On 31st July, 2019, the Companies (Amendment) Act, 2019 (“Amendment Act“) received assent of the President of India with a view to bring a robust framework through which the Companies Act, 2013 (“Act“) can be implemented. Amongst the various provisions of the Act that have been amended, one such amendment has been made to the Section 135. Section 135, along with other ancillary sections, Schedule VII of the Act (containing the list of activities that may be included in CSR policies) and the Companies (Corporate Social Responsibility Policy) Rules, 2014 mandate the scope of corporate social responsibility (“CSR“) under Indian law.
Before understanding the amendments that have been brought to Section 135 through the Amendment Act, let us first examine what Section 135 requires.
Section 135 under the Act
Section 135(1) provides that companies having net worth of Rs. 500 Crore or more or turnover of Rs. 1000 Crore or more or net profit of Rs. 5 Crore during the immediately preceding financial year are required to form a CSR committee of their board of directors. The CSR committee assists in formulating and recommending a CSR policy as well as monitoring the same. This CSR policy that is formed is required to indicate the activities and the projects that will be undertaken in the areas specified in Schedule VII of the Act along with the recommended amount of expenditure to be incurred in conducting such activities. The activities that can be conducted by the company in order to achieve its CSR goals, which are enumerated in Schedule VII, are as follows:
- 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;
- contribution to the Prime Minister’s 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 Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
- such other matters as may be prescribed.
Additionally, Section 135(5) requires the board of directors to ensure that in every financial year a company spends at least two percent (2%) of the average net profits made by it during the three (3) immediately preceding financial years in pursuance of its CSR Policy. On failure to do the same, the companies were also required to specify in the annual report filed by it in its general meeting, the reasons for not being able to spend the stipulated amount.
Amendments made to Section 135 of the Act
As per the Amendment Act, the provisions of CSR are now also applicable to companies which haven’t completed the period of three (3) financial years from their respective incorporation. Thus, the amount spent on the CSR activities will be equivalent to two percent (2%) of the net profits made by the company in the previous financial year.
Transfer of Unspent Amount
The Amendment Act introduces a new concept wherein if any unspent amount from the total allocated amount for CSR remains, pursuant to any ongoing CSR project in accordance with its CSR policy, the company is then required to transfer such unspent amount to a special account within a period of thirty (30) days from the end of the financial year. Such special account is required to be opened in the name of Unspent Corporate Social Responsibility Account (“CSR Account“) in any of the scheduled banks. The amount that has been carry forwarded to the CSR Account must be spent in consonance with the CSR policy within the stipulated time period of three (3) financial years from the date of such transfer. On failure to do the same, the company should transfer this unspent amount to a fund specified under Schedule VII of the Act.
However, if the unspent amount does not relate to an ongoing CSR project, such unspent amount should be directly transferred to the fund mentioned in Schedule VII of the Act, within 6 (six) months from the end of the relevant financial year.
Penalty for Non-compliance of the Provisions
“It was easy for people to interpret that either we comply, or we give an explanation and get away with it. Now that is not happening because Section 135 (of the Companies Act) is being amended to provide specific penal provision in case of non-compliance,” said the Finance minister Nirmala Sitharaman.
As per the Amendment Act, on failure to comply with the provisions,the company shall be punishable with fine which shall not be less than Rs. 50,000/-and may further extend to Rs. 25,00,000/-. Further, every officer of such company who is in default, shall be punishable with imprisonment for a term which may extend to three (3) years or with fine which shall not be less than Rs. 50,000/-and may extend to Rs. 5,00,000/-, or with both.
Power with the Central Government
The Central Government has the authority to give general/special directions to a company or a class of companies to ensure compliance of the provisions of Section 135.
Though there are now stringent penalties to ensure the proper implementation of the CSR related provisions, the same has left the companies in a state of panic. As per recent reports, the Central Government will not operationalise the CSR provisions provided in the Amendment Act that make violations punishable by imprisonment. A high level committee on CSR (“Committee“) has been set up according to which instead of imprisonment, the penalty might be enhanced to two-three times the default. The Committee has further suggested including limited liability partnership firms as well as banks under the CSR provisions.
 21(b)(6) of The Companies Amendment Act, 2019 (No. 22 of 2019), Insertion of Section 135(6)
 21(a)(ii) of The Companies Amendment Act, 2019 (No. 22 of 2019), Amendment of Section 135(5)
 21(b)(8) of The Companies Amendment Act, 2019 (No. 22 of 2019), Insertion of Section 135(7)
 21(b)(8) of The Companies Amendment Act, 2019 (No. 22 of 2019), Insertion of Section 135(8)