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Governance : Is CSR flawed?

Entrusting, statutorily social responsibility to corporations, is commendable, but flawed with legal lacuna


PLACING responsibilities statutorily on companies to undertake socially beneficial activities for the masses out of their profits to the prescribed extent was hailed as a unique feature of the Companies Act, 2013 (Act), not found in the companies’ legislation of any other country. This feature was achieved by the insertion of Section 135 in the Act titled ‘Corporate Social Responsibility (CSR)’, which provides for spending of net profits to the extent specified in the section.

The philosophy behind the provision is that profitable companies, like governments, should share responsibilities towards the wellbeing and welfare of the people of the country. Actually, some enlightened business houses and companies are already doing so on a voluntary basis and some of the best institutions in various fields in India are being run under their patronage. However, the legislature, in its wisdom, has thought it appropriate to provide in the companies’ legislation itself the requirement of adhering to the needs of society and provide for the same in the Act itself, to be complied with, as per statutory requirements.

The compliance required for CSR is from companies

  • having net worth of Rs. 500 crore or more; or
  • turnover of Rs. 1,000 crore or more; or
  • net profit of Rs. 5 crore or more in any financial year. The amount, to be spent on CSR activities is 2 per cent of average net profits of the companies made during three immediately preceding years in every financial year. The Act provides that the Directors of companies, which are to comply with CSR requirements, shall constitute CSR Committees, laying down the CSR policy of such companies, which shall be placed on their websites. CSR has been defined in rule 2(c) of the Companies (Corporate Social Responsibility (CSR) Policy as under:

[c] CSR means and includes but is not limited to:-

[i] Projects or programmes relating to activities specified in Schedule VII to the Act; or

[ii] Projects or programmes relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.

Schedule II provides that the companies can take up any activities from the following:

  • eradicating hunger, poverty and malnutrition, promoting preventive healthcare, including contribution to the Swach Bharat Kosh set up by the Central Government for the promotion of sanitation and making available safe drinking water;
  • promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  • promoting gender equality and empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  • ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the ‘Clean Ganga Fund’ set-up by the Central Government for rejuvenation of river Ganga;
  • protecting national heritage, art and culture, including restoration of building and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
  • measures for the benefit of armed forces veterans, war widows and their dependents;
  • training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports;
  • contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
  • contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  • rural development projects; and,
  • slum area development.

It is suggested that Section 135 should be amended to provide for carry forward of unspent amount and thereby legalise the practice already being followed. The carry forward should be allowed for a limited period of 2 or 3 years only

Given the foregoing background, Section 135 can be appraised whether it is achieving the objectives expected from it. The beneficent section has become a mere showpiece because it has no provision to ensure implementation. The section contains no penal or prosecution provision concerning its enforcement. Thus, after allocation of the amount, as per the legal requirements, the companies can continue to use the same for their business needs without being liable for any contravention. The only requirement prescribed is that if the company fails to spend the CSR amount, the Board shall give, in its report, the reasons for not doing so. But, there is no mechanism to check the genuineness of the reasons given. There is no provision in the section to compel the companies to spend the amount on the purposes specified in the Schedule VII.

Is-CSR-flawedFURTHER, no time limit has been laid down within which the amounts for CSR must be spent. Also, there is no requirement prescribed for the carry forward of the unspent sums to the following year/years for being utilised in those years, though the companies are following the practice of carry forward and on that ground, continue to use the CSR funds for their day-to-day functioning instead of spending these in the prescribed specified activities.

The travesty of the situation is that despite amendment made to the 2013 Act since its enactment – the latest being the Companies (Amendment) Act, 2017 – these aspects have not been taken care of inadvertently or knowingly.

The situation needs to be remedied if the legislative intent behind Section 135 is to be achieved. Some suggestions for this are:

  • A separate account for CSR, which remains unutilised, can be opened on the lines of capital gains account scheme (CGAS) under the IT Act, 1961. The auditor should confirm in its report on the accounts of the company that the unspent amount, relating to CSR, is kept separately in an account, which cannot be used by the company for its own needs and withdrawals from it would be permissible only for being spent on the items specified in Schedule VII of the Act.
  • Section 135 be amended to provide for carry forward of unspent amount and legalise the practice already being followed. The carry forward should be allowed for a limited period of 2 or 3 years only.
  • Provisions to penalise/prosecute companies, who fail to comply with the provisions relating to CSR need to be incorporated in Section 135.

A socially beneficial legal provision has to be backed by adequate sanctions to ensure compliance. Enacting the section, without adequate provision and machinery to implement it, serves no purpose. It remains like a mere showpiece in the law.

The writer is former Chairman, CBDT

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