Jail term for CSR violation makes firms anxious

MUMBAI: A harassment tool or a better performance enabler? Indian companies are mostly anxious about recent changes in Companies Act making compliance with corporate social responsibility (CSR) norms more stringent. Some see more positive than negative.CSR norms violations now may attract fines ranging between Rs 50,000 and Rs 25 lakh, and even imprisonment of up to three years for defaulting executives after Parliament amended the Companies Act, 2013, on Wednesday.“The nature of the amendment is like penalising tax evaders but it may become tools in the hands of authorities who may use it to exert pressure on companies,” said a top executive of a prominent manufacturing company, speaking on the condition of anonymity.“In the current scenario, there is a lot that is spooking businesses — people are reluctant to sit on boards as directors anymore due to increased scrutiny,” the executive said.CSR rules mandate that every company with a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more, during any financial year has to constitute a CSR committee and has to spend 2% of the average net profit over the last three financial years on CSR activities.70506782 Smaller Cos may Face ConstraintsFinance minister Nirmala Sitharaman said Wednesday that the amendments seek to check the practice of companies “getting away” by providing an explanation on why they were unable to fulfil CSR norms.Legal practitioners, however, believe that such clauses are harsh and can be misused. “Imprisonment for violation of CSR requirements is arguably too harsh. Penalties are more appropriate for such violations,” said Sudip Mahapatra, partner at law firm S&R Associates.But the new provisions may lead to better adherence by company executives. “Companies will have to proactively ensure compliance with CSR requirements and now boards will have to pay more attention to the deployment of CSR funds,” Mahapatra added.Industry observers say most large-cap companies have adhered to the prescribed minimum in their spending and some companies spend more than what is required of them. Smaller companies, however, may have human resources constraint.Seshagiri Rao, joint MD at JSW Steel, said that there should have been some relaxation for MSMEs that often lack an organised CSR unit to carry out the mandate, and that third parties or NGOs hired for this purpose by smaller companies may not properly fulfil the CSR mandate.After the amendment, companies are allowed to transfer the money they fail to spend in a year to an “unspent CSR account” from which they can draw within next three years to spend on CSR activities. If a company is still unable to spend the amount within that period it can transfer it to a government fund specified in schedule 7 of the Companies Act, such as the Prime Minister's National Relief Fund, failing which the fines and imprisonment clauses will kick in.“By and large the amendment is an enabling one, at least for CSR activities…it is being made to appear draconian but it is actually not,” said, Neelima Khaitan, CSR head at Vedanta. Through the amendment, the government has actually given companies time to spend any unspent money judiciously, instead of rushing to spend it in one financial year, she said.

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