Corporate Social Responsibility Under Section 135 of The Companies Act, 2013 (‘act’)

Corporate Social Responsibility (“CSR”) implies a concept, whereby companies decide voluntarily to contribute to a better society and

a cleaner environment

Section 135 of the Act, Schedule VII of the Act and the Companies (Corporate Social Responsibility Policy) Rules, 2014 read with General Circular No. 21/2014 dated 18.06.2014 issued by the Ministry of Corporate Affairs

provide for the broad contour within which eligible company are require to formulate

their CSR policies including activities are to be undertaken and implement.

The provisions of section 135 in force are as follows:-

1.		Companies having a net worth of rupees 500 crores or more or a turnover of rupees 1,000 crores or more or a net profit of rupees 5 crores or more during immediately preceding financial year have to constitute a CSR Committee of the board;
2.		The CSR committee shall be responsible for formulating, recommending, and monitoring the CSR policy of the company;
3.		Board is required to ensure that the company spends at least 2% of last 3 years average net profits on CSR activities as specified in Schedule VII;
4.		Preference shall be given to local areas and areas around it where it operates;
5.		Any failure to spend the specified amount must be specifically explained in the board’s report.

Section 134(3)(o) sets out the company’s obligation to submit details about the policy developed and implemented by the company on corporate social responsibility, initiatives taken during the year

as a part of the report by the Board of Directors, attached

to the financial statements laid before a company in a general meeting.

Any failure to carry out disclosures under section 134(3)(o) can be punish under section 134(8). The company shall be punishable with a fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default

shall be punishable with imprisonment for a term which may extend to three years or

with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Schedule VII under the Act provides for the activities which may be include by companies in their Corporate Social Responsibility

Policies Activities relating to:—

1. Eradicating Extreme Hunger And Poverty;
2. Promotion Of Education;
3. Promoting Gender Equality And Empowering Women;
4. Reducing Child Mortality And Improving Maternal Health;
5. Combating Human Immunodeficiency Virus, Acquired Immune Deficiency Syndrome,   Malaria And Other Diseases;
6. Ensuring Environmental Sustainability;
7. Employment Enhancing Vocational Skills;
8. Social Business Projects;
9. 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
10. Such Other Matters As May Be Prescribe.

Analysis

The term “Corporate Social Responsibility” can be refer to as a corporate initiative to assess and take responsibility for the company’s effects on the environment and impact on social l welfare. The term generally applies to Company’s effort that goes beyond what may be required by regulators or environmental protection groups. Corporate Social Responsibility may also be refer to as “corporate citizenship” and can involve incurring short-term costs that do not provide an immediate financial benefit

to the company but instead promote positive social and

environmental change.

The concept of CSR in India is govern by Section 135 of the Act, the

said concept is based on the principle “Comply” or “Explain”. The Companies on whom the provisions of the CSR shall be applicable

are contain in Sub Section 1 of Section 135 of the Companies Act, 2013. As per the said section, the Companies having a Net worth of INR 500 crore or more; or Turnover of INR 1000 crore or more; or Net Profit of INR 5 crore or more during any financial year shall be

require to follow the following

• Form a CSR Committee;
• Disclose the composition of the CSR Committee in the Board’s Report under Section      134(3) of the Act;
• CSR Committee shall formulate and recommend the CSR Policy containing activities and the related expenditure to the Board, and monitor the same;
• The Board shall approve the policy and ensure that the activities are undertaken. The contents of the said policy are also require to be disclose in the Board’s report as per Section 134(3)(o) of the Act and on the company’s website;
• The Board shall also ensure that 2% of the average net profits need to be spent
• during the preceding three financial years in pursuance of the CSR Policy

Quandary

Section 135(5) of the Act requires the Board to specify the reasons for not spending the amount (i.e., two percent of net profits), where the company “fails” to do so. The dictionary meaning of “failure” is “the neglect or omission of expected or required action”. Such “failure to spend” also does not make these provisions of spending on CSR activities optional or voluntary. The Act and the Rules are also silent

as to what could be the valid reasons for not spending the CSR amount.

It is to be note that neither the Act nor the Rules prescribe any penal provisions if a company fails to spend the amount. There is no obligation on a company to spend on CSR or cover for the shortfalls in the subsequent years’ expenditure. It may so happen that a company does not spend the requisite amount as approved in its’ CSR Policy, but discloses

that it will cover the shortfalls in subsequent years, thereby

creating a constructive obligation for itself.

Hence, though there is no penalty for not spending the mandated amount, failing to explain the reasons for not spending in the Board’s report would attract penal provisions. The companies which have fail to meet the spending norms must explain the reasons in the Board’s report to avoid getting penalize. Not citing a reason or

simply stating that efforts would be made in the future to spend the amount does not meet

the requirements of Section 135 of the Act.

Section 450

However, it is possible that the relevant authorities may rely upon the residual provision in the Act that prescribes penalties for contraventions for which penalties are not specifically provided. As per Section 450 of the Act (residual provision for a penalty), a default in complying with the CSR provisions may expose the infringing company and every officer in default to a fine that may extend to a fine of ten thousand rupees, and

where the contravention is continuing one, with a further fine which may extend

to one thousand rupees for each day of the time period during which the default continues.

The Indian CSR Law seems to heavily rely upon comply-or-explain philosophy, stipulating minimal penalties for non-compliance. However, in our view, although the reporting of non-compliance of CSR provisions in the Board’s report has been made mandatory, failing which, the defaulting company shall be specifically penalize under Section 134(8) of the Act, it cannot be said

that incurring the prescribed expenditure by the company is optional. On a comprehensive reading of the relevant provisions, it appears that each company, to which

Section 135 of the Act applies, needs to spend the amount that is earmark for CSR.