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The government is considering a proposal to amend existing laws to make it mandatory for limited liability partnership (LLP) firms and state-run banks such as the State Bank of India (SBI) to spend 2% of their net profit in corporate social responsibility (CSR) activities, two officials said.

At present, CSR is mandatory only for entities incorporated under the Companies Act, 2013. Section 135 of the Act mandates that firms with a net worth of at least 500 crore or revenue of 1,000 crore or net profit of 5 crore should spend at least 2% of their average net profit made during the three preceding financial years on activities such as sanitation, education, healthcare, poverty alleviation and the environment. Small firms do not come under the ambit of mandatory CSR.

LLPs and public sector banks (PSBs) are governed by the LLP Act, 2008, and the Banking Regulation Act, 1949, and these laws are silent on the matter.

Many big corporates are now taking the LLP route to avoid CSR spending.

It is proposed to bring PSBs and LLPs under the ambit of 2% mandatory CSR, as there should be a level playing field and the matter is under consideration, officials working in two different ministries said, requesting anonymity.

“The existing provisions anyway exempt small firms from the mandatory CSR, hence small LLPs should not worry. Formalization of CSR laws for LLPs and PSBs on a par with other companies is desirable to create a level playing field and plug any loophole that would push many profitable firms to take the LLP route," one of the officials mentioned above said.

The ministry of corporate affairs (MCA), the department of financial services (DFS) and SBI did not respond to an email query on this matter. DFS is an arm of the finance ministry that regulates PSBs and state-run insurance companies such as Life Insurance Corporation of India (LIC).

Of the 12 PSBs, the average profit of four are positive, amounting to 15,732 crore, according to publicly available data. Of this, 2% would amount to at least 300 crore, said Saguna Sodhi, partner, forensic and integrity services at consultancy firm EY.

Private sector HDFC Bank spent 535.31 crore in 2019-20 on CSR activities, according to official data. It ranked fourth among companies in terms of CSR spends that year after Reliance Industries Ltd ( 908.71 crore), Tata Consultancy Services Ltd ( 602 crore) and state-run Oil and Natural Gas Corporation ( 582.35 crore).

“With the growing importance of social responsibility in business, the potential of contribution by all profitable organizations, including PSBs and big LLPs, would be a positive step," Sodhi said.

A high-level committee on CSR under the chairmanship of former corporate affairs secretary Injeti Srinivas had in 2019 also recommended extending the applicability of CSR to LLPs, PSBs and other entities such as LIC, according to Manu Varghese, partner at law firm White & Brief Advocates & Solicitors. “As the government would be required to amend the specific regulations applicable to these entities, it will take some time," he said.

According to MCA, LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. In LLPs, no partner is liable for the independent or unauthorized actions of other partners. Thus, individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

A basic difference between an LLP and a joint stock company lies in that the internal governance structure of a company is regulated by statute (Companies Act, 1956), whereas for an LLP it would be by a contractual agreement between partners.

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