Corporate Social Responsibility (CSR) under Companies Act 2013- Concept, Applicability, Provisions, Penalty
The Companies Act 1956 replaced by the new Companies Act 2013. There are so many changes that came into force and several provisions inserted the first time in the corporate world of India.
One of such new provisions is Corporate Social Responsibility (CSR) (section 135 of the companies act 13). The concept of CSR rests on the ideology of ‘give and take’.
CSR is a concept whereby companies not only consider their profitability and growth, but also the interest of society and the environment by taking the responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities, and all other members in the public sphere. The basic premise is that when the corporates get bigger in size, apart from the economic responsibility of earning profits, there are many other responsibilities attached to them which are more of non-financial /social nature.
Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014.
135(1) Section 135 is applicable to every Company including its holding or subsidiary having a net worth of Rs.500 Cr or more, OR turnover of Rs.1000 Cr or more OR a net profit of Rs. 5 Cr or more during the immediately preceding financial year. ( It is clarified in FAQ issued by CSR that Net Profit means ‘NET PROFIT BEFORE TAX’)
Once a company is covered under the ambit of the CSR, it shall be required to comply with the provisions of the CSR -Section 135(1), required to do the following activities
As company crosses the prescribed threshold limit as per section 135(1), the very first step to constitute a CSR Committee of the Board consisting
The major function/role of the CSR committee are as follows
The Board of Directors of every company on which CSR is applicable shall,
The Board of every company on which CSR is applicable shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years* in pursuance of its Corporate Social Responsibility Policy.
(*where the company has not completed the period of 3 financial years since its incorporation, during such immediately preceding financial years)
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR Activities.
The CSR policy of the company mainly include such as,
The CSR activities shall be undertaken by the company, should be recommended by CSR Committee & it should be mentioned CSR Policy, excluding activities undertaken in pursuance of its normal course of business.
SCHEDULE VII (List of Permitted Activities for CSR)
Schedule VII of the Companies Act 2013, indicate the list of probable activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to,
(Explanation.- For the purposes of this item, the term `slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.)
The Board of Director may decide to undertake its CSR activities approved by the CSR Committee, through
The CSR projects or programs or activities NOT to be considered as CSR Activities:
Section 135 does not lay down any penal provision in case a company fails to spend towards CSR activities. However, Section 135(5) provides that in case the company fails to spend such amount, the Board shall specify in its report reason for not spending the amount under Section 134(3)(o).
In case the company does not comply with Section 134, the company shall be punishable under Section 134(8).
1. Section 134(8): As per Section 134(3)(o) of the Companies Act, companies shall include in its Board Report the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year. If the company contravenes the provisions of Section 134:
2. Section 450: Where no specific penalty is provided, in case of contravention of any such provision, company, and every officer in default or such other person shall be punishable with:
In view of the use of the words “Shall ensure that the company spends” under Section 135 of the Act, it is mandatory for eligible companies covered under Section 135(1) to mandatorily spend the prescribed amount and non-spending of CSR amount shall attract penal action as mentioned in the Act unless the regulatory authority accepts the reasons given in the Board reports of the companies. Since the coming into force of this provision i.e. from 01st April 2014, it has been observed that most of the companies are still not spending towards CSR. In order to ensure compliance of Section 135, MCA has taken the following steps:
1. National CSR Data Portal- Ministry has launched the National CSR Data Portal on 19th January 2018 for driving accountability and transparency in Corporate India. This portal has been created with the objective of achieving high level of compliance as well as transparency towards CSR activities of companies. The CSR data portal is showing the data on the basis of the Director’s Report and Forms filed on MCA Portal.
2. Show Cause Notices to companies: The Show Cause Notices have been issued to more than 1000 companies for initiating prosecution for non-compliance of Section 135 read with Section 134(3)(o). However, as per Section 135, if company fails to spend the CSR amount, it has to give reason under Section 134(3)(o), hence if a company is giving its reason in the Board Report then it is complying with the provisions of Section 135 and Section 134(3)(o). Further, Section 450 will also not be attracted, since Section 135 and Section 134 cannot be considered as contravened if the company has provided its reasons for nonspending of the amount. Hence, this action of MCA can be questioned on behalf of the industry because the law should be clear that if companies do not spend or less spend towards CSR, then it can be prosecuted if the reasons given by them in Board Reports are not acceptable.
3. Unspent CSR amount to be transferred to designated Central Government Funds: In the report of Legal Sub-committee on Corporate Social Responsibility submitted to Ministry of Corporate Affairs on 26th April, 2018, it has been recommended that in order to ensure that companies become complaint of CSR, the Ministry may issue a circular stating that in case a company is not able to spend the entire prescribed CSR amount by end of the financial year, then the balance remaining unspent should be transferred to designated Central Government Funds as listed in Schedule VII of the Act i.e. Prime Minister’s National Relief Fund or Swachh Bharat Kosh or Clean Ganga Fund etc. It is also recommended that companies who have either less spent or not spent and after issuance of show cause notice in case such companies deposit such amount to the Central Government Fund as per Schedule VII, the Central Government shall not file prosecution against such companies
Further, as recently the Ministry of Corporate Affairs (MCA) notified the Companies (Auditor’s Report) Order 2020, Auditor has to give their opinion on CSR in reference to section 135(5) & 135(6) of the Companies Act 2013. These two sections pertain to transferring unspent CSR money to PM National Relief Fund.
In the present scenario, companies are complying with Section 135 and Rules made thereunder as per their literal interpretation by disclosing their reasons for not spending the CSR amount in their Board Reports. Further, if companies are giving reasons under Section 134(3)(o) for not spending the CSR amount, companies are duly complying with the provisions of CSR under Section 135 and Section 134 because it is unwritten in the law that the submitted reasons shall be cross re-validated or verified by either accepting the reasons or set aside the same; and initiate the prosecution for recovery of unspent CSR amount for specified activities as mentioned in Schedule VII. If based on this unwritten law, Ministry is issuing notices to companies, then Companies should stand for it and question it before the Court of Law for making the law clear so that better compliance of law be possible in the future.