By Rajeev Nair (Principal Associate) & Nishant Sogani (Associate), Rajani Associates
Corporate Social Responsibility in India is governed by the Companies Act, 2013 (Act) under Section 135 which mandates every company having
(i) net worth of INR 500 crore or more, or
(ii) turnover of INR 1,000 crore or more, or
(iii) a net profit of INR 5 crore or more
during the immediately preceding financial year to constitute a Corporate Social Responsibility Committee of the Board which shall formulate a Corporate Social Responsibility Policy of the company and shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years in the areas or subjects specified in Schedule VII of the Act.
Proposed amendment to Section 135 of the Companies Act
The Ministry of Corporate Affairs (Ministry) is proposing to amend the Act in order to inter alia strengthen the enforcement framework in relation to the CSR spends made by the companies.
The Ministry proposes to add a provision which require that any amount remaining unspent under sub-section (5) of Section 135 of the Act to be transferred by the company within thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the ‘Unspent Corporate Social Responsibility Account’ and such amount to be spent by the company in pursuance of its Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer.
The Ministry felt the need for such amendment as many companies were not fully using the amounts earmarked for CSR activities and there have been instances of diversion of such earmarked funds. As per the existing provisions of Section 135 of the Act, the Company has to just explain the reason for not spending the amount earmarked for CSR.
However, in terms of the proposed amendments, the companies will have to transfer the unspent funds to ‘Unspent Corporate Social Responsibility Account’. This is expected to further coax the companies to show more willingness towards CSR spending so as to avoid having a situation of accrual of CSR spend in the balance sheets, which eventually may have to be transferred to the unspent account.
Such accrual of unspent CSR spend, and its eventual transfer to the unspent account, defeats the very objective of having the CSR provisions in the first place.
Challenges faced by the companies in CSR activities
Companies which are willing to take initiatives and undertake spending towards their CSR activities often encounter challenges at the grass root level while implementing its CSR policies. Such challenges, to name a few, include lack of community participation in CSR activities, lack of awareness among people of the CSR initiatives undertaken by the companies in their area, lack of local capacities and infrastructure and issues of transparency of working of implementing agencies.
The role of a legal advisor in addressing these challenges
A legal adviser has a pertinent role to play in the entire CSR ecosystem by advising the companies to understand the regulatory paradigm pertaining CSR and assisting the companies in successful and effective implementation of their CSR initiatives.
A legal adviser may also advise companies on formulation of their CSR policies which provides for the CSR framework of the companies and the roadmap for effectively implementation of their CSR endeavors.
More than the monetary aspect, willingness seems to be a pre-requisite for undertaking CSR in India. Here, it becomes very apt to quote ‘Where there is a will there is a way’.
One can also understand from the proposed changes to the CSR, that quite a few companies do not spend the entire funds earmarked towards CSR spending. Though, it may be argued that such instances pale before the cases where the companies fail to even set aside funds for CSR.
The proposed amendment aptly targets another aspect viz. unspent CSR amounts wherein the Ministry aims to discourage the practice of hoarding of CSR funds. This will necessitate the corporates to actually spend on CSR, rather than merely earmarking funds, since that goes a long way in realizing the ulterior spirit of having CSR regime in place.
It is indeed a step in the right direction, but it would not be inappropriate to concur that the CSR is still at its infancy in India and that it may require a considerable time before this ‘infant’ actually graduates to take concrete steps ahead towards maturity wherein the companies would eventually undertake CSR spends responsibly in the right spirit and not as a matter of one of the compliance aspects.
Views of the authors are personal and do not necessarily represent the website’s views.
Rajeev Nair is Principal Associate, Rajani Associates. He has been with the firm since 2010. He is currently a part of the Merger & Acquisition Team. Rajeev has passed his LL.B. examination in the year 2007. He is also a qualified Company Secretary from the Institute of Company Secretaries of India. Nishant Sogani has been with the Firm since 2019. He is currently a part of the Mergers & Acquisitions and General Corporate Team. Nishant has passed his LL.B. examination in the year 2013. His interest lies in travelling and watching movies.