Imprisonment for firms who fail to comply with CSR regulations; new clause feared to be “improperly” used

“Used as a means to harass business”, is what corporates think of the new clause that was added in the Companies Act. Working in compliance with corporate social responsibility (CSR) norms, the new clause is expected to make CSR spends more effective and reduce violations pertaining to the same.

Fines ranging anywhere between  Rs 50,000 and Rs 25 lakh may be levied on companies, along with imprisonment of up to three years.

“The nature of the amendment is like penalizing tax evaders but it may become tools in the hands of authorities who may use it to exert pressure on companies,” said a top executive of a prominent manufacturing company, speaking on the condition of anonymity.

“In the current scenario, there is a lot that is spooking businesses — people are reluctant to sit on boards as directors anymore due to increased scrutiny,” an insider said.

The additional penalty comes after the continuous efforts of the government to rejig The Companies Act, penalizing firms for inadequate CSR spends.

Amendments in the existing Companies Act primarily takes into account all the companies who do not meet the mandated 2% spends on the CSR activities’,

CSR rules mandate companies that earn a turnover of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more, during any financial year is liable to form a CSR committee, and to spend 2% of the average net profit over the last three financial years on CSR initiatives and activities.

What might make the new clause favourable?

The new framework is expected to spend the unspent money towards CSR more diligently and help provide maximum benefit. “Companies will have to proactively ensure compliance with CSR requirements and now boards will have to pay more attention to the deployment of CSR funds,” said Sudip Mahapatra, partner at law firm S&R Associates.

What might make the new clause turn unfavorable?

The new clause may be used as a tool to harass the existing corporates and also prove to be in justiciable to MSMEs, which often lack an organized CSR committee working the favour. Legal authorities opine that this clauses can be improperly used. “Imprisonment for violation of CSR requirements is arguably too harsh. Penalties are more appropriate for such violations,” opined Sudip Mahapatra.