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Accountability of non-executive directors for CSR non-compliances

Two Indian companies have recently been levied with penalties for their failure to comply with the Corporate Social Responsibility (“CSR”) provisions of the Companies Act, 2013 (“CA 2013”). The registrar of companies (“ROC”) has taken a stance, imposing penalties on the companies and holding their directors (including non-executive directors) accountable.

In both instances, the ROC upon examining the compounding applications filed by the underlying companies, levied penalties on the company and each director (irrespective of the director holding a non-executive position). While levying penalties, the ROC emphasized that compliance with the CSR obligations is a board of directors (“Board”) driven process i.e., it is the responsibility of the Board to comply with the CSR provisions, irrespective of the directors’ role or position (as the law does not make any distinction or segregation in this regard). It also relied on the Frequently Asked Questions on Corporate Social Responsibility (CSR) (issued vide General Circular 14/2021 dated August 25, 2021) to support its reasoning that the responsibility of ensuring compliance with the CSR provisions is on the entire Board (which would include the non-executive directors).

These cases highlight the importance of CSR in corporate practices and specifically brings out the responsibility of the Board to fulfil its CSR commitments under the CA 2013. Given that the CSR provisions aim to encourage businesses to actively contribute to the welfare of society and address pressing social issues, the decisions taken by the ROC highlight a new trend being adopted vis-à-vis non-executive directors’ accountability in CSR compliances. The penalties imposed serve as a reminder to the Board of the consequences of negligence and reinforce the significance of its role in promoting responsible business practices.

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