No penalty for cos not spending on CSR

Business Standard, October 26, 2012

It is mandatory that the companies have a CSR expenditure of 2% of their average profits

Even as government attempts to make it mandatory for companies to spend on corporate social responsibility(CSR), there is no provision to penalise those violating the law. Besides, the fact that companies can explain not meeting the requirement , makes the whole objective of the amendment mundane, says experts.

The Amendments to the Companies Bill, 2011, recently cleared by the Cabinet and expected to be tabled in the winter session of the Parliament, aims at mandating expenditure of 2% of a companys average profits in the three previous years on CSR, amongst other changes. However, companies can explain the shortfall and there is no fine or penalty if they do not abide by the law.

The clause on CSR proposes every company having net worth of Rs 500 crore or more, or turnover of rupees Rs 1,000 crore, or more or a net profit of Rs 5 crore or more during any financial year shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

According to an industry expert, Rs 5 crore of net profit is very low benchmark as compared to the net worth and turnover benchmarks. Also, the Bill lacks clarity on what happens if a company has reported a mix of profit and loss during three immediately preceding financial years, he said.

According to Mehul M Modi, Senior Director, Deloitte Touche Tohmatsu India, even if the money flows as per the mandate of the law, it is doubtful that it will be instrumental in creating infrastructure. The concept is good but the implementation is the key. If not implemented earnestly, it might create mere bureaucratic interventions with most of the money going to specific constituencies of ministers, Modi said.

The Bill also lists out specific activities that qualify as CSR initiatives. For instance, eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment-enhancing vocational skills, social business projects and contribution to the Prime Ministers National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Schedule Castes, the Scheduled Tribes, other backward classes, minorities and women are all defined as a CSR initiatives.

Experts opine that it is unfair to expect a corporate entity to spend on such activities. CSR should mean an ethical attitude, where companies must observe the highest standards while dealing with its stakeholders – customers, suppliers, shareholders, says Modi.

It should not mean that a company while spending 2% of profits on activities listed by government , is cheating its stakeholders, fudges its accounts and ignores hazards, another analyst on corporate governance said.

However, some also feel that this is a good start in the direction and more stringent norms may follow.

There may not be any penalty but it is a small step and enforcement aspects may follow later, says Pradeep S Mehta, Secretary General, CUTS International. Agrees Harinderjit Singh, Partner, PricewaterhouseCoopers. No listed company would like to put a statement as explanation in their annual report. It more about moral responsibility and reputation. Independent directors would also insist that a company must spend, Singh said.

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