[By Parth Tyagi and Achyutam S. Bhatnagar]
The authors are third year students of NLIU Bhopal and NLU Orissa respectively.
Meaning and Provisions of Corporate Social Responsibility
The list of activities comprising Corporate Social Responsibility (“CSR”) in Schedule VII of the Companies Act, 2013 (hereinafter “the Act”) is inclusive and not exhaustive as it contains the phrase “such other matters as maybe prescribed”. However it does not give absolute discretion to Companies to include any activity as a part of their CSR policy. The Companies are mandated to adhere to activities mentioned in Schedule VII. An affidavit issued by Ministry of Corporate Affairs in Mohd. Ahmed v. Union of India defined CSR as an activity carried out by a Company covered under Schedule VII, which forms a part of its core business, if not done with a profit motive. [i] CSR as a concept involves an initiative by which, a company evaluates and takes responsibility for its impact on environment [ii] and social welfare. India is one of the few countries to have a law dedicated to CSR. [iii] No other country, except India had given CSR a mandatory legal character. [iv]
Section 135 of the Act dealing with CSR makes the compliance of CSR mandatory, if, the Company has a net worth of Rs.500 crore or more, or a turnover of Rs.1000 crore or more, or net profit of Rs.5 crore or more during any financial year. [v]
CSR Policy and Responsibilities of the Board in Relation to CSR
The Companies that fall within the scope of the above three criteria are mandated to set up a CSR Committee with a minimum of 3 directors; with at least one of them being an independent director. In case of an unlisted or a private company, 2 directors are sufficient and there is no need of an independent director.[vi] The law further defines functions of the CSR committee. The committee is required to set up a mechanism regarding CSR and give their recommendations to the Board, indicating suggested CSR activities mentioned in schedule VII for implementation. The amount to be spent upon CSR activities is also decided by way of recommendations to the Board. Additionally one of the important purposes of CSR committee is to oversee the policy and review and revise it if needed.[vii] The Board, by acting as an approving body for CSR policy[viii] also plays an important role in carrying out CSR. The Act also provides for monitoring of the initiatives and projects under the CSR policy. The policy is to be included in the Director’s report [ix] as well as the steps taken in furtherance of it so far.[x]
In the case of Meenakshi Textiles v. ROC, Tamil Nadu [xi]the Company was directed to carry out its CSR obligations as it had a net profit of more than 5 crores but somehow represented that it had profits in negative by deducting losses two times. The Tribunal, in its order mentioned that the appellant company was liable for not forming a CSR committee and therefore not carrying out its CSR obligations. The role of the board, as defined under Companies Act goes as far as to ensure the manifestation of the CSR policy on the website of the Company as well as to ensure that the company spends at least 2% of the average net profits made during the 3 financial years immediately preceding in pursuance of the policy (net profits to be calculated as per Section 198).[xii] During the expenditure of CSR funds, local areas should be preferred in the vicinity of the Company. The reasons for not spending the amount, if any should be mentioned in the Director’s report.[xiii] Funds spent on CSR engagements should be disclosed as a note in the profit and loss statement.
Implementation of CSR
Companies can act directly or through Trusts/ Societies or Section 8 companies operating in India and set up by it.[xiv] They can also enter into collaborations for CSR projects with other companies, provided, the collaborating companies report the CSR activities as per the CSR Rules, 2014. Section 134 (8) of the Act contains provisions for liability in case of non-compliance. In the matter of M/s. Celsia Hotels Private Limited,[xv] a petition regarding compounding of offence under Section 134 (3) (o) of the Act was made. The Tribunal directed the Company and erring directors to pay Rs. 25 lakhs and Rs. 5 lakhs respectively. Similar orders were issued in the matter of matter of Rapid Estates Private Limited [xvi]. Generally, the Tribunal imposes a compounding fee [xvii] rather than ordering imprisonment in case of contravention or non-compliance. The tribunal can also order utilization of CSR funds collected in a previous financial year if not already utilized.[xviii] In Coastal Gujarat Power Ltd. v Gujarat Urja Vikas and Ors.,[xix]wherein the Ministry of Environment and Forest issued a notification according to which companies were supposed to carry out CSR activities irrespective of whether they were making profits or not; Central Electricity Regulatory Commission held that the provisions of Companies Act, 2013 already had rules regarding CSR which mandated that the company had to be in profit to carry out CSR activities.
