The Companies (Amendment) Act, 2019 (‘Amendment Act’) received President’s assent and was published in the Official Gazette on 31 July 2019. The Amendment Act was brought into effect to consider the amendments brought out by The Companies (Amendment) Second Ordinance, 2019 (‘Second Ordinance’). Earlier, the Second Ordinance was promulgated to retain the effect of the Companies (Amendment) Ordinance, 2019 which was promulgated to give continued effect of the Companies (Amendment) Ordinance, 2018.
Under the Act, certain class of profitable companies are required to shell out at least two per cent of their three-year annual average net profit towards CSR activities.The Amendment Act along with retaining the provisions of the aforesaid Ordinances, amends few other sections of the Companies Act, 2013 (‘the Act’), including section 135 dealing with Corporate Social Responsibility.
The companies law that will tighten norms pertaining to CSR spending for corporates, strengthen enforcement provisions and help unclog National Company Law Tribunal. We are trying to bring in ease of doing business, bring in a robust framework through which the Companies Act can be implemented. We are also trying to rationalise and re-categorise minor offences for civil defaults,” Corporate Affairs Minister Nirmala Sitharaman said in the Upper House.
She further said, the bill aims to strengthen provisions that enable the Serious Fraud Investigation Office (SFIO) to ensure speedy and more effective enforcement.The government has brought in all the provisions of the ordinance besides adding new amendments.
About Corporate Social Responsibility (CSR) norms, the minister said companies used to comply with the requirement fully or partly and then explain and get away with it.
This Alert provides an overview of amendments brought out by the Amendment Act in Section 135 (Corporate Social Responsibility).
- The Amendment Act clarifies that a Company who has not completed a period of three financial years since its incorporation shall consider the average net profits earned by it during financial years after incorporation. Thus, the Amendment Act has given relaxation to the three-year criteria for calculation of average profits for a Company in existence for less than the stipulated period.
- The Amendment Act provides that:
- If there is any unspent CSR amount at the end of the financial year (not being unspent amount related to an ongoing CSR project), the Company has to transfer such unspent amount to a Fund specified in Schedule VII, within a period of 6 (six) months of the expiry of that financial year;
- In respect of unspent amount on ongoing projects, the following is prescribed:
- The company within a period of 30 (thirty) days from the end of the financial year has to transfer the unspent contribution amount to a special account to be opened in any scheduled bank, to be called ‘the Unspent Corporate Social Responsibility Account’
- The amount so transferred to the designated account, is to be utilized in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of next 3 (three) financial years from the date of such transfer
- If the Company fails to utilize the said amount, it is required to transfer the same to a Fund specified in Schedule VII, within a period of 30 (thirty) days from the date of completion of the third financial year
- The Amendment Act has introduced penal provisions for non-compliance in reporting, utilization and transfer of the unspent CSR amount;
- The company shall be punishable with fine which shall not be less than INR 50,000 but which may extend to INR 25 lacs
- Every officer of the Company who is in default shall be punishable with imprisonment for a term which may extend to 3 (three) years or with fine which shall not be less than INR 50,000 but which may extend to INR 5 lacs, or with both.
- The amendments to section 135 of the Act have not yet came into force. The Central Government by notification in Official Gazette shall appoint the effective date.
- ‘Fund’ under Schedule VII means, Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the scheduled castes / tribes, other backward classes, minorities and women, Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
- The Central Government is yet to prescribe conditions categorizing ‘ongoing project’ for purpose of section 135(6) of the Act.
- The Central Government will issue general or special directions for a Company or class of Companies for ensuring compliance of provisions of section 135 of the Act.
- With the Government’s focus on social development, it is imperative for corporate India to ensure adequate compliance of this law.