5 Key Changes introduced by the Companies Amendment Act, 2019 and their implications for India Inc. – Part III

Section 135: Corporate Social Responsibility

One of the major changes brought in by the Amendment is with respect to the provisions of Corporate Social Responsibility (“CSR”).

 (1) Prior to the amendment, Section 135 (5) of the Act stated that companies which cross the prescribed thresholds[1] during the 3 preceding financial years have to spend at least 2% of the average net profits made in the 3 immediately preceding financial years. The Amendment now states that in cases where the companies have not completed 3 years of incorporation, then in such cases “immediately preceding financial years” will be applied. This means that the requirement of CSR spends is now applicable on companies immediately after completion of their first financial year, as long as the eligibility thresholds are fulfilled.

(2) The Amendment adds specific requirements with respect to transfer of any unspent amount allocated for the purposes of CSR, whether for an ongoing project (Section 135 (6)), or otherwise (proviso to Section 135 (5)), to a Fund specified in Schedule VII within certain specific time periods. Previously, any unspent amounts only needed to be disclosed in the annual report of the company, in line with the philosophy of “name and shame”. However, with the Amendment, this effectively results in CSR becoming a mandatory spend over the prescribed period.

(3) Further, to ensure strict enforceability of CSR responsibilities, the Amendment has also added criminal penalties with respect to non-compliance. Any company which is required to undertake CSR spends but fails to follow the requirement of transferring the unspent amounts out of the CSR allocation, whether allocated to an ongoing project or otherwise, can be punished with a fine ranging from INR 50,000 to INR 25,00,000 and every officer of the company which is in default can be punished with imprisonment for a term which may extend to three years or with a fine ranging from Rs. 50,000 to Rs. 5,00,000, or with both.

(4) The Amendment also provides to the Central Government, the right to issue general or special directions to companies or class of companies as it deems necessary for the compliance of Section 135.

In our view the changes introduced by the Amendment are creating burdens which are more than necessary on companies by acting in furtherance of taking away the fundamental character of willingness associated with CSR. The Amendment makes CSR mandatory even for companies which have completed only 1 year since incorporation and cross the above-mentioned thresholds. To top it off, the Amendment makes the non-fulfilment of the CSR responsibilities a penal provision. Curiously, even though the penalty for non-compliance of CSR obligations is stated in the provision, the Amendment gives discretionary powers to the Central Government to issue directions for ensuring compliance, which may further lead to Central Government intruding in the company management and autonomy.

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