High Level Committee Report on CSR: Recommends Removal of Criminal Liability among other changes proposed

The Ministry of Corporate Affairs (“MCA”) released the report of the High Level Committee On Corporate Social Responsibility, 2018 (“Report”) on August 07, 2019. We have summarized the key highlights of the Report under the following two categories: (1) Recommendations with respect to the changes brought about vide The Companies (Amendment) Act, 2019 (“Amendment Act”) and (2) Other Key Recommendations.   

(1)  KEY RECOMMENDATIONS W.R.T THE CHANGES BROUGHT ABOUT VIDE THE AMENDMENT ACT:

(a)  No Criminal Liability for Non-Compliance

The Companies (Amendment) Act, 2019 (“Amendment Act”) has introduced a specific penalty clause with respect to non-compliance with the provisions of Section 135 of the Companies Act, 2013. The newly introduced penalty clause states that the officers in default may be punished with a fine ranging from INR 50,000/- to INR 5,00,000/- OR with imprisonment for a maximum period of 3 years.

The Report recommends that non-compliance with Corporate Social Responsibility (“CSR”) provisions should be treated as civil offence and that the penalty for non-compliance be enhanced to twice or thrice of the default amount with a maximum penalty of INR 1 Crore.

(b)  Applicability to Newly Incorporated Companies

The Amendment Act  requires even newly incorporated  companies to carry out CSR activities as long as they satisfy the threshold outlined in Section 135 of the Companies Act. . However, the Report recommended that for newly incorporated companies CSR obligations shall trigger only after they have been in existence for 3 years. This recommendation is to promote ease of doing business for new companies in India.

(2)  OTHER KEY RECOMMENDATIONS

(a)  Applicability of CSR Provisions on Not-For-Profit Companies; Foreign Companies

It was highlighted by the Report that all not-for-profit companies (Also known as Section 8 Companies) are not incorporated to carry out charitable activities for the benefit of society; that Section 8 companies generate profits and that they are companies irrespective of their object of carrying out business, thus, recommended that they should remain to be within the ambit of CSR provisions. The Report has also clarified that CSR provisions have always been applicable to foreign companies by virtue of the Companies (CSR) Policy, Rules 2014.

(b)  CSR to be carried out by LLPs and Banks

The Report recommended that in order to uphold the philosophy of responsible business conduct, all entities which are regulated by the Companies Act, 2013 including Limited Liability Partnerships and Banking Companies should comply with the CSR provisions.

(c)  Companies having prescribed CSR amount below INR 50 lakhs be exempted from forming CSR Committees

In order to ensure that a company is not unduly burdened with compliances, the Report has recommended that companies having prescribed CSR amount below INR 50 lakhs to be exempt from forming a separate CSR Committee.

(d)  Strengthening Reporting Requirements for CSR

The Report recognized the need for enhanced monitoring of CSR activities by companies. The Report recommended that CSR may be brought within the purview of the statutory financial audit, by making details of CSR spending as part of the financial statement of a company.

(e)  Changes with respect to Implementing Agencies

The Report highlighted that a sizable proportion of CSR expenditure is channelled through implementing agencies, the Report recommended that mere disbursal of money to implementing agencies should not be considered to be CSR spending, the Board of Directors of a company should have the duty to ensure that CSR funds are duly spent in terms with the list of CSR activities to be carried out by companies given under Schedule VII of the Companies Act, 2013.

The Report has also recommended that implementing agencies should be registered with the MCA, the present requirement for an implementing agency to carry out CSR activities is to have a track record of three years of carrying out social initiatives.

(f)  Appointment of CSR Experts by Companies

The Report pointed out that the CSR Committee of aa company may lack technical expertise or subject knowledge with respect to carrying out CSR activities.  For which, the Report recommended that the Board of a company may engage a CSR professional, and the government may prescribe eligibility criteria for such professionals.

(g)  Recognizing ‘Social Impact Companies’

The Report has recommended that a new framework be put in place to recognize ‘social impact companies’. The Report highlighted that there are companies in India with developmental objectives, such companies may be either for-profit or not-for-profit ventures. The Report recommended that such companies be created as vehicles to carry out CSR activities.

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The Report has addressed various grey areas with respect to CSR provisions, for example – applicability to foreign companies and appointment of CSR experts, uniform tax benefits, concerns regarding CSR activities mandated to be undertaken in local areas etc. The same will be seen as a welcome move by companies if it is implemented by the government. Most of the recommendations of the Report suggest that the Committee, has indeed, factored in ‘Ease of Doing Business’.

Disclaimer: This post has been prepared for informational purposes only. The information/or observations contained in this post does not constitute legal advice and should not be acted upon in any specific situation without seeking proper legal advice from a practicing attorney.