CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY

Workshop on Corporate Social Responsibility

Introduction & Overview of the Presentation Regulatory Framework Non Compliances & Penalties Analysis of Sections 134, 135 & CSR Rules & Section 441, 450 & 451 Analysis of Sections 447, 448 & 449 Show Cause Notices/Prosecutions & Compounding of Offences Present Scenario Lectu re Outli ne

CSR Charity

REGULATORY FRAMEWORK

Section 135 Of Companies Act, 2013 REGULATORY FRAMEWORK Section 134 Of Companies Act, 2013 Sections 441, 450, 451, 447 & 448 Companies (Corporate Social Responsibility) Rules, 2014 [As amended from time to Time) Schedule VII to Companies Act Other Guidelines FAQs/Clarifications/General Circulars from MCA/ICSI & ICAI on CSR Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities Issued by ICAI

* MCA Data As at 31st January 2016 ü No. of CSR Eligible companies ü No. of Companies Reported 7334 ü No. of companies not reported CSR 3141 ü ü ü ü 10475 No. companies reported SOME expenditure (of the reported companies) Total prescribed CSR expenditure Actual amount actually spent (74%) 3139 INR.11883 Crores INR. 8803 Crores 39 Cos. spent on CSR despite incurring losses in previous years.

**Reasons for underspend

Reasons given for Zero Spend on CSR Incurred loss CSR data not found Non finalization of CSR areas Company is not required to constitute CSR committee Board approval for projects delayed Technical and Procedural difficulty Many projects were in conceptualization stage CSR Policy formulation is under process Necessary documents could not be executed to release the amount on CSR activities. Not formed CSR Committee Very less resources to execute CSR activities Projects were approved by CSR committee at the end of financial year Lack of Clarity on CSR issues Companies Cash Flow doesn't permit CSR Spending will commence in due course The CSR Committee deferred expenditure on CSR

CSR COMPLIANCES

SECTION 135 CORPORATE SOCIAL RESPONSIBILITY Sec.135 (1) Criteria on Applicability & Constitution of Committee Sec.135 (2) Boards report to disclose composition of CSR committee Sec.135 (3) Duties of CSR Committee Formulation of Policy, Recommendation of expenditure & Monitoring of CSR Policy Sec.135 (4) Duties of Board Approval of CSR Policy, Disclosures in Boards Report & website, Ensure activities are undertaken Sec.135 (5) Ensure spending of 2% of average profits of last 3 years. Preference to local areas, reasons for non-spending to be given in Boards report under 134(3)(o)

Duties of the Board (a) To approve CSR Policy as per CSR Committee Recommendation. (b) Disclose contents of CSR Policy in Boards report & place it on the company's website, if any, (c) To ensure that the CSR activities are undertaken by the company. (d) Shall ensure that Co., spends 2% of average net profits in every Financial year

(e) To report in Boards Report about the policy developed & implemented on CSR during the year [Section 134(3) (o)] (f) Shall specify the reasons for not spending CSR in Boards Report along with Disclosure Section 134(3)(o) COMPLY OR EXPLAIN principle. (g) Compliance of the Rules, which inter alia deals with CSR Activities, Committees, Policies, Expenditure & Reporting thereof

NON COMPLIANCES

What constitutes Non-Compliance of Section 134 of the Act? Non compliance of : Section 134 (3) (o): Boards Report to include The details about the policy developed & implemented by the company on CSR initiatives taken during the year The reasons for not spending the [CSR] amount [Second proviso to Section 135(5) of the Act] Non-disclosure of the contents of the CSR policy in Boards Report [Rule 9 of Companies (Accounts) Rules,2014]

Indicative Non-Compliance of Section 135 & Companies (CSR Rules) 2014 a) Non constitution of CSR Committee b) Disclosure of constitution of committee in Boards Report c) Formulation of policy which is not in line with Schedule VII d) Not placing the Policy in the website (if any) e) Activities that are not forming part of CSR Policy or Schedule VII

f) Determination of criteria or calculation of profits or average profits g) Expenditure in the normal course of business treated as CSR g) Trust/Section 8 Cos. without track record & h) Non adoption of policy. i) Non- compliance of any part of the Rules

Penalties for Non-Compliance of CSR

Charging Sections in case of commission of offence Section 134(8) Violation of non disclosure of information in Boards report Section 450 Punishment where no specific penalty or punishment is provided For non compliance of Section 135 & flouting of the Rules Section 451 Punishment for repeated violations Section 447 Section 448 & Section 449 Punishment for fraud, false statements and false evidence on certain circumstances

