The Issue is provisions relating to ‘Corporate Social Responsibilities’ contained in the Companies Act,2013 and the recent developments on action taken by the Department of Company affairs under the ministry of Corporate affairs, Government of India.

In the recent past the Department of corporate affairs has spent a spate of notices to corporates for defaults from complying with provisions of section 134 / 135 of the Companies Act, 2013. The number of such notices sent by the department itself is an indication that non compliance could not have been wilful but only on account of some technical or lack of understanding of the provisions requiring compliance. The threat of punishment and penalties for disclosure would only encourage corruption but not enhance compliance in terms of CSR spends by the companies.

Let me try to highlight the issues involved one by one:

1. Formation of a committee for Corporate Social Responsibility:

Companies are expected to constitute a committee for CSR. This provision is more of a delegation of authority of the Board of Directors to a smaller Group for operational convenience. There can be no bar on the Board taking the responsibility itself and decide of policy frame work, projects, programmes for CSR implementation.

Moreover, there are a number of private Limited companies, with just two Directors on the Board but having profits in excess of Rs.5 crores getting attracted to this provision. There is no point in such companies constituting a committee for CSR as the same two Directors are to form part of such committee. Non constitution of CSR committee in such cases is redundant and punishment for non compliance is rude and should be withdrawn.

2. Stress is on Disclosure and not on spending: The Intent of the legislation is to create awareness among corporates a sense of responsibility to the society. This is expected to be a voluntary compliance as the law does not specify any time limit with in which the amount of 2% of average net profits of the company in the preceding 3 financial years is to be spent. Nor does the act specifies any penalty for not spending. The failure in not spending the required amount is not even recognised as a default much less providing penalty for such failure. Strangely the non disclosure of constitution of the committee, the CSR policy framework and projects and programmes is punishable with stringent penal provisions. In other words if the company makes a disclosure on composition of CSR committee, details of CSR policy, projects and programmes and disclose the same in the Directors’ report, But does not spend the required amount and only gives reasons for not spending the amount it amounts to valid compliance of the provisions, even though no amount is actually spent on CSR activities. On the other hand if a company based on its Board approved CSR policies had actually spent the required amount but fails / omits to disclose the same in its Directors’ report , the company and its officers are liable for penalty. I am of the opinion that disclosure should be on the status of compliance and not for offering reasons for non- compliance.

3. Discretionary penalty provisions: The Bandwidth of fine on the company for non disclosure ranges from Rs.25000/- up to Rs.25 lakhs and that on defaulting officers of the company range from Rs.50000/-up to Rs.5 lakhs or imprisonment for a term extending up to 3 years. The discretionary powers given to the officers in determining the amount of fine and also to decide on compounding the offence will only pave way for corrupt practices.

4. Carry forward of unspent money: The CSR provisions does not mandate carry forward of unspent amount to the subsequent year(s) to be spent on projects / programmes or activities. This eventually means that If reasons for not spending the amount is given in the directors’ report by way of disclosure, then the so called Corporate Social Responsibility is satisfied!

The Unspent money should be allowed to be carried forward and the company should be allowed to accumulate the same for a period of at least 5 years to be spent on CSR activities in the future years. Otherwise the very purpose of the Scheme gets defeated. There should also be a requirement that any amount left unspent even after the expiry of a period of 5 years should be transferred to PM’s Relief fund or any other notified funds such as the Swatch Bharath initiative, Clean Ganga and the like.

5. Set off of Excess amount spent: Similarly if a company during any period spends more than the required amount of 2% of the Average Net profits of the preceding 3 years should be allowed to set off such excess amount spent out of the amounts to be spent in the subsequent years. This is necessary because no project or programme could be designed / devised to spend exactly the 2% of 3 years average net profits.

6. Income Tax benefit: Contributions made to the PM’s relief fund and to the NGOs registered under section 35AC as part of CSR spend are eligible to claim deduction of the amounts so paid for Income tax computation under section 80G or section 35AC as t6he case may be. However if the company makes its own scheme or project / programme for CSR spend and does actually spend the money the amount so spent is not allowed as deductible expenditure for the purpose of computation of Taxable income of the Company. This is clearly a negative attitude will only be counterproductive to the legislative intent of making corporate spend on social responsibility projects / programmes in the local area of operation of the company.

7. Monitoring CSR activity: In the FAQs released by the department of corporate affairs it is clearly stated that the spirit of the law is not to monitor but to create a conducive environment for the corporate to conduct themselves in a socially responsible manner. It also states that the Government has no role to play in engaging external experts for monitoring the quality and efficacy of CSR expenditure of companies. It also adds that the Government has no role in the approval & implementation of CSR programmes of companies. There is no reason for the Government to shirk responsibility. If it cannot monitor the CSR activities itself it can at least provide a mechanism similar to Tax audit in the case of Income tax, audit of CSR spends by professionals. Strangely such an important item does not figure in the list of items to be reported by the Company’s Auditor in his Audit report either. CARO – should at least be modified to the extent of reporting on the compliance of CSR activities. 8. Conclusion: Having said in clear terms that the spirit of the law is not to monitor but to create a conducive environment for the corporate to conduct themselves in a socially responsible manner, the Government should not be engaging in the act of harassing and threatening companies and its officers with consequences of huge fines and even imprisonment. The better option for ensuring compliance is to make the companies spend on CSR activities and compliance reporting by way of a professional audit. A Noble concept that is to result in benefit to the society at large should be enforced with ease and without use of force / threat of punishment. Otherwise ease of doing business in India will only remain in paper and not in practice.

S.R.Seetharaman

Partner

Rao & Gopal

Chartered Accountants

8/13 Dhanasekaran Street

Kodambakkam, Chennai

600024