Companies Act amended to include penal provisions for CSR norm violations

Parliament on Tuesday cleared amendments to the companies law that will tighten norms pertaining to CSR spending for corporates, strengthen enforcement provisions and help unclog National Company Law Tribunal.

Rajya Sabha passed the Companies (Amendment) Bill, 2019 by voice vote on Tuesday and the legislation would replace the ordinance issued by the corporate affairs ministry.

"We are trying to bring in ease of doing business, bring in a robust framework through which the Companies Act can be implemented. We are also trying to rationalise and re-categorise minor offences for civil defaults," Corporate Affairs Minister Nirmala Sitharaman said in the Upper House.

 

She also said the bill aims to strengthen provisions that enable the Serious Fraud Investigation Office (SFIO) to ensure speedy and more effective enforcement.

The bill was passed by Lok Sabha on July 26.

Replying to the discussion on the bill, Sitharaman, who is also the Finance Minister, said the government has brought in all the provisions of the ordinance besides adding new amendments.

The ordinance is to lapse on Wednesday, she added.

About Corporate Social Responsibility (CSR) norms, the minister said companies used to comply with the requirement fully or partly and then explain and get away with it.

Now, there would be a provision wherein the unspent CSR amount would be transferred to an escrow account for three financial years. Subsequently, if the amount remain unspent then the same would be moved to funds specified in Scheduled VII of the Companies Act.

Under the Act, certain class of profitable companies are required to shell out at least two per cent of their three-year annual average net profit towards CSR activities.

"It is a very interesting step which we have taken keeping the spirit of the legislative intent of Companies Act, 2013. Actually, CSR is applicable to all those companies which have Rs 5 crore profit or Rs 1,000 crore turnover or Rs 500 crore networth.

"So CSR, does not apply to everybody but you have to fall in this category. Therefore, those companies will now have to be state as to where they have to spend the money," Sitharaman said.

Stating that the bill provides for better clarity related to CSR, she said if a company is unable to spend the earmarked amount for CSR activities within a particular financial year, it shall transfer the same to an CSR or an escrow account to be spend within the next three fiscal years.

"Any amount remaining unutilised in such CSR account shall thereafter to be transferred to any fund specified in Schedule VII," Sitharaman said, adding that "money will come to the ground, money will be available for actual spending".

The minister said that Section 135 of the Act was being amended to provide for specific penal provision in case of non-compliance of CSR provisions.

According to her, the Act is undergoing major changes with number of amendments and wondered whether the earlier Act was passed in a hurried manner. The law was passed during the UPA regime.

She said that the amended bill will de-clog the National Company Law Tribunal by shifting routine matters out of it.

To crack down on shell companies, the minister said it has been made mandatory to have physical address and register to ensure such companies exist on ground.

She said that four lakh companies have so far been de-registered as they did not file financial results for two years and did not even apply for dormant status.

The Corporate Affairs Minister expressed concern over individuals breaching the ceiling on directorship and said the bill provides for disqualification in case of violation of permissible limit.

Responding to a member's concern over small companies facing problem in appointing company secretaries, Sitharaman assured the government is considering relaxing the provisions concerned and would hold consultations with all stakeholders to work out a solution.

She also assured that there is no conflict between National Financial Reporting Authority (NFRA) and chartered accountants' apex body ICAI.

The bill empowers Registrar of Companies (RoC) to initiate action for removal of a company's name from official records if it is not carrying on any business or operation in accordance with the company law.

Among other things, the bill provides for re-categorisation of 16 minor offences as purely civil defaults and transferring of functions with regard to dealing with applications for change of financial year to central government.

It also provides for shifting of powers for conversion from public to private companies from NCLT to the central government, as well as more clarity with respect to certain powers of the NFRA.