Cracking the whip: CSR spending may soon be mandatory; companies set to face penalties for non-compliance

After foreign portfolio investors and hedge funds, it is now the turn of Corporate India to face the policy change heat. The Centre proposes to tighten the Corporate Social Responsibility (CSR) provisions in the company law, virtually making it mandatory for companies to make their CSR spend, failing which they would be penalised.

Provisions to this effect— approved by the Union Cabinet — would come as part of the amendments to the company law that the Government is expected to move in Parliament in the coming days.

Under the proposed amendments, any unspent amount in a financial year has to be transferred to a CSR account, to be spent within the next three financial years. If after three years any amount is unutilised it has to be transferred to a Central Government-created Fund specified in Schedule VII.

The proposed changes in CSR provisions would mean that India Inc would lose the hitherto available leeway of not spending on CSR, but merely disclosing such a fact in the annual report that amounts were unspent due to specific reasons. Now, if the proposed amendments to company law go through, the CSR non-compliance would invite penalties.

Experts’ take

Aseem Chawla, Managing Partner, ASC Legal, a law firm, said: “The proposed amendments to CSR provisions would clamp down on CSR irregularities; as non-compliance would invite invocation of penal provisions and authorise issuance of directions to companies to adhere to CSR provisions.”

Ashok Haldia, former CA Institute Secretary, said the proposed CSR provision changes would not only increase the CSR spend many fold but also make CSR activities more organised, responsive and professional. “The proposed changes will virtually compel the company to spend on CSR. It will be no more comply or explain non-compliance, as it was hitherto,” he said.

Amarjit Chopra, Past President of ICAI, said the CSR provisions are going to be “virtually mandatory” once the proposed amendments to company law get enacted.

Saurav Kumar, Partner, Induslaw, a law firm, said there have been several instances in the past where, due to problems of liquidity, corporates could not make adequate CSR spends and highlight that they did not find any relevant projects.

“Corporates took advantage of the loophole and viewed CSR as a voluntary exercise. With the current amendment there will be some seriousness to the process as the loophole has been plugged,” he said.

Vaibhav Kakkar, Partner, L&L Partners, said there is now a significant jurisprudential shift in as much as going forward, the companies would be mandated to transfer any unspent funds required to be utilised for CSR activities to an unspent CSR account and such amounts would need to be mandatorily spent within the three-year period.

“Hitherto, companies and their directors covered under CSR obligations were only required to disclose reasons if they were not spending the required funds towards CSR activities in discharge of their fiduciary duty,” he said.

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