1.1. Introduction
The Companies Act, 2013, provides provisions for companies’ liability in cases of violation. At the same time, it lays down certain obligations for the companies for economic, environmental, and social goals. This could be called a Triple Bottom Line Approach (TBL), which expands the traditional notion of profit to incorporate social and environmental considerations. In FY 2023, India’s top 100 companies earmarked over 41,000 crore for CSR activities. However, environmental degradation persists across industrial clusters. This gap between spend and impact underscores why Section 135 of the Companies Act, 2013 is important. “Corporate Social Responsibility pertains to the ‘idea that organizations have a responsibility to conduct their operations in a way that promotes social progress and the long-term sustainability of the planet.”. On April 1, 2014, India became the first country to mandate corporate social responsibility legally. It mandates that the following companies have to spend at least 2% of their average net profits on CSR. The Companies (CSR) Rules further state that such spending should not exceed 5 percent of the expenditure. By enforcing this provision, it has transformed a social responsibility into a legally enforceable duty. This is further reiterated in the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.
1.2. What needs to be disclosed as per the CSR Rules, 2021?
- Activities that companies carry out in the normal course of business. However, the companies engaged in research and development related to drugs, medical devices may carry out research for COVID-19 (for three financial years).
- Disclosure is mandatory in the annual report of the board of directors.
- These could include training of sports personnel representing any part of India at a international level or political contribution
- Activities done for the benefit of the employees
1.3. Core Duties Under Section 135
Section 135 applies to any company meeting any of these thresholds.
- Companies with a net worth of more than 500 crores (> 500 crores)
- Companies with a turnover of 1000 rupees or more (=/> 1000 crores)
- Companies with a net profit of 5 crore or more (=/> 5 crores)
By a simple interpretation of this provision, it may seem that prime importance is given to the top businesses. Perhaps it might be due to the significant financial resources needed. The reason for the same is not yet clarified. However, recent studies indicate that small and medium-sized companies can also help in contributing to reduced environmental damage. This can be done via careful planning of resources. The best strategy for SMEs (small & medium-sized enterprises) could be improving employees’ working conditions and launching small local initiatives within their reach. Further, collaborating with other SMEs could increase their reach. While there is no strict implementation, the subject is under the interpretation of the Parliament. We could do nothing, yet suggest some observations.
Upon delving into the duties of the companies mentioned under Section 135, it states that companies should
- Constitute a CSR Committee of at least three directors (including an independent director when required)
- Adopt a CSR policy aligned with Schedule VII activities
- Spend a prescribed 2 percent or send the non-spend by depositing the balance in a government-specified fund.
The provision makes it mandatory for companies fulfilling the above criteria to form a CSR Committee. While the powers of the committee are recommendatory, the final decision lies with the Board of Directors. The idea of CSR was to reduce the already existing workload of the board of directors. Additionally, it ensures adequate time and knowledge are given to fulfill the objective of the provision. The monitoring and implementation are likewise done by the CSR, thus ensuring proper compliance. The CSR Report on activities shall further be mentioned in the Annual Report of the company. The Companies Act provides that the Annual Report shall be submitted to the MCA and published on the company’s website. Thus, ensuring there is due compliance.
A crucial detail is hereby noted: “independent director”. While a detailed description of an independent director has been provided in Section 149 of the Companies Act, 2013, we shall limit it. An independent director is a non-executive director who has relevant expertise and experience and is free from any material or pecuniary relationships with the company. In times like these, independent directors ensure that the company’s CSR report does not put forth its profit-making motives. However, it still juggles with challenges. They need to navigate so that the policy does not compromise the company’s performance. The societal expectations on corporations continue to rise even more. LG Polymers Gas leak could be a striking example of the same, where the company was held accountable for the death of 7 individuals. The tales of Union Carbide, likewise, have been everywhere. In times like these, the independent directors have to balance social justice and climate change.
The significance of CSR has been recognized by the Hon’ble Supreme Court in myriad judgments. In “Binani Cement Ltd v Srei Equipment Finance Ltd & Ors”, the Court upheld the necessity of CSR. Corporate Social Responsibility cannot be disregarded even during insolvency. Further in “Vivek Ranjan Sriram v IRDAI,” CSR was seen as a fundamental part of the ethical framework guiding businesses. The CSR obligations should be applied consistently with regulatory oversight.
Example – A steel manufacturer operating in an ecologically sensitive zone must allocate part of its CSR outlay to river-bank afforestation or rainwater harvesting projects. Failure to do so constitutes a breach of duty.
1.4. Responsibilities Under Section 135
- The Committee shall formulate a policy to be followed by the company in local areas, and the subjects mentioned in Schedule VII of the Companies Act, 2013.
1. Health and Hygiene
- Fight hunger, poverty, and malnutrition,
- Donate to Swachh Bharat Kosh
- Support healthcare, sanitation
2. Education and Skill Development
- Promote education for disadvantaged groups
- Support vocational training and livelihood programs
3. Social Welfare
- Empower women and promote gender equality
- Support orphans, the elderly with hostels, old age homes, and day care centers
4.Cultural Preservation
5. Support for armed veterans and families, CAPF/CPMF Personnel
6. Promote national and international players of India
7. Disaster Relief and Management
- Contribute to PM’ Relief Funds or PM Cares
- Support Emergency Relief and welfare of backward castes, minorities, and women
- Relief, Rehabilitation, and Reconstruction efforts
8. Research and Innovation
- Fund incubators, R&D in science, tech, engineering, and medicine
- Donate to institutions like IITs, ICMR, ICAR, and more
9. Rural and Slum Development
- The Board shall take into account the recommendations made by the CSR committee and approve the CSR Policy for the company. This should be in line with Section 9 of the Companies (Accounts ) Rules, 2014.
- Further, the Policy approved should be disclosed in the Board’s report as per Section 134 of the Companies Act, 2013, and on the company’s website.
- In case of failure in CSR application, the Companies (Amendment) Act 2019 and Companies (CSR Policy) Amendment Rules, 2021, brought forth new compliance requirements. If the prescribed amount is unspent, companies need to deposit the balance into a government-specific fund.
1.5. Empirical Compliance Landscape
A study conducted by Research Scholar, M Arunmozhi, showcases the sectoral spend by companies, where Environment takes the foremost position. It is quite a jovial fact, 48 percent have spent more than the requisite amount, and at least 23 percent have spent the requisite amount. There is not much difference between the prescribed and actual amount, indicating the guidelines have been duly followed. On the question of environment, companies were asked for reasons for investments in the environment. 4 prime reasons were showcased –
Long-term sustainability, ethical responsibility, initiatives from non-profit partners, and peer companies. The first one, long-term sustainability, took the topmost spot with 91 percent of respondents agreeing to the same. Further, some intriguing facts have been brought forth. The majority of companies voluntarily engage in climate and environment initiatives. 83 percent do consider themselves a part of afforestation and plantation projects. This further reinforces the belief and is a positive sign that corporations are aware of the impacts of climate change.
1.6. Conclusion
To concur, Section 135 of the Companies Act, 2013, marks a significant step in embedding social and environmental responsibility in corporate governance. While proactive steps have been taken by the government and corporations themselves. Nevertheless, small and medium companies are excluded from this provision. By encouraging them to take some campaigns perhaps India can succeed in its goal of net zero by 2070 and further become the world’s best economy by 2047.
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