Companies (Amendment) Act 2019 & Corporate Social Responsibility (CSR)

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Companies (Amendment) Act, 2019 had received presidential assent on 31st of July this year. India is the first nation to make Corporate Social Responsibility a mandatory duty of those who have huge profits. However, it received disapproval from the corporate sector for its stringent provisions related to Corporate Social Responsibility. This is due to the fact that the law proposes penal provisions that may include fine or imprisonment or both, to the defaulting officers. The government, therefore, had responded to this criticism by changing the defaults on corporate social responsibility as a civil offence rather than a criminal offence.

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What is the Companies (Amendment) Act, 2019?

  • Companies (Amendment) Act, 2019 amends the Companies Act, 2013.
  • The Amendment Act aims to tighten the Corporate Social Responsibility (CSR) compliance and reduce the number of cases before the National Company Law Tribunal (NCLT)

What are the key features of the new Act?

Re-classification of offences:

  • The 2013 Act consisted of 81 compoundable offences punishable with fine or imprisonment or both and these are heard by courts.
  • The 2019 Act re-classified 16 of these offences as civil defaults, where the adjudicating officers, who are appointed by the Centre, may now levy penalties instead.
  • The offences include the issuance of shares at a discount and failure to file an annual return.
  • Furthermore, the 2019 Amendment Act amends the penalties for few other offences.

Corporate Social Responsibility:

  • Under the 2013 Act, if the companies which are to provide CSR did not fully spend the funds, they must disclose the reasons for not spending in their annual report.
  • Under the 2019 Act, any of the unspent annual CSR funds must be transferred to one of the funds under the Schedule 7 of the Act (Example: PM Relief Fund) within six months of the fiscal year.
  • However, if the CSR funds are committed to certain on-going projects, then the unspent funds should be transferred to the Unspent CSR account within 3 years.
  • Any funds that remain unspent after 3 years should be transferred to one of the funds under the 7th Schedule of the Act.
  • In case of violation, the defaulter may be punished with imprisonment of up to 3 years or fine between Rs.25, 000 and 50,000 or both.

Suspension of auditors:

  • Under the 2013 Act, the National Financial Reporting Authority can debar an individual or a firm from practising as a Chartered Accountant in case of proven misconduct for 6 months to 10 years.
  • The 2019 amendment Act changes the punishment to provide for debarment from appointment as an auditor or internal auditor of a company or performing company’s valuation for a period between 6 months and 10 years.

Business Commencement:

  • The 2019 Act states that a company should not initiate business unless it:
  1. Files a declaration within 180 days of incorporation, confirming that every subscriber to the Memorandum of the company has paid for the shares agreed to be taken by him.
  2. Files a verification of its registered address with the RoC within 30 days of incorporation.
  • If the company fails to comply with these provisions and is found to not carrying out its business, its name may be removed from the Register of Companies.

Registration charges:

  • The 2013 Act necessitates companies to register charges (example: mortgages) on their property within 30 days of the creation of charge, extendable up to 300 days with the permission of RoC.
  • The 2019 Act changed the deadline to 60 days.

Approving Authority:

  • Under the 2013 Act, any alteration in the incorporation document of a public company, which is going to be privatised, has to be approved by the NCLT.
  • As per the 2019 Act, any changes in the incorporation document of the public company which is going to be converted to a private company is transferred from NCLT to the Central Government.

Compounding:

  • As per the 2013 Act, a regional director can settle offences with a penalty of up to Rs.5 lakh.
  • The 2019 Act increases the penalty to Rs.25 lakh.

Provision to bar those holding office:

  • Under the previous Act, the Centre or certain shareholders can apply to NCLT for relief against mismanagement of the company.
  • The amended 2019 Act states that, in case of such complaint, the Centre may also make a case against an officer of the company on the ground that he/she is not fit to hold office in the company, for reasons like fraud or negligence.
  • If the NCLT passes an order against the officer, he/she will not be eligible to hold office in any company for 5 years.

Beneficial ownership:

  • If an individual holds a beneficial interest of at least 25% shares in a company or exercises substantial influence over the company, he is required to make a declaration of his interest.
  • The 2019 Amendment Act requires every company to take steps to identify an individual who is a significant beneficiary and require that person’s compliance under the Act.

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What is Corporate Social Responsibility?

  • CSR is a managerial concept wherein the companies integrate social and environmental concerns in their business activities.
  • It is generally understood to be the way through which a company can achieve a balance of economic, environmental and social necessities (Triple-Bottom-Line-Approach), while at the same time addressing the expectations of all parties involved.
  • India has become the first country in the world to make CSR spending mandatory through the law, i.e. through Section 135 of the Companies Act, 2013.
  • Amongst the various provisions stated under the Act, the Indian Government makes it compulsory for a particular class of profitable companies to contribute their profit shares for the cause of social activities through prescribed procedures under the CSR rules and regulations.
  • The shares may be contributed towards acts like:
  • Eradication of hunger, malnutrition or poverty
  • Promotion of healthcare and sanitation
  • Providing support for education and employment that can enhance vocational skills
  • Promotion of gender equality
  • Ensuring sustainable development
  • Protection of heritage
  • Working for the benefits of the Indian armed forces
  • Promotion of sports activities
  • Contribution to relief projects
  • As per the 2019 Amendment Act, the companies that have not completed 3 whole years but fall under the following categories will have to contribute 2% of their average net profit of the previous 3 years or years after the incorporation, if less than 3 years, on CSR:
  • Companies that have a net worth of Rs.500 crores or more
  • Companies having an annual turnover of Rs.1,000 crores or more
  • Companies having a net profit of Rs.5 crores or more

How is the government implementing the Amended Act?

  • The Companies (Amendment) Act, 2019 has brought in a lot of changes in the existing Act.
  • The law-makers have emphasised upon the aspects like CSR and imprisonment for various offences.
  • Also, the amended Act has bestowed the Centre with more power in comparison to the previous Act.
  • However, the government is faced with criticism from India’s corporate sector due to the burdensome CSR amendment proposed in the 2019 Amendment Act.
  • The Ministry of Corporate Affairs (MCA) has recently notified several sections of the Amendment Act except the provision related to the implementation of Section 21 on the CSR amendments.
  • As the CSR amendments have not been notified by the Centre, the provisions related to the same is assumed status quo and that the CSR will now be charged voluntarily.
  • Also, the non-spending of the 2% of the net profit on the CSR will not account for the criminal offence.
  • It is possible that the CSR amendments may not be notified at all as the recommendations made by the high-level panel on CSR headed by the MCA Secretary was submitted to the ministry after the Parliament has passed the Companies (Amendment), Bill, 2019 and the government has changed the stance over the CSR provisions as one of the recommendations in the report included the non-compliance of the CSR should be treated as a civil offence rather than a criminal offence.
  • Thus the government had earlier announced that it had no intention to go on the prosecution route and that the CSR will be treated as a civil matter rather than a criminal matter.

Conclusion:

The Companies (Amendment) Act, 2019 has brought in a lot of noteworthy changes. Making CSR mandatory is a need of the hour, as numerous social issues in the country can be addressed only if those with high profits cooperate. However, the needs of the corporate sector should also be taken into consideration by the government so that the Indian economy does not face the negative implications and the Centre has done just that.

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