Deliberations on the matter have started and a final decision will be taken soon, they said. The changes, once finalised, could be part of amendments to Companies Act, 2013, as well as relevant rules, which the Ministry of Corporate Affairs (MCA) is planning to introduce after the general election, one of the persons said.
Section 135 of Companies Act requires firms of a certain size to spend every year at least 2% of average net profits of previous three financial years on stipulated CSR activities. Failure to do so will make a company liable to pay a penalty twice the unspent amount, or ₹1 crore, whichever is less. Even every officer of a company who is in default is also liable to a maximum penalty of ₹2 lakh.
To be sure, the current penalties are still way above the levels stipulated earlier. However, they are not acting as a deterrent and doing little to force companies, especially some of those with high spending obligations, from complying with CSR provisions on time, the people said.
The fine loophole
“Where the companies are supposed to spend a large amount of money on CSR, they can potentially keep the unspent amount in fixed deposits or deploy it elsewhere and get away with a penalty of just Rs 1 crore. So, this cap is being reviewed,” a second person said.
The government is also considering widening the scope of activities eligible for CSR expenditure, said experts. “One way of doing it is to remove unnecessary specifics while stipulating eligible activity heads and let companies cover a wider spectrum of activities within the broad heads,” another person said.
As many as 3,984 companies, which were required to undertake CSR obligations, did not spend any amount in FY22, according to the latest available official data. Total CSR expenditure in FY22 stood at Rs 26,279 crore, a tad higher than Rs 26,211 crore in the previous year, the data showed.
Local area CSR spending
The Centre could also relook at local area CSR expenditure stipulations, said one of the persons cited earlier. Section 135(5) of Companies Act says, “the company shall give preference to the local area and areas around it where it operates” for its CSR spending.
However, a 2021 FAQ issued by the MCA said, “the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities”. FAQs usually don’t have solid legal sanctity but this one led to unnecessary ambiguity over the actual intent of the law that now needs to be addressed, the people said.
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