Corporate Social Responsibility under Companies Act 2013

UPDATE: on 30^th August 2013: Companies Bill 2012 became the Companies Act, 2013 (Act 18 of 2013).

The provision related to Corporate Social Responsibility under present Clause  Section 135 of Companies Bill 2012 Act 2013 applies to all companies; listed, unlisted, public, private, one – person subject to limitation based on its net worth, turnover and net profit. These threshold limits are:

1. Net worth rupees five hundred crore or more (Rs. 500,00,00,000/-) or rupees five arab
2. Turnover rupees one thousand crore or more (Rs. 10,00,00,00,000/-) or rupees ten arab
3. Net Profit rupees five crore of more (Rs. 5,00,00,000/-)

Plain reading of this provision make it clear that provision of this section are applicable only to above mentioned companies but all other companies are free to frame their own vision, mission, policy and provision on corporate social responsibility.

There is a requirement of constitution of Corporate Social Responsibility Committee of the Board of Directors consisting of three or more directors. There must be at least one independent director in the board irrespective of nature of constitution of company; public or private. I hope, in Rajya Sabha, Government may correct this position.

In the report of the Board of Directors under Section 134 (4) shall disclose composition of this CSR Committee.

The mandate of this committee shall be:

1. Formulate and recommend a corporate social responsibility policy
2. Recommend amount to spend
3. Monitor this CSR policy

There is no freedom for companies to choose anything under sky as its corporate social responsibility programme. The Government list out government directive on this programme under Schedule VII of the Bill Act. Corporate Social Responsibility activities may include:—

(i)           eradicating extreme hunger and poverty;

(ii)          promotion of education;

(iii)         promoting gender equality and empowering women;

(iv)         reducing child mortality and improving maternal health;

(v)          combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

(vi)         ensuring environmental sustainability;

(vii)        employment enhancing vocational skills;

(viii)       social business projects;

(ix)         contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

(x)          such other matters as may be prescribed.

In this schedule, there is lot of concern for corporate. This schedule opens scope for voluntary organisations to receive or extort donations for them. There is no need for doing business responsibly or rum their own programme but use of “Promoting and ensuring” ensure good fund for voluntary organisation.

The Board has duty to approve corporate social responsibility policy. This corporate social responsibility policy is public document and required to disclose in (i) Board’s Report, (ii) company website in prescribed manner.

This is duty of board to make sure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

These are mandatory requirement but now we will discuss most crucial but “almost mandatory” requirement.

The Board shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. This use of term “shall ensure” when read “at least” make it more than mandatory requirement but otherwise this may be about just ensuring not putting it in mandatory laws. A recommendatory law is no law. Further there is relief in proviso. Second proviso to relevant sub – section 5 give some relief, if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount. This is yet to prove beyond doubt, whether “fails to spend such amount” means to an amount “at least two per cent of not profit” or any amount higher than this amount but recommendation by the board committee under (b) of sub – section (3) of this section.

The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities.

It is natural that companies may prefer local areas for their activities. We all know companies are concentrated in some particular reasons and this may neglect under developed regions and low industrialisation states. You may consider BSE 100 companies which may spend about rupees six hundred crore (6 arab) in area around their operation from money / profit collected from consumers all over nation.

In my view, all government directives whether in the Companies Bill or otherwise must be in accordance with Directive Principle of State Policy enumerated by Constitution of India because this corporate social responsibility is to help society to overcome its problems. Our Indian society has clearly mandated its prime need under these Directive Principles. I am quoting some relevant principles here:

(a)  The State shall, in particular, direct its policy towards securing

1. that the citizens, men and women equally, have the right to an adequate means of livelihood;
2. that the ownership and control of the material resources of the community are so distributed as best to subserve the common good;
3. that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment;
4. that the health and strength of workers, men and women, and the tender age of children are not abused and that citizens are not forced by economic necessity to enter avocations unsuited to their age or strength;
5. that children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that childhood and youth are protected against exploitation and against moral and material abandonment

(b) The State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of un-deserved want.

(c)  The State shall endeavour to protect and improve the environment and to safeguard the forests and wild life of the country.

(d)  The State shall, in particular, strive to minimise the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations.

I find local area operation clause in this corporate responsibility provision not confirming the mandate of Article 38 of our Constitution.

All reporting framework for Corporate Social Responsibility are to be developed after passing of this bill.

Procedural Compliance related to this provision are here:

1. Board meeting, passing resolution for term of references and constitution of Corporate Social Responsibility Committee with at least three directors including one independent director,
2. CSR Committee meeting
   1. to formulate corporate social responsibility policy in confirmation with Schedule VII,
   2. recommend final draft to company and its Board,
   3. recommend amount for proposed CSR activities (not less than 2% of average net profit of last three years),
   4. Board meeting to approve:
      1. CSR policy with or without change to the recommended draft policy by CSR committee,
      2. Annual meeting to earmark some,
      3. Regular/quarterly CSR Committee meeting to monitor CSR policy and activities,
      4. Board Report to report compliance or failure on CSR activities and spending of earmarked amount, specify reason for any failure, and
      5. Go to step one at beginning of every financial year.

Please note: this blog post is not a professional advice but general information about the subject covered here. I appreciate if readers share this post on social media with friends and colleagues. I welcome your comments and feedback.