Companies

Company, Board members need to be wary of penal consequences of non-compliance: EY India

K.R.Srivats New Delhi | Updated on April 27, 2021

Penalty will be imposed on the company and board members for failure to transfer unspent amounts as prescribed   -  istock.com/cnythzl

The new law required companies to spend in a given financial year, at least 2% of their average net profits earned over the preceding three financial years

Corporates would do well to evaluate and review their CSR policy, procedure and controls for compliance of the newly amended corporate social responsibility (CSR) requirements considering that both company and officers are liable to penal provisions in case of non-compliance, EY India report said.

This report titled ‘Changing regulatory paradigm of corporate social responsibility’ highlighted that Penalty will be imposed on the company and board members for failure to transfer unspent amounts as prescribed. There will also be obligation on the board to ensure the dispersed funds are utilised as approved and monitor implementations (fund allocation/timelines) of ongoing projects.

Framework to assist CFO

The EY India report suggested that a company needs to put a framework in place to assist the Chief Financial Officer in certifying the funds spent on projects under CSR. The fund disbursement review must assess the existing control environment and address the risk of non-compliance, leakage and provide structured approach to ensure that the funds have been used for board approved CSR activities, it added.

It may be recalled that in 2014, India became the second country (after Mauritius) in the world to mandate spend on CSR by introducing specific provisions in company law. The new law required companies to spend in a given financial year, at least 2 per cent of their average net profits earned over the preceding three financial years subject to satisfying certain qualifying conditions.

In January this year, with an objective to reinforce compliance, anti-abuse and strengthen governance, transparency and flexibility, the Corporate Affairs Ministry (MCA) had introduced significant changes through amendments in the company law and the related rules.

The amendments introduced new concepts like a specific negative list in the CSR definition, mandatory treatment of CSR underspend, mandatory impact assessment, mandatory registration by NGOs undertaking CSR activities etc, said the EY India report.

The EY India report highlighted that there are now both general and specific penalties leviable under the company law for non-compliance with the CSR provisions. The board should prepare a detailed checklist of processes with the owners and timelines, to monitor continued complains of CSR regulations by the company. The compliance agenda could be strengthened if the related monitoring could be undertaken by an independent agency on periodic basis, it added.

Penalties

For non-compliance, in the case of a company the penalty would be twice the amount required to be transferred by the company to the specified fund under Schedule VII or the unspent CSR account, as the case maybe, or ₹1 crore, whichever is less. As regards an officer of the company, the penalty would be 1/10th of the amount required to be transferred by the company to such fund or the unspent CSR account, as the case maybe, whichever is less.

Also, the payment of such penalties would not extinguish the company’s obligation to transfer unspent CSR amounts either to the fund specified in schedule VII or the unspent CSR account. The penal provisions reinforce the mandatory nature of CSR obligations and the penalties introduced for non-compliance are not compoundable, the EY report said.

Published on April 27, 2021

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