Section 134(8) : Boards Report If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and Every officer of the 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 fifty thousand rupees but which may extend to five lakh rupees, or with both. Violations: Non Disclosure about the policy developed & implemented on CSR during the year [Section 134(3)(o)] in Boards Report Non disclosure of the reasons for not spending CSR in Boards Report

SECTION 450: Punishment where no specific penalty or punishment is provided If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made there under, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues. Violations: NON COMPLIANCE OF SECTION 135 any part of Companies (CSR) Rules, 2014, Schedule VII including non compliances w.r.t. CSR Activities, Committees, Policies, Expenditure & Reporting hereof

Repeated violations of Section 134 or 135 or the Rules made there under SECTION 451: Punishment in case of repeated default If a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.

Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit and Loss under Schedule III to the Companies Act, 2013, requires that in case of companies covered under Section 135, the amount of expenditure incurred on Corporate Social Responsibility Activities shall be disclosed by way of a note to the statement of profit and loss. Non compliance will attract penal provisions of Section 129(7) of the Act, wherein MD/STD/ CFO or other person charged by the board or all the directors shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand but which may extend to five lakh rupees or both.

FEW INSTANCES OF NON COMPLIANCES A DISCUSSION - Wrong calculation of Net profits For determination of Criteria - Interpretation of Previous Financial Year as contemplated u/s.135 - - Non constitution of committee though there is no CSR to be spent due to average profits Non appointment of Independent director leading to non constitution of committee thereof - Non filling of CSR details in Xbrl - Formation of Trust by the Promoter/Individuals

CSR Frauds? Is Companies Act Equipped To handle CSR Frauds!

India CSR law could open door to fraud, says Margraten Tata One of India s highest-profile philanthropists has warned a new law that mandates Corporate Social Responsibility (CSR) by large corporations is vulnerable to fraud and exploitation - Tata warned that some venal companies would see the mandated donations as a form of taxation, and would attempt to short-circuit funds back into NGOs with which they are connected under the surface. The whole scheme is very vulnerable to exploitation, he added. It needs much more clarification than there is currently.

News on INDIAN EXPRESS ON 29TH JANUARY 2017 Over 530 companies may face action for CSR norm violations More than 530 firms have come under the scanner of the government for violating CSR spending norms under the companies law and are likely to face action. The violations pertain to the 201415 financial year and reports to this regard have been submitted by Registrar of Companies (Rocks) concerned to the Corporate Affairs Ministry, sources said. Instances of non-compliance as well as non-disclosure have been detected. Under the Act, prosecution can be initiated against the erring companies while a final decision in this respect is yet to be taken, sources said. After finding discrepancies in CSR spending data, the Ministry, had last year, issued show cause notices to

HOW INDIAN COMPANIES ARE MISUSING PUBLIC TRUST TO LAUNDER THEIR CSR SPENDING 25TH OCTOBER 2015 Some companies are using on hire charitable trusts to fabricate CSR spending, at least two sources who have helped craft and execute such transactions said. They spoke to ET on the condition of anonymity. CSR spends disclosed by companies need not be vetted by statutory auditors unlike other spending. Moreover, financials of charitable trusts also come under little statutory scrutiny. This combination of factors has left the new CSR norms wide open for abuse. Also this article cited more details about modus operandi

Few instances how CSR fraud can happen in a Corporate Draw backs Public trusts are a favoured route to launder money because they are not adequately governed or monitored Trust are not governed by nationwide Law (Except on certain cases) There is no centralized repository like the registrar of companies for corporates on information on public trusts. MCAs jurisdiction over Trust is very limited unlike Section 8 Companies or in case of Direct spending. RISK Involved post incurring CSR expenditure through Other Agencies

PREVENTION OF CSR Frauds? The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company & Reporting mechanism. Implementation and monitoring process is in compliance with the CSR objectives, in letter and in spirit KYC Norms to be followed in case of Trust or other Section 8 Cos. Fraud can be prevented or detected by way of regular checks & audits. Appointment of Professionals as Administrator of CSR. Act/Rule to have more disclosures & making CSR audit as compulsory

Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws. - Plato

Penalty for Fraud & Misstatement / False evidence Section.447, 448 & 449

SECTION 447: Punishment for Fraud Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years AND shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

SECTION 447: Punishment for Fraud (contd..) (i) (ii) (iii) fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or., with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss; wrongful gain means the gain by unlawful means of property to which the person gaining is not legally entitled; wrongful loss means the loss by unlawful means of property to which the person losing is legally entitled.

