Violation of CSR norms will now attract fines for both the company and defaulting officers ranging from Rs 50,000 to Rs 25 lakh, with the latter also liable for imprisonment of up to three years, according to the Companies Amendment Bill, 2019, which received Parliament’s nod on July 30.
Finance Minister Nirmala Sitharaman’s stand on the subject offers a perspective. “It was easy for people to interpret that either we comply or we give an explanation and get away with it. Now that is not happening because Section 135 (of the Companies Act) is being amended to provide specific penal provision in case of non-compliance,” she said.
A company hitherto was expected to spend at least 2 percent of its average profit for the three preceding financial years for prescribed altruistic purposes, a solemn law that ended with a whimper though – a disclosure in the directors’ report laying out the reasons for non-compliance would absolve them and the company of all the guilt in this regard.
Now, the CSR law can be breached only at the pain of penalty and prosecution. If the earlier law was inane, the new law is draconian. Perhaps, it was to remove the inane and woolly character of the law, but the government has swung to the other extreme and read the riot act to the non-compliers.
To be sure, a law is not obeyed unless its non-compliance is visited with a deterrent penalty. In the five years of its existence, the CSR law remained a favourite of talking heads, but many companies looked askance at it either by completely ignoring it or resorting to tokenism, secure in the smug knowledge that disclosure of reasons for non-compliance was as good as compliance itself!
When ushered in, the CSR law was hailed as unique as no other country had legislated for it. But in the first five years of its implementation, the response of the Indian corporates has been lukewarm. The following report brings out the blasé attitude of our corporates in the absence of deterrent penalty: Indian companies spent “less than the Rs 9,669 crore as they were mandated to spend 2 percent of profits. In fact, both the CRISIL and Prime Database analyses show that only a little over half (57 percent) of the companies complied with the 2 percent stipulation. Prime Database reports that a median company still has up to one-third of the mandated spending unspent though there has been some improvement over the years. While in 2015-16, the unspent funds as a percentage of prescribed spends were 57.66 percent, this has now come down to 30 percent.”
While the fear of serving a prison term and penalty may beget compliance, often grudging, the moot question is whether Corporate India should worry about such altruistic concerns such as ending hunger, promotion of education, reducing child mortality etc.
To my mind, a company would have acted like a good corporate citizen if it did not fall foul of environment protection, tax, labour and consumer protection laws in particular. A company can go out of the way and humour its employees with sumptuous meals as the TVS group in India does, but it cannot be expected to organise langar throughout the day as gurudwaras and some temples do. A company also cannot be expected to get embroiled in the caste politics in the name of uplifting the downtrodden. Indeed, all altruistic activities must be undertaken by the government and NGOs. After all, the business of a business is business, isn’t it?
As it is, a company meeting one of the three criteria -- net worth of Rs 500 crore or more; turnover of Rs 1,000 crore or more and net profit of Rs 5 crore or more -- has to abide by the CSR law. Its rigour, especially in light of the new penalty regime, can be softened if the small among them are kept away from its purview. This can be done by making the above three criteria cumulative instead of alternative.
To wit, a company earning Rs 5 crore profit should not be expected to do CSR spend unless it has a turnover of Rs 1,000 crore as well besides a net worth of Rs 500 crore. The 2 percent mandatory CSR spend effectively is an additional corporate tax, albeit on select companies. It ought to be imposed if at all only on real big companies i.e. the ones that meet all the three criteria above.
Better still, generous tax breaks must be given to those who donate generously to altruistic causes. Section 80G is too niggardly. Ironically, a company gets a generous 100 percent deduction for political donations so long as they do not exceed 7.5 percent of its profits. Our lawmakers alas have chosen to give a greater tax break for political donations than for altruistic ones!S Murlidharan is a chartered accountant and columnist. Views are personal.