintenance of registered office will be a ground for deregistration of companies,” she said. The amendment is likely to reduce the load of cases on the National Company Law Tribunal (NCLT) too. At present, as per the law, they are only supposed to explain about the unspent amount.

Why the Bill?

Though there has been an increase in CSR spending with some companies spending more than what they are supposed to spend as per the Companies Act 2013, yet the government found 77 companies having unspent amounts in FY 2018. The majority of the funds (57.66 per cent) were unspent in 2014-15, which however came down to 30.02 per cent in 2017-18. The government also examined the spending of 6,286 companies from April- November of 2016-17 fiscal, and a majority of the firms reportedly spent less than what is required to be spent. However, 2,203 firms were found to have spent more than what was required during the same time. Following this, the government set up a high-level committee in July 2018 which made a detailed study of penal provisions in the Act and some offences of minor nature were being noncompoundable, said Sitharaman.

The government had brought an ordinance to this effect which was passed by the 16th Lok Sabha but could not be taken up in the Rajya Sabha. On July 17, 2019, the government approved 43 amendments to the Companies Law and introduced it in the Lower House on July 25. Highlights of the Bill As per the Companies Amendment Bill 2019, businesses will get one full year to firm up the CSR proposal and another three years to spend funds. The Bill proposed that unspent CSR funds be carried forward to a special account called the ‘Unspent Corporate Social Responsibility Account’. In case, the money remains unspent for three years, it has to be transferred to any fund specified in Schedule VII of the Act such as the Prime Minister’s National Relief Fund or any other fund set up by the Central or the state governments for socio-economic development or relief. Even when the project concerned is not ongoing, the unspent fund would have to be transferred. The Bill also empowers the Centre with approval from the NCLT to expel directors responsible for mismanagement, and debar errant directors of the companies for five years from holding similar posts in any company following irregularities in the IL&FS. A fine of `50,000 to `25 lakh will be levied on those not adhering to these provisions and the company officials involved may be punished with imprisonment up to three years and fine. The Bill gives the Registrar of Companies (ROC) power to remove the name of the company from Register of Companies if it is not carrying on any business or operation as per the company law.

Criticism However, this Bill which requires companies to have a CSR policy overseen by their boards into a statutory requirement is being criticized for giving companies too short a time to implement genuine projects which are cost-efficient and more effective. This may force companies to exhaust the funds on projects with little social impact, critics believe.