Narendra Modi-led government plans to penalise CSR defaulters under Companies Act 2013

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It has reported that the Narendra Modi-led government will not let companies get away easily if they do not spend the mandated 2% of their profits on Corporate Social Responsibility (CSR) activities as specified by law. The government is planning to add more teeth to the Companies Act 2013 by introducing the penalty clause for companies that miss this target spending repeatedly. At present, non-compliance of CSR rule isn’t penalized by the Companies Law, and those unable to spend the stipulated amount can get away with some justification.

india csr awards“Under the current law, there’s no mandatory obligation on the company, but a responsibility is cast upon the board members. In case companies repeatedly fail to do so for two or more years, they should be penalized. We can’t leave any grey areas in law,” a senior government official told.

Under the Companies Act 2013, a company must spend 2% of its average net profit in the preceding three years on CSR if it has a turnover of Rs 1,000 crore or more, or net worth of Rs 500 crore or more, or net profit of Rs 5 crore or more.

The new law, which came into effect on April 1, 2014, says if a company isn’t able to give a satisfactory explanation about not spending on CSR activities, the corporate affairs ministry, at most, can question the roles and responsibility of its directors, but can’t act beyond that. “The quantum of penalty in case of non-compliance hasn’t been worked out,” the official added. However, the industry and corporate lawyers are critical of the government’s proposal of penalising in case of repeated non-compliance.

“A better proposition would be to provide tax incentives to corporates, effectively complying with the CSR obligations,” a senior executive of a multinational told.

Around 14,000 companies are expected to spend about Rs 15,000 crore on various social projects under the mandatory CSR spending. The government has provided a list of activities that qualify as CSR, which include measures to eradicate hunger, promote education and rural sports, protection of heritage, and environmental sustainability.

The companies which fail to spend the entire 2% on CSR activities can also transfer the remaining amount to the Prime Minister’s relief fund. “The government expects companies to abide by the spirit of the legislation, which is currently enacted on the principle of ‘comply or explain’, and does not have any penal provisions. If the compliance levels are seen to be low, the corporate affairs ministry would consider introduction of penalties,” said Sai Venkateshwaran, Partner and Head -Accounting Advisory Services, KPMG in India.

(Economic Times, 18 Sept 2014)

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