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Decoding the CSR clause in the new Companies Bill

The thrust of new Companies Bill was to enhance corporate governance, accountability and responsibility of directors and independent directors

August 31, 2013 11:54 IST | India Infoline News Service

Corporate social responsibility (CSR) is about how companies run their business to produce an overall positive impact on the society on a continuous basis to contribute to the economic development and betterment of lives of all the stakeholders of the company. Many companies have realised that if they want to survive or want sustainability in the long run, they have to play an active role in the welfare of community and care for environment.


Many private companies such as Tata Steel,  Larsen & Toubro, Reliance Industries, Hindalco, Bharti Airtel, Mahindra and Mahindra, TCS, Maruti Suzuki, Tata Motors and ICICI Bank spend huge amount of money voluntarily on CSR activities. Also public sector companies are not lagging behind and these have made a name for themselves in CSR activities by adopting villages and extending help in the field of education, healthcare, etc. It could be seen that many companies have been taking CSR activities seriously.


What is the connection between companies and CSR?


Let us now explore the connection between CSR and companies. Companies run businesses to earn profits for their owners and shareholders. Although profit earning is the main objective, companies cannot ignore interest of other stakeholders such as employees, suppliers, customers, society and their surroundings. They have to pay attention to the welfare of employees and their families to retain good talent. Similarly by producing good quality of products at reasonable prices, interests of both company and its consumers can be balanced. By contributing to the government in the form of taxes on its sales / profits and caring for the environment, it takes care of the society directly or indirectly.


New Companies Bill 2012

The much awaited Companies Bill, 2012 has been finally passed by both the houses of parliament. Now it requires the assent of President to become an Act and to replace the old Companies Act, 1956. The thrust of new Companies Bill was to enhance corporate governance, accountability and responsibility of directors and independent directors. The Bill also ensures independence of independent directors and auditors. Further, it introduced new concepts such as one man company, dormant company and mandatory corporate social responsibility (CSR) in the interest of stakeholders. The Bill provides for setting up of special courts for speedy trials and stronger steps for transparent corporate governance practices as well as measures to curb corporate misdoings.


Government’s efforts for effective CSR activities

The Ministry of Corporate Affairs (MCA) had introduced CSR voluntary guidelines in 2009 as the passing of Companies’ Bill was delayed. MCA was expecting many companies to comply with these guidelines. These guidelines required companies to frame CSR policy constitute CSR Committee, allocate funds for identified CSR activities and finally execute the CSR projects.


This New Companies Bill contains certain provisions about CSR activities, formation of CSR committee, mandatory spend amount and manner in which 2% of average net profits should be spent by the companies registered under the Companies Act.


Provisions in New Companies Bill:

  • Clause no.135 of the Bill deals with CSR provisions. This clause states that compliance of CSR is mandatory, if company meets any one of the following criteria
  • 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 during any financial year.

The CSR requirements to be complied with can be summarised as follows:

  • Companies which meet the criteria (any one of 3) as mentioned above are required to constitute a CSR committee with three or more directors (at least one of them to be independent director).

Functions of the Committee:

  • It shall formulate a CSR Policy and recommend to board and indicate CSR activities to be undertaken.
  • CSR activities may include eradication of hunger and poverty, promotion of education, gender equality, reducing child mortality and improving maternal health, environment sustainability, social business projects or any other matters as may be specified. (Readers may refer to schedule VII)
  • It shall recommend to the Board, amount of expenditure to be spent for identified CSR activities. 
  • Review CSR activity from time to time.

Responsibility of the Board:

  • The board of directors of company must approve the CSR policy—recommended by CSR committee—and disclose the same in the directors report.
  • Further, it should ensure that the CSR policy is displayed on the company’s website in such manner as may be prescribed.
  • It should ensure that the company spends at least 2% of the average net profits made during the three financial years immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy (net profits to be calculated as per Clause 198)
  • While spending the committed CSR funds, preference must be given to local areas around which the company operates.
  • If the company fails to spend, the company must specify the reasons for not spending the amount in its directors report.
  • General instructions to the statement of profit and loss require the companies to which CSR clause is applicable should give following note. “k) In case of Companies covered under Section 135, amount of expenditure incurred on corporate social responsibility activities”.

Areas of concern

There is a concern whether the amounts spent on CSR will be allowed as business expenditure under the Income Tax Act. Many companies will come forward to spend voluntarily, if such income tax deductions / exemptions are allowed. There is no need for mandatory provision. Moreover, it is not clear whether companies can get away with the requirement by simply disclosing the reasons for not spending mandatory amount. Some guidelines should be framed to give more clarity to deal with unusual situations such as absence of adequate profits or bad economic scenario to make the mandatory spend provision more meaningful.


Conclusion

Indian corporate world is unhappy with the requirement of mandatory spend on CSR activities as they strongly felt that it is a matter to be left to shareholders and board of directors. If CSR is seen as a philanthropic act, this argument sounds good and in the short term.


The horizon of CSR is not so narrow. Neglecting environment may expose the company to the risk of business closure. Similarly, if welfare of workforce is ignored, the resultant labour unrest, may force closure of plant operations. The company which takes CSR as an inevitable part of its business process not only earns a goodwill and image but also attracts all stakeholders. Let us hope India Inc will for a change commit itself to the mandatory spend barring exceptional circumstances. CSR should lead companies to the slogan “Live and let others Live”.


The writer is the deputy general manager-legal at OCL India Ltd.

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