India Inc is on hot coals. This time over, it’s the social responsibility (CSR) spending. The latest amendment in the Companies Act, which has been cleared by both the Houses of Parliament and is now awaiting the President’s assent, breaks with the past making breach of CSR norms a criminal offence.
The new law holds company officials personally liable and those found guilty of evading CSR targets can be fined between Rs 50,000 and Rs 25 lakh and/or made to suffer jail terms of up to three years.
The introduction of Section 135 in the Companies Act in 2013 had mandated all listed companies with a net worth of Rs 500 crore or more and a turnover of over Rs 1,000 crore to spend 2 per cent of their average net profit over three years on CSR activity. The object was to get corporates to give back to civil society a small part of their profits.
Going by the latest amendments, this government feels that companies are not taking the law seriously; and it has decided to come down on heavily. Besides fines and jail terms, the amendments also empower the government to debar directors responsible for CSR mismanagement for five years from taking positions elsewhere.
There are a slew of deterrents at the corporate level too. For instance, the new Bill proposes the unspent CSR funds should be carried over to a special escrow account and spent within three years. If the company fails in this too, the money will be transferred to a government fund such as the PM’s National Relief Fund.
India Inc’s dereliction of duty
It’s true there are rogues, but you can’t tar all of India Inc with the same brush. There are companies that have displayed strong social conscience. A ‘Futurescape’ study two years ago showed that in FY2017, the top three CSR spenders in manufacturing went far beyond the statutory requirement — Jindal Stainless, Hissar (6.3 per cent), National Fertilizers (4.7 per cent) and Ambuja Cement (4.0 per cent). In services, Piramal Services spent 7.2 per cent of profit, followed by Canara Bank (4.2 per cent) and IDFC (2.7 per cent).
Overall though, the big picture is not good. If the total CSR spend in the four fiscals till FY2018 was Rs 50,000 crore, a much larger Rs 60,000 crore due from corporates went missing.
A recent February report said that as many as one-third of the 1,913 companies that came under the CSR net did not spend at all. Among the 220 NSE-listed companies, about 60 went short and did not spend their whole budget in FY2019. This includes many we look up to like TCS, which held over Rs 108 crore.
Of the 1,913 ‘CSR covered’ companies, as many as 340 said they did not find the right projects in time and therefore held over their CSR budgets. Others pointed out that the social milieu and the network of NGOs and projects were not conducive to absorbing such high CSR spends.
Penal provisions
However, it is the penal provisions against senior management in the new amendment that has attracted maximum ire.
There could be slip-ups, some of them due to bad management; but it is rare that there is deliberate manipulation. Therefore, to hold individual heads of companies responsible and levy heavy fines and jail sentences seems to be an autocratic provision, industry bodies have been pointing out.
The provision that allows directors to be disqualified for five years from holding management office is also yet to be legally tested and could be struck down.
That said, the government must be commended in pinpointing an area of poor corporate governance; and one that needs to be plugged.
Scratch the surface, and we all know that most of India Inc is not too serious about CSR obligations. It is also well known that some companies with ‘philanthropic’ trusts in place, put their CSR money in these questionable in-house arrangements. This kind of ‘round-tripping’ needs to be weeded out too.
On the other hand, the government must make a difference between ‘civil’ and ‘criminal’ liability. It has our support for shaking open the purse strings of devious corporate groups through: 1) Making the heads of companies personally liable and 2) Imposing stiff fines on them where evasion or manipulation is detected. When the pocket pinches, things work.
But on jail terms, the government should do a rethink. Is not keeping one’s CSR target really a ‘criminal’ act? Is it really necessary to use a sledgehammer? If punitive fines can fix the problem, why terrorise the business community?
The overall picture
If the total CSR spend in the four fiscals till FY2018 was I50,000 crore, a much larger I60,000 crore due from corporates went missing.