RoCs tighten CSR enforcement; over a dozen businesses get penalty orders so far this year | Mint

New Delhi: Companies defaulting on social obligations mandated by law are increasingly beginning to face the brunt of non-compliance, more than three years after a penalty provision was introduced. As per the Companies Act, companies of certain size or profit are required to spend 2% of their net profit on social work as part of their corporate social responsibility (CSR).

According to data from the ministry of corporate affairs, the registrars of companies (RoCs) in Tamil Nadu, Maharashtra, Karnataka and Delhi have issued penalty orders to 14 companies so far this financial year for allegedly defaulting on their CSR spending obligations.

Of the 14 companies that have faced penalty orders this fiscal, eight are Tamil Nadu-based spinning mills, which attracted minimum penalty of ₹10,000 for procedural irregularities. Barring Sivaraj Spinning Mills Pvt. Ltd, none of these eight companies showed a dedicated website with contact information.

Implementation of the penalty provision, which was given effect in January 2021, has picked up pace. The first two penalty orders were given in 2022, followed by orders to 16 companies in 2023, publicly available orders from the ministry of corporate affairs showed.

The reasons for being penalised vary. Some companies were penalised for procedural violations related to reporting, others for delays in transferring unspent amounts not related to ongoing CSR projects to state-designated funds within specified time.

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Some of the companies that were penalised pointed out to Mint that the defaults were due to procedural oversight in the initial years of implementing the penalty provisions, and that there has been no further recurrence.

Queries emailed to Sivaraj Spinning Mills Pvt. Ltd, Convergint India Pvt. Ltd—a systems integration company that was issued a penalty order last year, and to Toyota Tsusho India Pvt. Ltd, which was also issued a penalty order last year, remained unanswered at the time of publishing.

Freudenberg Performance Materials India Pvt. Ltd, a technical textiles supplier, and Takraf India Pvt. Ltd, the Indian arm of German business TAKRAF GmbH, which provides technology solutions for mining and mineral processing, have also been issued orders for alleged lapses in their CSR obligations.

Freudenberg Performance Materials India was issued a penalty order this August for not meeting its CSR obligations for FY20 and FY21. “Considering the proactive steps we took to rectify the procedural lapse and our subsequent compliance with CSR obligations, which demonstrate our commitment to CSR, with the said grounds as base, the appellate authority ordered in our favour, imposing only minimal charges for the procedural lapse. These charges have been remitted and the matter now stands closed,” Sivasailam G, Managing Director, Freudenberg Performance Materials India Pvt. Ltd. told Mint in response to an emailed query.

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Takraf India was issued a penalty order last year. A TAKRAF Gmbh spokesperson said in an emailed response to a query from Mint, “Subsequently, the Regional Director (RD) intervened the RoC order on the ground that there was only a mere procedural oversight in transferring to a separate special banking account, which was required through an amendment on 22 January 2021, and the said violation occurred in the first year of such requirement.” RD is a high-ranking field official administering the Companies Act.

“Furthermore, it should be recognized that the Company did not do any harm to the public interest or gain any unfair advantage. Proactive efforts were taken to correct the procedural gap, and the Company’s subsequent compliance with CSR obligations demonstrates its commitment to Corporate Social Responsibility,” the spokesperson wrote.

Subodh Dandawate, associate director for regulatory services at Nexdigm, a business and professional services company, said India is the first country to legally mandate CSR and its provisions have been tightened over a period. “Adherence to those provisions is an absolute requirement by all companies to which CSR spending is applicable,” he said.

To avoid any potential non-compliance, the CSR committee and the Board of companies need to periodically assess their CSR policy, monitor spending programs and incorporate appropriate disclosures in their financials, said Dandawate. The CSR provisions also allow companies to deposit unspent CSR amount pertaining to ongoing projects to special accounts, set-off of any excess amount spent and transfer any unspent amount to funds specified in schedule seven of the Companies Act, he said. Taking precaution always would mitigate penal action, said Dandawate.

With the reporting functionalities coming in, it has become easy for RoCs to identify non-compliances and adjudicate penalties, said Noorul, partner at law firm Lakshmikumaran and Sridharan.

“To ensure compliance and effective use of funds, companies may align their CSR initiatives with both legal requirements and community needs, partner with reputable organisations, and continuously monitor the effectiveness of the initiatives, creating a culture of CSR through internal training and awareness programmes,” said Noorul.

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