Monday, 4 June 2018

MCA proposing ‘Enforcement’ & ‘Prosecution’ to ensure CSR compliance

  • From the ‘Show or Shame’ policy of 2014, the Ministry of Corporate Affairs (MCA) seems to be moving towards ‘Spend or get Spanked’ policy in the year 2018, barely four years after CSR was made mandatory for companies having either Net-worth of INR 500/- crore or more or Turnover of INR 1,000/- crore or more or Net Profit of INR 5 crore or more.
  • It would appear that merely providing explanation for not undertaking expenditure on CSR activities would not be considered as adequate compliance of law and the Government seems intent on strictly dealing with issues encompassing CSR and its compliance.

Stricter Enforcement & Prosecution
The Ministry of Corporate Affairs (MCA) has commenced review of the functioning of CSR implementation and this exercise has been initiated to recommend a uniform approach for its enforcement amongst corporates.

Government is also revisiting the guidelines for enforcement of CSR provisions, including: 

  • structure of Centralized Scrutiny and Prosecution Mechanism; 
  • methodologies for monitoring compliance; 
  • criteria to identify responsibility for non-compliance; 
  • draft standard Show Cause Notice, 
  • standard sanction letter for prosecutions, 
  • power to withdraw prosecutions, etc.

CSR was practiced even before legislative mandate
Several companies have been involved in CSR related activities long before the Indian Companies Act 2013 made it mandatory for certain companies and such companies have been undertaking such activities because they genuinely believed and still believe that they have a social obligation towards society.

To the best of our knowledge and belief nowhere in world is CSR mandated under law and yet, companies in large economies like the USA and the UK as also smaller economies like the Philippines and Singapore voluntarily practice CSR.

Rationale behind Section 135(5)
When CSR became mandatory for certain companies from the fiscal year 2014-15 the assurance given was that companies will be allowed to undertake CSR activities as per their own policies.

Sub-section (5) of Section 135 was clearly drafted so as not to put undue pressure on companies. 

The second proviso of sub-section 5 of Section 135 of the Indian Companies Act 2013 states: “Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.” 
This provision was specifically inserted in the Act to allow companies to follow the ‘Comply or Explain’ philosophy on CSR. The company and its officers were liable to be penalized only in case of non-disclosures of CSR.

Regulatory excesses will kill the voluntary spirit of CSR
In our view what MCA is contemplating now is regulatory excesses which will kill the very spirit of voluntary CSR which has and should stem from the heart of corporate India.

The role of the regulator should be restricted to regulating and not control.

Statistics reveal that CSR spend by companies is growing and far from diminishing. Why then should there be CSR “enforcement”? 

CSR as the name itself suggests, is a ‘social responsibility’ which is a voluntary corporate value and MCA should refrain from creating an enforcement and prosecution regime.

Law should create an enabling environment
The law should create an “enabling environment” for CSR and not one of “enforcement”.

CSR spend is not even allowed as a business expenditure under section 37 of the Income tax Act and thus smaller companies do not even see any incentive for spending on CSR. In fact, some even see this as an additional “charity tax” over and above corporate taxes.

Insisting that two percent of the net profits should be utilized fully will create unnecessary pressure on companies to spend only in order to meet compliance requirement. This sort of pressure will lead to giving to easy causes, thus defeating the very essence of strategic and sustainable CSR.

In our opinion, government should allow CSR to take root and grow at its own natural pace without threats of ‘enforcement’ and ‘prosecution’. There is significant growth in CSR spending over the last four years and in our opinion, additional controls and enforcement will prove detrimental to the essence of CSR.

Noshir H. Dadrawala

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