EVOLUTION:

The footprints of Corporate Social Responsibility (CSR) can be traced way back, somewhere during mid-1800s. In India, before independence, the then philanthropists and communal activists promoted altruism and social good through various mediums. Even the wealthy industrialists kept up the fine vibe by setting up number of charitable institutions and trusts for community development. Kudos to the overall impact of prevailing societal elements such as religion, tradition, culture, moral standards etc. and its influence on general public. These were the major contributing factors to develop CSR in India.

During the post-independence era, the socio-economic philosophy of ‘Trusteeship’ promulgated by Mahatma Gandhiji persuaded the giant magnates of the industry to contribute fairly towards the social welfare. However, despite of such efforts, CSR did not gain the required cognizance to the maximum possible extent. It was only after 1991, that the said notion witnessed its full swing growth due to introduction of Liberalisation, Privatization and Globalization (LPG) schemes. In this phase, the companies started to incorporate CSR as a ‘Business Strategy’ because of fresh entry of global players in the market. This not only benefitted the general public, but also increased the overall momentum of industrial growth as well.

Thus, CSR has seen its journey right from starting as a deed of charity, to be performed as an obligation, to be fulfilled as a responsibility and now to act as a compulsion. India is perhaps the only country to ‘mandate’ all the CSR activities and quantify the CSR expenses conducted by companies. The relevant provisions for the same has been introduced and stated under Section135 of ‘The Companies Act, 2013’ (the Act).

APPLICABILITY:

  • Section 135 of the Act is applicable on every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more, or a net profit of rupees five crore or more, during immediately preceding financial year.
  • If either of the above conditions are satisfied by any company, then, to carry out all the CSR functions smoothly and in accordance, it is required to constitute a CSR committee of Board, consisting of 3 or more directors, out of which at least one shall be an Independent Director. Besides, this composition of CSR Committee shall also be disclosed in the Board Report.
  • However, if company is not required to appoint Independent Director under section 149(4), then it shall have 2 or more directors in its CSR Committee. Section 149(4) specifies the minimum number of Independent Directors required in case of listed public companies and any other class(es) of public companies. Hence, the above amendment articulates about requirement of such directors for all the companies not falling under Section 149(4). Especially in case of Private Limited Companies, where the total number of directors required for the ‘incorporation’ itself is 2, then in such scenario, the specified provision can prove to be extremely helpful and relevant.

AMOUNT DETERMINATION:

The company is required to spend at least 2% of average net profit of three immediate previous financial years for the purpose of CSR. If the company is unable to spend such amount then, reasons for such failure shall be recorded in its report made under clause (o) of Section 134(3).

FUNCTIONS:

FUNCTIONS OF CSR COMMITTEE FUNCTIONS OF BOARD
Formulate and Recommend CSR Policies Consider and Approve or Reformulate the recommended policies
Recommend amount of expense required for CSR Activities Disclose the CSR policy contents in Board Report and on the official website of the Company as well
Monitor the CSR policies from time to time Ensure that CSR activities are timely and adequately undertaken by the company

HIGHLIGHTED CSR AMENDMENTS, 2019:

The Companies (Amendment) Act, 2019[1] came into existence after receiving President’s assent on 31st July 2019. Few of the sections of this amendment act shall deemed to have come into force from November 2018 itself. However, some of the provisions including Section 21 (Amendment to Section 135 of Principal Act) has yet to be notified.

(1) The first amendment is given in Sub-Section (5) of Section 135, explaining that, if the company has not completed the period of 3 financial years since its incorporation, and still satisfies any of the given CSR applicability requirements, then here, the average net profit of immediate preceding financial years must be taken. For contemplating average net profit, this provision shall be r/w Section 198 of the Act.

(2) The next amendment plays vital role in computing the budget plan required to be spent towards the affairs of CSR since, it specifically talks about the treatment of unspent targeted CSR amount. If the company is unable to spend the reserved amount for CSR project, as decided, then along with the reasonable explanation in the board report, following steps are required to be taken by the company –

Case 1: Company is having any ongoing CSR projects –

> Any unspent amount by the company, despite of having any ongoing CSR project, shall be transferred to any scheduled bank under a special account in the name of “Unspent Corporate Social Responsibility Account” within a period of 30 days from the end of financial year.

> Such transferred amount essentially needs to be spent by the company for the due compliance of CSR policies within a period of next 3 financial years from the date of such transfer.

> Even after 3 years, if the company fails to disburse such balance amount, then, that shall be transferred to any of the funds specified in Schedule VII of the Act within a period of 30 days from the date of completion of 3rd financial year.

Case 2: Company is not having any ongoing CSR projects –

> If the company is not currently engaged in any of the ongoing CSR projects, then the aimed unspent sum of CSR money straight away shall move to any of the funds specified in Schedule VII of the Act within a period of 6 months from the expiry of financial year.

(3) The former “comply or express” (CorEx) provision of CSR has now become a punishable offence with the launch of following amendment. The defaulting company as well as their respective officers shall attract a penalty in case of violation of above terms. The sanction structure for the same has been provided as follows –

> Fine Amount for Defaulting Company: Starting from Rs. 50,000/- extending upto Rs. 25,00,000/-

AND

  • Fine Amount for Defaulting Officer: Starting from Rs. 50,000/- extending upto Rs. 5,00,000/-

Or

  • Term of Imprisonment for Defaulting Officer: Upto 3 years

Or

  • Both

CONCLUSION:

As per the given amendments, all the unspent amount is demanded to be transferred in Prime Minister’s National Relief Fund or any other fund set up Central Government for socio-economic development and welfare of SC/ST, minorities, women etc. as specified under Schedule VII of the Act, either within 6 months or ultimately after the completion of 3 financial years. The forethought behind the same could be that, if in case, the company fails to spend the entire or part money dedicated towards CSR, then the Government can switch the roles by making appropriate use of that money in a much better and more standardized way. However, the corollary effect could be that the company may purposely avoid expending the CSR money to escape from its responsibilities towards the society and just opt for this easier option to free itself from all the CSR obligations.

Besides, due to imposition of sanctions, instead of voluntarily taking up initiatives for betterment of community, the company might as well deterrently follow the provision just for the sake of compliance, defeating the whole purpose of the CSR concept. But looking at the brighter side, there will surely be some reasonable and much needed development in the said sector, either by the company or by the Government.

Additionally, the amendments are still pretty much unclear and surely require some detailed explanations. For an instance, what is the definition of the word ‘ongoing’? What all aspects can be included under it? What if the company has approved the CSR project idea but not yet disbursed the money for the same? Or, what if the company has sanctioned the money for the approved proposition of CSR, but the project is yet to be initiated? Also, how to process and operate the escrow account made for the unspent CSR amount? All these prevailing doubts can be resolved only with the assistance of further directions expected to be given by Ministry of Corporate Affairs (MCA).

Thus, all the amendments are fairly and squarely made with the intention to improve existing societal situation. However, with the correct clarity and lucidity of provisions, the adequate upliftment of general public could be achieved promptly.

[1] https://taxguru.in/company-law/companies-amendment-act-2017-receives-presidents-assent.html

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