Activities or campaigns carried out in exclusivity for families of employees or the employees themselves do not fall under the ambit of CSR, nor does any money contributed towards any political party comprise CSR.[xx]
Consequences of the Companies (Amendment), 2019
According to the recent Companies (Amendment), 2019 (“Amendment”), companies are allowed to transfer the money they fail to spend in a year to an “unspent CSR account” from which they can draw within the next three years to spend on CSR activities. If a company is still unable to spend the amount within that period, it can transfer it to a government fund specified under Schedule VII of the Act, such as the Prime Minister’s National Relief Fund, failing which the penal provisions would be invoked.[xxi]
The imprisonment clause is the most condemned clause of this new Amendment. The amended clause provides for imprisonment of every officer of the company who is in default for up to 3 (three) years.[xxii] With this amendment CSR has now has become mandatory and is no more a soft law. People in favour of the Amendment argue that so far, large companies have defaulted on CSR provisions and have gotten away by paying fines. Paying fines is not an issue for large companies making ample profits. However, the Amendment does not specifically point towards any person who would be liable and face this penal consequence as the phrase “every officer of such company who is in default” is open ended.[xxiii] Could it be someone from the board of directors or someone from the CSR Committee? The Act does not have an answer for it.
The Amendment also makes clear the position that if the company has not completed 3 years of incorporation and yet falls under Section 135 of the Act; then in that case the Company is supposed to take into account the net profit made in the previous two years.
With the advent of the 2019 Amendment, through the penalty provision, government has tightened its grip on the corporate sector. Imposing fines and compounding fee on the defaulters was tolerable and much required. However, going to the extent of imprisonment is excessive. It must be realised that CSR in other developing economies is voluntary. Making it mandatory to the extent of imprisonment for non-compliance makes it equivalent to imposing an unreasonable tax on a company when the company is already paying other taxes. It highlights the lacuna on the part of the government that it requires funds from CSR (according to the new amendment) to fund its schemes and not through the taxes that are already being paid.
[i] Mohd. Ahmed v Union of India 2014 SCC OnLine Del 1508[ii] Kasala Malla Reddy v State of Andhra Pradesh 2017 SCC OnLine NGT 1914
[iii] Saurabh Kumar, ‘Corporate Social Responsibility under Companies Act’ (iPleaders, 28 June 2018) https://blog.ipleaders.in/csr-laws-india/ accessed 2 August 2019
[iv] Arjun Adhikari, ‘Corporate Social Responsibility:Voluntary or Mandatory’ (2014) 8 NJALJ 185
[v] The Companies Act 2013, s 135
[vi] Companies (Corporate Social Responsibility Policy) Rules 2014, s 5
[vii] Companies (Corporate Social Responsibility Policy) Rules 2014, s 5 (2)
[viii] The Companies Act 2013, s 135 (4)
[ix] The Companies Act 2013, s 134(3) (o)
[x] Divesh Goyal, ‘Directors Report under Companies Act 2013’ (TaxGuru, 28 February 2015) https://taxguru.in/company-law/provisions-related-director-report-companies-act-2013.html accessed 3 August 2019
[xi] Meenakshi Textiles v ROC, Tamil Nadu 2019 SCC OnLine NCLAT 378
[xii] G S Rao, ‘New Rules of Corporate Social Responsibility’ (TaxGuru, 10 Marsh 2014) https://taxguru.in/company-law/rules-corporate-social-responsibility.html accessed 2 August 2019
[xiii] Companies Act 2013, s 135 (2)
[xv] In the Matter of M/s. Celsia Hotels Private Limited 2017 SCC OnLine NCLT 573
[xvi] In the Matter of Rapid Estates Private Limited 2018 SCC OnLine NCLT 545: In the matter of: M/s. Parikh Enterprises Private Limited 2017 SCC OnLine NCLT 2312 : In the matter of M/s. Chintamani Estates Private Limited 2017 SCC OnLine NCLT 11240: M/s. Eversmile Construction Co 2017 SCC OnLine NCLT 11276
[xvii] In the matter of Kunkel Wagner (India) Private Limited 2017 SCC OnLine NCLT 12825[xviii] In the Matter of: Scheme of Amalgamation between Span Nihon Kahden Diagnostics & Ninon Kohden 2017 SCC OnLine NCLT 13876
[xix] Coastal Gujarat Power Ltd. v Gujarat Urja Vikas and ors 2017 SCC OnLine CERC 32
[xx] The Companies Act 2013, s 189
[xxi] Vatsala Gaur, ‘Jail term for CSR violation makes firms anxious’ (The Economic Times, 3 August 2019)
https:://conomictimes.indiatimes.com/articleshow/70506775.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst accessed 4 August 2019
[xxii] Rabindra Jhunjhunwala, Parag Bhide and Abhishek Rao, ‘Companies (Amendment) Act 2019 Has A New Meaning For CSR – Voluntary To Mandatory (mondaq, 7 August 2019) http://www.mondaq.com/india/x/834362/Corporate+Commercial+Law/Companies+Amendment+Act+2019+Has+A+New+Meaning+For+CSR+Voluntary+To+Mandatory accessed 7 August 2019
[xxiii] The Companies Act 2013, s 135 (7)