HYDERABAD : As Milton Friedman once said, the power to do good is also power to do harm. The amendments to the Companies Act 2013, with particular reference to Corporate Social Responsibility (CSR) norms, bear testimony to this fact. CSR spend by profitable public and private entities was made mandatory in 2014, but those who couldn’t spend simply got away with a humbling explanation in the annual report. But not anymore.
The changes made to Section 135 of the Act, which the Parliament cleared Wednesday and is now set to become an Act after President’s consent, will show tough love on non-compliant companies. Henceforth, firms should divert all unspent CSR funds in a given financial year to an escrow account and utilise it in next three years. Failing to do so implies transfer of funds to state-run accounts like the Prime Minister’s National Relief Fund. According to Finance Minister Nirmala Sitharaman, such a radical measure ensures accountability as profitable firms cannot be devoid of social responsibility.
While companies remained zip-lipped on the changes, trade bodies hinted that they would knock on the government doors seeking a rethink on the arbitrary conditions. “The amendments are retrograde. Profits belong to shareholders alone and there’s no reason why a profit-driven private entity should be tied up for social causes, which in any case is the government’s job,” said a member of CII.
Non-compliant companies will also face penalties of Rs 5,000 to Rs 25 lakh, while officials held in default will be liable to imprisonment of up to three years as well as a fine up to Rs 5 lakh. Section 135 pertains to CSR, and mandates companies with a networth of over Rs 500 crore or a turnover of above Rs 1,000 crore or net profit of Rs 5 crore or more to necessarily spend 2 per cent of the average of three-year profits on CSR every year towards social causes. Despite making it mandatory, CSR expenditure by both public and private firms isn’t growing rapidly. For instance, if they spent Rs 14,527 crore in FY16, it fell to Rs 14,242 in FY17.