Penalty for CSR Violations: Instance of Gaffe, Likely to Culminate in Climbdown

Kolkata: Call it a gaffe or a rush job or an oversight on the part of the Centre; punishment for violation of corporate social responsibility [CSR] by companies has proved to be a rare example of wide divergence between what is prescribed in an amendment passed by Parliament and what is recommended by a high-power committee, all in a matter of just three weeks. The parliamentary approval preceded the high-power committee’s report.

At the root of this is Section 135 of the Companies Act, 2013 which deals with CSR. Under the amendment passed by Parliament, violation of CSR is to be treated as a criminal offence with provision for jail term and/or fine and this is to apply to not only the defaulting company, but also the executives entrusted with the responsibility of CSR implementation.

The amendment was passed by Lok Sabha on July 26 and by Rajya Sabha on July 30. It received the President’s assent on July 31 and the gazette notification was issued the same day.

The high-power committee, which was set up by the Union government in October 2018 and was headed by Ministry of Corporate Affairs Secretary Injeti Srinivas, submitted its report to Minister for Finance and Corporate Affairs Nirmala Sitharaman on August 13. It recommended that violations of CSR be treated as civil offence with provision for penalty. Inter alia, it also recommended benefit of tax deduction and allowing companies to carry forward unspent balances.

The wide divergence was writ large – provision to treat violations as criminal offence and recommendation to treat violations as civil offence; and no question of jail term. The criminal offence provision had been strongly opposed by corporates. Nirmala had sought to justify the stiff prescription saying it was all intended to check the practice of companies “getting away” by providing an explanation on why they were unable to fulfil CSR obligations.

After Srinivas panel’s report became public, corporates welcomed the recommendation to treat violations as a civil offence with a penalty regime. They simultaneously demanded removal of the provision for treatment as criminal offence. Sensing the mood of corporates, Nirmala offered to review the situation that had arisen. Companies are now speculating and awaiting the outcome of the review, says informed quarters.

These quarters wonder whether this situation could have been averted or whether this was a faux pas or an oversight. It’s a fact that the Companies (Amendment) Bill 2019, which had within its purview a number of other sections and sub-sections besides Section 135, was designed to replace an Ordinance, which was to lapse on July 31. This explains the urgency on the part of MCA to complete this particular legislative business.

It is safe to presume that MCA and the minister were aware that a high-power committee was on the job of reviewing the CSR framework and recommending how to strengthen the ecosystem. Therefore, ways to exclude Section 135 from the purview of the amendment Bill should have been explored. If that was not possible, the ordinance should have been allowed to lapse, and a fresh amendment bill brought for all other sections and sub-sections; of course excluding Section 135.

For Section 135-related issues, MCA should have waited for the committee’s report and formed a view taking into account its recommendation. The Ordinance had reflected the government’s inclination for a tough stand on CSR violations and, therefore, a soft stance was not on its radar, say company sources.

In a bid to address corporates’ concerns and opposition, senior officers have already hinted that follow-up rules under the new provision would not be issued, suggesting thereby that it won’t be operationalised. Nirmala has offered to review the matter. In these circumstances, what are the government’s options? Issue an ordinance? Introduce a fresh amendment bill?

Till the government takes a call, it will retain the authority to treat violations as a criminal offence even if follow-up rules are not there, but which can be framed at a short notice. Also, involved is the larger question as to what extent the Srinivas committee’s report will be accepted by the government. Given the tone and tenor of the government’s response to corporates’ concerns and opposition, it looks likely that the suggestion to regard violations as a civil offence with a penalty regime will be accepted and, therefore, a fresh amendment will be a logical step. But, that will also mark a climbdown. This is the assessment of knowledgeable quarters. Latest reports indicate that MCA wants to expedite matters and, therefore, government’s intentions may become clear before the next session of Parliament.

Among the many other recommendations, one more stands out. The specified types of companies shall constitute CSR committee of the board of directors. This committee shall have three or more directors, with one of them being an independent director. Which means CSR has to be handled at the board level. The specified types of companies are: networth (assets minus liabilities) of Rs 500 crore or more, turnover of Rs 1,000 crore or more and net profit of Rs five crore or more.

For the record, it may be mentioned that from what was initially considered a philanthropic act, CSR has come a long way towards formalisation by way of enactments. CSR guidelines were issued by MCA in the course of 2009, which culminated in Section 135 of the Companies Act, 2013. Spending by companies and disclosures by specified types of companies were made mandatory. It received the President’s assent on August 29, 2013.

Also read: Statue of Unity: CSR Funds from Several PSUs Diverted for Construction