1. Column: The Companies Act, 2013; road to CSR non-compliance

Column: The Companies Act, 2013; road to CSR non-compliance

Absence of stringent provisions has led companies to hide under the garb of explanation for not meeting CSR norms.

Published: May 20, 2016 6:14 AM

The Companies Act, 2013 considered to be one of the significant legal reforms in India, has replaced the 60 year old Companies Act, 1956. The legislation has introduced several new provisions, amongst which those with regard to the Corporate Social Responsibility (CSR) have gained utmost importance as the prescribed classes of companies have been asked to make CSR contribution.

The provisions have been introduced by virtue of section 135 of the Act, read with The Companies (Corporate Social Responsibility Policy) Rules, 2014. The section 135 of the Act stipulates that every company having (i) net worth of R500 crore or more; or (ii) turnover of R1,000 crore or more; or (iii) net profit of R5 crore or more during any financial year shall constitute a CSR committee of the Board. The committee shall comprise three or more directors, of which atleast one shall be an independent director. The committee shall be responsible for the formation of CSR policy—which shall indicate the activities to be undertaken by the company, implementation of the mandate of the policy, calculate and recommend the amount of CSR expenditure and also monitor the policy from time to time.

The CSR provisions were notified with clarity around the regulations that govern them, but the stakeholders continue to threadbare discussions on its applicability, calculation of net profit and on the amount of CSR expenditure. What makes CSR provisions so significant amongst many other critical provisions of the Act? There is no one answer to this question. There are wide-ranging responses given by stakeholders and experts. Few believe that, it contributes to the overall growth of the country and few categorise it as a ‘return on the investment’—which may be in terms of land, manpower, resources (tangible or otherwise) used by the companies registered in India. However, the peculiarity of the provisions of section 135 are such that the Act mandates certain class of companies to comply with the provisions of the section, and on the other hand permits the companies violating the provisions to provide necessary explanations in its Boards report—making it a comply or explain concept. The explanations shield the company from the penal consequences, i.e., the defaulting companies and officers of the company need not pay any penalty and will not be charged for the default. Interestingly, in the recent past the ministry of corporate affairs (MCA) seems to have taken the CSR mantra very seriously and has directed all the Registrar of Companies (RoC) to send show cause notices, in their respective jurisdiction to those companies who fall under the ambit of the provisions of the section of the law.

By virtue of section 206 of the law—power to call for information, inspect the books and conduct inquiries, the RoCs have been sending out notices to the companies seeking information on the (i) annual report for the financial year FY15; (ii) information pertaining to net profits, average net profits, of the three immediate preceding financial years; (iii) 2% of the prescribed CSR expenditure; (iv) complete information on the CSR expenditure, if any; (v) further details for not meeting the CSR requirements or on explanations provided in the Board’s report.

With the enthusiasm shown by the RoCs under the directions of the MCA, one can infer that the companies may expect to receive notices even for the financial year FY16. As there are no stringent penal provisions provided for non-compliance of section 135, numerous companies have not complied with provisions and the rules framed thereunder and have been claiming defence by providing necessary explanations in the Board’s report for not meeting the CSR requirements.

In view of such non-compliances, it is clear that the RoCs have been very enthusiastic in having right amount of checks and balances in CSR compliance by the companies who fall under the ambit of CSR and also to create a distress on the companies who fail to comply and take advantage of the shield of providing necessary explanations in the Board’s report.

On a separate note, there may be a possibility that, MCA may consider CSR compliance for a period of three years, i.e., from the date of notification of the CSR provisions, thereafter may decide to amend the provisions and the rules made thereunder, so as to fit in the necessary penal provisions for the companies and its officers for the non-compliance or partial compliance of section 135 of the Act. In which case, a diligent compliance of the CSR provisions, will replace the explanations in the Board’s report.

Anup Vijay Kulkarni

The author advises on areas relating to corporate secretarial & compliance and is a consultant with

J Sagar Associates.

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