Corporate Social Responsibility (CSR) is the way how the companies integrate societies into their culture, values, strategy and operations. The idea behind CSR is to establish better practice within the companies so that firms and society could grow together.
However, it was observed that some of the corporates mandated under the Companies Act, 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014 were continuously failing to perform CSR duties.
Recently, the President of India has given his assent to the Companies (Amendment) Bill, 2019, which amended the Companies Act, 2013. Through this amendment, the government is trying to strengthen the governance framework for the corporates and is indirectly making it mandatory to spend towards CSR activities.
Section 135 of the Companies Act, 2013 when reading with Companies (Corporate Social Responsibility Policy) Rules, 2014. Every company, whether private, public or listed, unlisted having:
· Net Worth of rupees five hundred crores or more, or
· Turnover of rupees one thousand crores or more, or
· Net profit of rupees five crores or more
Were mandated to constitute CSR Committee of the board consisting of three or more directors, with at least one director as an independent director. The company was to ensure that it spends in two per cent of the average net profits of the company every financial year in pursuance of CSR activities.
The Companies (Amendment) Act, 2019 amended the Companies Act, 2013, it allowed the companies to transfer the money they fail to spend in a year to an “unspent CSR account”. The companies can withdraw the amount within three years to spend on CSR activities.
Failing the obligation within the given period, the company will have to transfer the same amount to a Fund specified in Schedule VII, within thirty days from the date of completion of the third financial year.
The amendment includes provisions that will invite a maximum three-year jail term and a penalty up to Rs 5 lakh or both for company executives and a penalty up to 25 lakhs for the employers for breaching CSR rules.
The amendment also increased the powers of the Central Government and National Company Law Tribunal (NCLT) in case of oppression and mismanagement. The government can now initiate a case against unfit and improper persons (involved in the conduct and management of a company and found guilty of fraud, misfeasance, not conducting the business in accordance with sound business principles or practices, etc.) and refer the same to NCLT.