Companies may be Penalized For not Meeting CSR Rules

Narendra Kumar

05 Sep, 2019

Recently CSR Rules have been amended. By the way of an amendment to Company law, Finance Minister Nirmala Sitharaman has passed a specific reform to ensure more transparency and also strengthen the company regulation and accountability of the organization. The bill was passed to avoid the violation of the Corporate social responsibility and could land company officials in jail for up to 3 years. The bill advocates that the company will have to give entire details about the spending of money and also the company cannot get away without meeting the corporate social responsibility requirements.

What are CSR Rules?

The full form of CSR is Corporate Social Responsibility. CSR is the compliance for eligible business organizations that aims to create  socially accountable business entities. In CSR, a company makes initiative to enhance society and the environment. CSR programs, philanthropy events, and volunteer efforts are major channels of CSR implementation.

Businesses can benefit the society while boosting their brand presence through various activities during the implementation of CSR policy. CSR works on the policy that the more visible and successful the organization is, the more responsibility it has, to set standards of ethical behavior for its transparency, competition, and the industry.

Which Activities does not Include in CSR?

The activities/programs/events that benefit only the employees of the company and their families shall not be considered as a part of CSR. Further as per section 135 of the Act following activities is not considered as CSR activities;

• One-off events such as marathons, awards, charitable contribution, advertisement, sponsorships of TV programs, etc.
• Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labor Laws, Land Acquisition Act, etc.)
• Contribution of any amount to any political party whether directly or indirectly will not considered as a CSR activity.
• Activities carried by the company in pursuance of its normal course of business.

Also Read: Applicability of CSR Under Companies Act 2013

Key Points of the Amendments

All the companies falling in any of the below-mentioned categories are required to spend 2% of their average profit of the previous 3 years on CSR activities every year. 

• Companies need to give details about their spending pattern to the government companies will be given a three-year window for that purpose.
• Under CSR, the company violating the policy will have to bear the penalty of Rs 25000 to Rs 25 Lakh and for officers’ imprisonment up to 3 years.
• Taking into consideration the principle that the legitimate profit-earning cannot be devoid of social responsibility, the amendment was passed to sharpen and focus on the Companies Act along with CSR Policy and Rules effectively.

Physical verification of companies is important, as many companies are reportedly /operating from a single room. Now it has become mandatory that companies have a physical address.4

• The government enables the SFIO (serious Fraud Investigation Office) to strengthens the enforcement provisions, including actions of disgorgement to ensure speedy and more effective enforcement
• After the amendment, the corporate affairs ministry will now be able to give directions to companies to ensure compliance with CSR norms. 
  Earlier, it was easy for people to interpret that either we comply, or to give an explanation and get away with the situation. Now after amendment, As per Section 135 of the Companies Act 2013, the company has to bear specific penal provision in case of non-compliance.
• As per the amendment, any unspent amount must be transferred to government prescribed funds i.e., the companies transferring unspent CSR money in a financial year to an escrow account meant for CSR for 3 years must be transferred to a fund specified by the government.
• Categorization of 16 compoundable offenses in the amendment. For example- failure to file returns and issuance of shares at a discount, are categorized as civil defaults where adjudicating officers of the central government may levy penalties.
• The amendment includes the facility of shifting routine matters to the Central government to reduce the burden of the National Company Law Tribunals (NCLTs)to help in resolving the fast track disputes.
• In case of proven misconduct, debarring the auditor for 6 months to a maximum of 10 years.
• Allowing subsidiaries of international companies to follow different accounting standards.
• After the amendment, The Regional Director can now compound offenses under section 441 and also impose a fine up to 25 lakhs.
• Disqualification of the directors: in case of breach of maximum directorship allowed by the Companies act.

Conclusion

The government has tightened the CSR Rules for companies. The success of the company depends on what the general public thinks about the company. CSR includes the business practices that uplift and incorporates the sustainable development into company’s business model. which as a result provides opportunity to the companies to demonstrate their good corporate citizenship and helps in risk management by protecting the company from the outside risks. As per the latest amendment, the corporates must meet all the social responsibility requirements.

Note:- As per a senior Government Official these changes will not be commenced until the government fully analyse these amendments and pass any final comment. These amendment rules were considered for further discussion because it was facing a sharp criticism from the corporate sectors.