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    Why CSR rule amendments can put cash stress on some companies

    Why CSR rule amendments can put cash stress on some companies

    Why CSR rule amendments can put cash stress on some companies
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    By Milan Mody   IST (Updated)

    Mini

    This change in law on CSR would have an impact on several companies which presently do not spend the recommended amount towards CSR and provide a reason for not spending in the director’s report.

    The Companies (Amendment) Bill, 2019 enacted by the Parliament has come up with many amendments to various sections of the Companies Act, 2013. One of the amendments is in respect of CSR (Section 135 of the Companies Act, 2013). CSR was introduced in India under the principle ‘comply or explain’, which implies that a company can either incur cost for a CSR project or explain the reason as why it has not been able to spend towards CSR. This article analyses the recent changes, benefits due the change and the challenges faced by some companies.
    As per the Companies (Amendment) Bill, 2019, the unspent amount is classified in two buckets with different provisions for each of them, the provision for each of the two category is elaborated below:
    • Unspent amount not related to an ongoing project
    • All companies need to spend the prescribed CSR amount and if they are unable to spend it within the stipulated period, then the company along with providing a reason for the same in the directors report shall transfer such unspent amount to a fund specified in Schedule VII (eg. PM’s relief fund) within a period of six months from the expiry of the financial year provided the unspent amount should not relate to any ongoing project.
      • Unspent amount relating to an ongoing project
      • Any amount remaining unspent and pertaining to any ongoing project undertaken by the company in pursuance of its corporate social responsibility policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company on that behalf for that financial year in any scheduled bank to be called as ‘Unspent Corporate Social Responsibility Account’ and such amount shall be spent by the company in pursuance of its obligations towards the corporate social responsibility policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
        If a company contravenes the provisions stated in the CSR section, the company shall be punishable with fine which shall not be less than Rs 50,000, but it may extend to Rs 25 lakh and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than Rs 50,000, but it may extend to Rs 5 lakh, or both.
        Here is my view on some of the key implication and challenges:
        • This change would ensure that companies are serious in CSR activity and it will benefit the society and community at large as more money would be available.
        • This change in law on CSR would have an impact on several companies which presently do not spend the recommended amount towards CSR and provide a reason for not spending in the director’s report. Such companies would now have to provide for the obligation/liability for unspent amount in the book of accounts. Listed companies would have to make provision towards CSR expense on a quarterly basis.
        • This would be a challenge for companies in turnaround phase as the past losses which are primarily on account of taxes, i.e. losses before the past three years, which are solely on account of taxes cannot be set off while computing the CSR liability which is based on average profit before tax of last three years. Also a company suffering a loss in the current year will still have to contribute as the average of last three years is considered for computing liability.
        • Further this would squeeze the cash flow available with the company since transfer to separate account would mean that it would be idle funds not available for business purposes. At times, profit may not be equal to cash inflow and this would put cash stress on such companies.
        • Milan Mody is Partner at NA Shah Associates LLP.  The views expressed in the article are personal.
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