The Companies Act 2013 (the ‘Act’) has brought in new provisions for responsible conduct of businesses. And one such new provision is the concept of Corporate Social Responsibility (CSR) activities. Earlier, CSR was voluntary. Now, there are provisions included in the Act for CSR contributions. The underlying aim is to make profit making companies to help development of the society and not merely charity or donations. In this note, we have tried to examine a few of the frequently asked questions regarding CSR provisions.
1.Which companies are impacted by this provision?
Section 135 (1) stipulates that “Every company
a) having net worth of INR 500Cr. or more; or
b) turnover of INR 1000Cr or more; or
c) a net profit of INR 5Cr or more;
during any financial year shall constitute a Corporate Social Responsibility Committee, of the Board consisting of three or more directors, out of which at least one director shall be an independent director. Further, the Section 135 (2) stipulates that such composition of the Committee has to be disclosed in the Board report which has to be prepared under Section 134 (3) of the Act.
The Rules (read here),which are yet to be notified, provide for more clarity. The calculation of CSR amount shall be 2% of the average net profits (before tax) made by the company during every block of three years. The tax treatment of CSR spend will be notified by the CBDT.
Clarity required: If in a block of three financial years, the criteria laid out above is not met, does it mean the company is not required to have the CSR requirements? As the requirement is three directors, does it mean the requirement is for public companies (since private companies are required to have two directors or should the private companies increase the size of their Board)? While the section is not yet notified as of date, we believe there will be clearer guidelines on the applicability of the provisions.
2.What is the responsibility of the ‘corporate social responsibility’ committee?
Section 135 (3) provides the responsibility of the Committee which includes:
a) formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
c) monitor the CSR Policy of the company from time to time.
Analysis: Since the Committee has to recommend and monitor, it appears that the decision will still be taken by the Board and that the Committee plays an advisory role.
3. If CSR Committee is merely an Advisory Body, what is the responsibility of the company’s Board?
As explained above the committee will formulate and recommend the CSR policy to the Board and Sections 135 (4) & (5) provides for the responsibility of the Board of Directors:
a) approve the CSR Policy for the company, disclose contents of such Policy in its report, place it on the company’s website, AND
b) ensure that the activities as are included in CSR Policy of the company are undertaken by the company;
Section 135(5):The Board shall ensure that in every financial year the company spends at least two per cent of the average net profits made during the three immediately preceding financial years, in pursuance of its CSR Policy.
Proviso to Section 135 (5) states that the company shall give preference to the local area and areas around it where it operates.
Also, if the company fails to spend such amount, the Board shall, in its report made u/s 134(3) (o), specify the reasons for not spending the amount.
Analysis: Again, important point to note here is that though the provision is farmed under the Act, does it make mandatory for the eligible companies to spend the amount under CSR. The answer is NO, it is not mandatory or essential for an eligible company to spend at least 2% of the average net profits on CSR activities. The Act clearly provides that even if a company which is covered by this section chooses not to spend any amount on CSR, there is no violation of any provision, nor there be any liability, provided company discloses its reason for not spending the said amount in the Board report.
4. What activities can the company include in its CSR policy?
Schedule VII of the Act lists out certain activities which may be either taken up by the company directly or in which the company can invest through various organizations which carry out the listed work. The activities are:
i) eradicating extreme hunger and poverty;
ii) promotion of education;
iii) promoting gender equality and empowering women;
iv) reducing child mortality and improving maternal health;
v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
vi) ensuring environmental sustainability;
vii) employment enhancing vocational skills;
viii) social business projects;
ix) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
x) such other matters as may be prescribed.
Our opinion: We believe having a ‘list’ is a little too prescriptive, but it appears the intention is to have the corporate spend responsibly on the societal growth.
5. If spending amount is no violation, then why is there a penal provision u/s134 (8) of the Act?
It has been clearly provided that even if the company does not spend any amount on CSR, it still is under the compliance of the provisions, provided the company has disclosed the reason for not spending the same.
S. 134 (8), In case of contravention or failure to comply with the requirements of Section 134 (8) the company shall be:
a) punishable with fine which shall not be less than fifty thousand rupees but which may
extend to twenty-five lakh rupees; and
b) every officer of the company who is in default shall be:
i) punishable with imprisonment for a term which may extend to three years; or
ii) with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees,
iii) or with both.
After examining the above provisions, CSR has to be:
a) It should be rupee measurable. While the measure is for the ‘spend’, ‘impact’ is not yet measured.
b) It should not pre-dominantly benefit employees of the company. If the benefits are for the employees of the company, it is not a CSR, hence any housing societies, hospitals made for the employees are not considered as a CSR.
c) It must bring direct benefits to marginalized, disadvantaged, poor or deprived section of the community/ies.
d) Programmes/projects must be within India;
e) It should be independent of compliances with any regulation or law. Any CSR activity undertaken as a compliance activity shall be independent from CSR under this Act.
Based on the analysis by various agencies on how much corporate India will contribute, the estimated are that 1% of the eligible companies will contribute about INR 15,000 Cr. to INR 20,000 Cr. in CSR activity. If these figures can be channelized in the right direction and spirit, we will see a caring, inclusive and more benevolent India.
Disclaimer: This is not a legal opinion and should not be construed as one. Please speak with your attorney for any advice.