Companies will have to pay unused CSR money into state corpus

Cabinet approves changes in provisions of CSR norms under Companies Act

• Companies will have to deposit their unspent CSR amount to a fund set up by the government

Companies will have to deposit their unused funds meant for corporate social responsibility (CSR) activities to a fund set up by the government for better utilization of resources for public welfare, according to amendments to the Companies Act approved by the Cabinet on Wednesday.

The Companies (Amendment) Bill 2019 cleared by the Cabinet will replace an ordinance issued earlier to help reduce the burden on special courts and to bring down applicable penalties for small companies. In addition, it seeks to bring about a few other changes to the law, which includes the provisions related to CSR. The proposed amendment requires businesses to transfer the CSR amount allocated in specific years to a dedicated fund set up by the government if the company could not utilize it for three years. This would bring accountability to the CSR activities of businesses, said a government official who spoke on condition of anonymity.

Indian companies spend around ₹15,000 crore a year on CSR, according to information available with the government. The law mandates that firms with a net worth of at least ₹500 crore or revenue of ₹1,000 crore or net profit of ₹5 crore should spend at least 2% of their net profit on CSR. Any failure in this regard should be explained in the annual financial statement.

The Bill also proposes to give more administrative power to the National Financial Reporting Authority (NFRA) for smooth functioning.

Another proposal in the Bill is to ensure that all private limited companies dematerialize their shares. The proposal may be implemented in stages. Dematerialization of shares will help prevent share manipulation and theft of shares.

The Companies (Amendment) Act, 2019 (the Act) came into effect July 31, 2019 and replaced the Companies (Amendment) Second Ordinance, 2019 with certain additional amendments.

The Act will significantly affect corporate compliances and litigation in India.

Companies operating in the country or planning to set up should pay close attention to the changes to understand legal implications as well as to ensure the smooth running of their business in India.

Below, we highlight some of the key provisions of the Act.