CSR offences by firms now a ‘civil wrong’, not a crime

In line with a commitment made by the finance minister, the government formally notified that non-compliance with CSR provisions would be a “civil wrong,” not a crime, and shifted such violations to a penalty regime, two officials said, requesting anonymity.

The government on Friday decriminalised corporate social responsibility (CSR) offences, introduced impact analyses of CSR projects and made it mandatory for companies to transfer capital assets created by CSR funds to a registered public trust, society or another beneficiary.

After the move was opposed by industry, finance minister Nirmala Sitharaman said on August 23, 2019 that violations of CSR norms under the Companies Act would be treated as a civil liability and not as a criminal offence.(HT file photo. Representative image)

In line with a commitment made by the finance minister, the government formally notified that non-compliance with CSR provisions would be a “civil wrong,” not a crime, and shifted such violations to a penalty regime, two officials said, requesting anonymity.

“The new rule decriminalises CSR violations and it shall be applicable from the date of notification [January 22]. This is in line with overall exercise of de-criminalisation of offences under the Companies Act, 2013,” one of the officials said.

Earlier, a committee had proposed treating non-compliance with CSR provisions as a criminal offence. In July 2019, the government had amended the law that treated non-compliance with CSR provisions as a criminal offence. The amended Act was, however, not operationalised due to protests by stakeholders.

After the move was opposed by industry, finance minister Nirmala Sitharaman said on August 23, 2019 that violations of CSR norms under the Companies Act would be treated as a civil liability and not as a criminal offence.

Abhishek A Rastogi, partner at law firm Khaitan & Company, said treating non-compliance as a civil wrong and not as a criminal offence was “a major relief to companies as such offences are of civil in nature”.

“This is a major move towards ease of doing business. Other provisions are also practical and will ensure compliance transparently.”

In order to ensure that companies do not misuse CSR funds for creating assets for themselves rather than for public goods, it has made it mandatory to transfer capital assets to a public trust, society or another beneficiary, the officials said.

“While the companies are allowed to create or acquire capital assets through CSR, the same shall be in the name of beneficiaries or a public authority or registered trust, society or Section 8 company. The ownership of assets with the community will further enhance the connect between the business and the community at large,” the first official said. A Section 8 company is a non-profit organisation.

“A 180-days window is given to companies to transfer such capital assets, already created through CSR funds in the past, to be transferred to either a trust or a society or the beneficiary,” a second official said.

The new rules notified on Friday exempted companies having CSR obligations below ₹50 lakh from the need to form a CSR committee. “They can fulfil their CSR obligations through their respective boards. This is done specifically to ease the burden of CSR compliances on small firms,” the official said.

The new rules also allow companies to undertake multi-year projects, provides for compulsory registration of agencies implementing CSR activities on behalf of companies and allow firms to set off the excess amount spent under CSR up to three succeeding financial years.

“After that they have to transfer the amount to a government-specified fund,” the second official said. HT reported it on August 11, 2019.

The schedule specifies government-approved CSR activities, which include eradicating hunger, poverty and malnutrition and promoting health care, education and gender equality. It also covers activities related to environmental sustainability, art and culture, contributing to the Prime Minister’s National Relief Fund and disaster management.

Under the law, companies with a net worth of ₹500 crore or more, or a turnover of R1,000 crore or more, or a net profit of ₹5 crore or more in the immediately preceding financial year are required to spend 2% of their average net profit of the preceding three years on CSR. These activities are governed by Section 135 of the Companies Act, 2013 and the government specifies activities to be undertaken by the company under CSR.