SECTION 448:- Punishment for False Statement Save as otherwise provided in this Act, if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made there under, any person makes a statement,a) which is false in any material particulars, knowing it to be false; or b) which omits any material fact, knowing it to be material, he shall be liable under section 447.

449. Punishment for false evidence: Save as otherwise provided in this Act, if any person intentionally gives false evidence: (a) upon any examination on oath or solemn affirmation, authorised under this Act; or (b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act, he shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and with fine which may extend to ten lakh rupees.

Present Scenario

Issue of Show Cause notices & Prosecution Notices were issued across India thorough Registrar of Companies which to several

Compounding of Offences

COMPOUNDING OF OFFENCES PAST, PRESENT & FUTURE Companies Act, 1956 Companies Act 2013 Companies Amendmen t Bill 2016

PAST: SECTION 621 A of Companies Act Notwithstanding anything contained in the Crop, 1973, any offence punishable under this Act (whether committed by a company or any officer thereof) not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may, either before or after the institution of any prosecution, be compounded. (7) Notwithstanding anything contained in the Crop, 1973 (a) any offence which is punishable under this act with imprisonment or with fine, or with both, shall be compoundable with the permission of the Court, in accordance with the procedure laid down in that Act for compounding of offences ; (b) any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable. (1)

Section: 441. Notwithstanding anything contained in the Crop, any offence punishable under this Act (whether committed by a company or any officer thereof) with fine only, may, either before or after the institution of any prosecution, be compounded by (a) the Tribunal; or (b) where the maximum amount of fine which may be imposed for such offence does not exceed five lakh rupees, by the Regional Director or any officer authorised by the Central Government. : PRACTICAL ISSUES: COMPOUNDING OF OFFENCES WITH FINE OR IMPRISONMENT - Section 134 (8) provides for fine or imprisonment and whereas, Section 450

SECTION 441 (6) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, (a) (b) any offence which is punishable under this Act, with imprisonment or fine, or with imprisonment or fine or with both, shall be compoundable with the permission of the * Special Court, in accordance with the procedure laid down in that Act for compounding of offences; any offence which is punishable under this Act with imprisonment only or with imprisonment and also with fine shall not be compoundable. * (Until the Special court is established, be tried by a Court of session exercising jurisdiction over the area)

TYPES OF OFFENCES WHICH ARE NON- COMPOUNDABLE Offences punishable with imprisonment mandatorily are non- compounding offences. Therefore, the following offences are non-compoundable. (i) Offences punishable with imprisonment only. (ii) Offences punishable with both imprisonment and fine. (iii) Any offence for which action is taken under Section 447, i.e. fraud, is non compoundable, as the punishment there for is fine and imprisonment. (iv) If the investigation against such company has been initiated or is pending under this Act

Future: Companies Amendment Bill 2016 In Section 441 of the principal Act, in sub-section (1),for the words "with fine only", the words # not being an offence punishable with imprisonment only, or punishable with imprisonment and also with fine" shall be substituted. (# as in Section 621 A of CA 1956) STATEMENT OF OBJECTS AND REASONS in the Bill Clause 85 of the Bill seeks to amend section 441 of the Act to enable Tribunal to compound offences punishable with fine only or with fine or imprisonment or both.

(i) PROCEDURE TOcan COMPOUND AN OFFENCE Application for compounding be made either before or after the institution of any prosecution, to be made to the Registrar of Companies. (ii) The registrar forwards the compounding application to the NCLT/Regional Director (as the case may be), with his comments on the application. (iii) Regional Director/Tribunal (as the case may be) upon hearing and considering the facts of the case compound the offence and levy penalty. (iv) If the offence is compounded, intimation of the fact is to be sent by the company to the Registrar within 7 days from the date on which the offence is compounded.

Effects of compounding (i) If the offence is compounded before the institution of prosecution cannot be launched against the person by the registrar or by any shareholder of the company or by any person authorized by the Central Government in relation to the offence which has been compounded. (ii) If the offence is compounded after the institution of prosecution, such compounding shall be brought by the Registrar in writing, to the notice of the court in which the prosecution is pending. Then the person shall be discharged.

TO CONCLUDE: LETS NOT TAKE CSR AS CHARITY RATHER, TAKE THIS AS RESPONSIBILITY TOWARDS THE NATION, SOCIETY AND PEOPLE AT LARGE.

By: Sriram Parthasarathy Founder Director PROWIS Corporate Services Private Ltd.,