The New companies’ act 2013 was signed in August 2013. The act replaces legislation to 1956. The New law is significantly more compact, better defined and organized than its predecessor companies’ act 1956, a significant reduction in section from 658 to 470 and 15 schedules to 7 schedules.
Companies’ act 2013 brings new reform in corporate sector, and brings massive changes with regard to implementation of provisions of companies’ act 2013 and the act requires more on governance transparency, and disclosures enhanced roles of key managerial personnel and accountability and liabilities of board, its committees.
According to the UNIDO3, “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (Triple-Bottom-Line Approach), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that.”
Companies’ act 2013 introduces the concept of Corporate Social Responsibility and brings the mandate provision for the companies falling under criteria mentioned under sub-section (1) of section 135. This article discusses some of the challenges faced by the Indian Inc for complying the provision of Corporate Social Responsibility (CSR).
CORPORATE SOCIAL RESPONSIBILITY [SECTION 135]
The rules of this provision were notified on 27th February and will come into effect on 1st April 2014.
Every Company including its holding or subsidiary and a foreign company defined under section 2(42) of the companies’ act 2013 having its branch office or project office in India, having:
a) Net Profit of Rs 5 crores or more; or
b) Net Worth of Rs 500 crores or more; or
c) Turnover of Rs 1000 crores 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.
Sub-section (5) of section 135 states that at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of the CSR policy.
Following are some of the challenges faced by the Indian Companies for Implementing Corporate Social responsibility Provision:-
1) Section 135(3)(a) provides that the activities should be undertaken by the company as specified in Schedule VII. In other words, on a plain reading of section 135 it seems that no other activities other than the once specified in Schedule VII are permissible.
However, Rule 2(c) defines that Corporate Social Responsibility shall not be confined to the projects and programmes specified in Schedule VII, therefore, if one goes by the definition of CSR then all kinds of charitable activities are permissible and Schedule VII is just a indicative list.
Thus, it could be legally debated whether a Rule can supersede the Act, because section 135(3)(a) clearly provides that the CSR activities should conform to Schedule VII.
2) 2% CSR expenditure has to be made based on such average profit. However, it is not clear whether losses in any particular year will be treated as negative income for the computation of average profit?
3) It is not clear for the companies whether to create a provision in the financial statements towards the unspent amount if it fails to spend 2% amount on the CSR activities in particular financial year?
4) The Board of every Companies’ will also be mandated to briefly notify their CSR activities on their website and disclose contents of such policy in its report.
5) The current CSR provisions do not require any CSR activity, if such Companies are making losses. There might be Companies which are making cash profits but book losses. For example, a Company may have cash profit before charging depreciation but loss after charging depreciation.
6) Indian subsidiaries of multinational corporations will face problems committing funds to CSR requirements because such contributions are not allowed under the Foreign Exchange Management Act. Their contributions under CSR requirement to charitable organizations will be subject to the Foreign Contribution Regulation Act that is Under FEMA foreign companies are permitted to conduct only those activities which are specifically permitted by Reserve Bank of India. Therefore, technically CSR activities cannot be implemented unless approved by RBI under FEMA. Normally the permissible list of activities does not include charitable activities for foreign companies. However, as per the new Companies Act, 2013, CSR has been made mandatory for the companies’ falls under the specified criteria mentioned under sub-section (1) of section 135.
7) Sub-Rule 2(ii) of Rule 4 of (corporate Social Responsibility), 2014 states that the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.
This Rule talks about “Monitoring and reporting mechanism”:- The companies must develop reporting mechanism and ensure the following aspects for accurate reporting:
I. Identify the resources consumed for the purpose of CSR and allocate a monetary value to the resources.
II. Understanding which resources qualifies to be included as CSR expenses and which do not?
This is a historic development making India the only country in the world to mandate corporate social responsibility (CSR) for companies.
(Author: AMAN SAH (Company Secretary Exam Qualified), B.Com (Hons) DU; CA FINAL. Author can be contacted at email@example.com)