Moily leaves 2% CSR to peer pressure, violations by cos wont attract penalty

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Dec 17 2011, 07:42am hrs
Companies wont be strictly bound by law to set aside a part of their profits for corporate social responsibility (CSR) initiatives. Contrary to expectations, the Companies Bill introduced in Parliament on Wednesday is ambiguous on imposing a mandatory CSR bill on companies. In a climbdown from its earlier assertions that companies above certain defined thresholds will have to spend 2% of their average net profits in the previous three years for CSR, the government now expects these companies to merely make every endeavour towards this objective.

This implies that the proposed CSR spend would virtually be a matter of choice and peer pressure, and violations wont attract any penalty.

Official sources attributed the whittling down of the provision to the need to make exceptions given the changing nature of businesses, but independent analysts and corporate lawyers said such vagueness in legal language was unusual. They were, however, divided on the enforceability of such a loosely-worded provision.

When the proposal was first mooted by the ministry of corporate affairs (MCA), the idea was that the 2% provision would be mandatory for all companies either having a net worth of R500 crore or turnover of R1,000 crore or a net profit of R5 crore or more during any financial year. These companies will now have much more flexible CSR regime for all practical purposes.

Many leading companies were critical of CSR being made mandatory.

Some corporate lawyers, however, believe that the vagueness of the wording of Section 135 of the Bill can throw in rude surprises for companies. The provision, a lawyer says, gives a directive principle nature to the law, which is rare.

FE has learnt that the vagueness is neither an oversight nor negligence on the part of the MCA, but a carefully-thought-out one. The idea, an official said, is to create a new law which would be futuristic in its approach and create the much-needed peer pressure to nudge unwilling companies to do more philanthropic work. This is not any ordinary law. The nature of businesses is changing rapidly and you need to make exceptions when required. This law would stand the test of time for the decades to come, the official said.

The official added that the proposal was inserted after various rounds of consultation.

Managing partner of Delhi-based law firm Titus & Company Diljeet Titus said that the government's move to insert a directive principle in the Bill is not often seen and criticised the term endeavour in it. The term is so very loose. It's not clear what would constitute 'every endeavour' in this respect, Titus said. Managing partner of Link Legal Atul Sharma said that the move is fraught with danger since it could create confusion. He also said that peer pressure might not work with companies since the final decision on CSR investments would lie with the board of directors.

When contacted, corporate affairs secretary Naved Massoud said, This has been a contentious issue with various shapes of opinions being made. But the law has to be seen (evolving) over the next three to four years. He said that Section 135 does not lay out any penal provisions for companies that do not follow the provision and added that having directive principles in law is not uncommon. The term endeavour is also not vague when read in its entirety, Massoud said.

Once the Bill is enacted, companies that qualify on laid-down parameters of net worth, turnover or profit would be required under law to constitute a CSR committee with at least three directors and formulate a CSR policy. The companies concerned would have to engage in activities that include eradication of extreme poverty and hunger, promoting education, gender equality and empowerment of women and fight diseases as varied as HIV and malaria. If companies do not invest in such activities, they would be required to give reasons in their CSR reports for the same.