En­trust­ing, statu­to­rily so­cial re­spon­si­bil­ity to cor­po­ra­tions, is com­mend­able, but flawed with le­gal la­cuna

Gfiles - - CONTENTS - The writer is former Chair­man, CBDT

En­trust­ing, statu­to­rily so­cial re­spon­si­bil­ity to cor­po­ra­tions, is com­mend­able, but flawed with le­gal la­cuna

PLAC­ING re­spon­si­bil­i­ties statu­to­rily on com­pa­nies to un­der­take so­cially ben­e­fi­cial ac­tiv­i­ties for the masses out of their prof­its to the pre­scribed ex­tent was hailed as a unique fea­ture of the Com­pa­nies Act, 2013 (Act), not found in the com­pa­nies’ leg­is­la­tion of any other coun­try. This fea­ture was achieved by the in­ser­tion of Sec­tion 135 in the Act ti­tled ‘Cor­po­rate So­cial Re­spon­si­bil­ity (CSR)’, which pro­vides for spend­ing of net prof­its to the ex­tent spec­i­fied in the sec­tion. The phi­los­o­phy be­hind the pro­vi­sion is that prof­itable com­pa­nies, like gov­ern­ments, should share re­spon­si­bil­i­ties to­wards the well­be­ing and wel­fare of the peo­ple of the coun­try. Ac­tu­ally, some en­light­ened busi­ness houses and com­pa­nies are al­ready do­ing so on a vol­un­tary ba­sis and some of the best in­sti­tu­tions in var­i­ous fields in In­dia are be­ing run un­der their pa­tron­age. How­ever, the leg­is­la­ture, in its wis­dom, has thought it ap­pro­pri­ate to pro­vide in the com­pa­nies’ leg­is­la­tion it­self the re­quire­ment of ad­her­ing to the needs of so­ci­ety and pro­vide for the same in the Act it­self, to be com­plied with, as per statu­tory re­quire­ments. The com­pli­ance re­quired for CSR is from com­pa­nies (i) hav­ing net worth of ` 500 crore or more; or (ii) turnover of ` 1,000 crore or more; or (iii) net profit of ` 5 crore or more in any fi­nan­cial year. The amount, to be spent on CSR ac­tiv­i­ties is 2 per cent of av­er­age net prof­its of the com­pa­nies made dur­ing three im­me­di­ately pre­ced­ing years in ev­ery fi­nan­cial year. The Act pro­vides that the Direc­tors of com­pa­nies, which are to com­ply with CSR re­quire­ments, shall con­sti­tute CSR Com­mit­tees, lay­ing down the CSR pol­icy of such com­pa­nies, which shall be placed on their web­sites. CSR has been de­fined in rule 2(c) of the Com­pa­nies (Cor­po­rate So­cial Re­spon­si­bil­ity (CSR) Pol­icy as un­der: [c] CSR means and in­cludes but is not lim­ited to:[i] Projects or pro­grammes re­lat­ing to ac­tiv­i­ties spec­i­fied in Sched­ule VII to the Act; or [ii] Projects or pro­grammes re­lat­ing to ac­tiv­i­ties un­der­taken by the board of direc­tors of a com­pany (Board) in pur­suance of rec­om­men­da­tions of the CSR Com­mit­tee of the Board as per de­clared CSR Pol­icy of the com­pany sub­ject to the con­di­tion that such pol­icy will cover sub­jects enu­mer­ated in Sched­ule VII of the Act. Sched­ule II pro­vides that the com­pa­nies can take up any ac­tiv­i­ties from the fol­low­ing: [i] erad­i­cat­ing hunger, poverty and mal­nu­tri­tion, pro­mot­ing pre­ven­tive health­care, in­clud­ing con­tri­bu­tion to the Swach Bharat Kosh set up by the Cen­tral Gov­ern­ment for the pro­mo­tion of san­i­ta­tion and mak­ing avail­able safe drink­ing wa­ter; [ii] pro­mot­ing ed­u­ca­tion, in­clud­ing spe­cial ed­u­ca­tion and em­ploy­ment en­hanc­ing vo­ca­tional skills es­pe­cially among chil­dren, women, el­derly, and the dif­fer­ently abled and liveli­hood en­hance­ment projects; [iii] pro­mot­ing gen­der equal­ity and em­pow­er­ing women, set­ting up homes and hos­tels for women and or­phans; set­ting up old age homes, day care cen­tres and such other fa­cil­i­ties for se­nior cit­i­zens and mea­sures for re­duc­ing in­equal­i­ties faced by so­cially and eco­nom­i­cally back­ward groups; [iv] en­sur­ing en­vi­ron­men­tal sus­tain­abil­ity, eco­log­i­cal bal­ance, pro­tec­tion of flora and fauna, an­i­mal wel­fare, agro forestry, con­ser­va­tion of nat­u­ral re­sources and main­tain­ing qual­ity of soil, air and wa­ter in­clud­ing con­tri­bu­tion to the ‘Clean Ganga Fund’ set-up by the Cen­tral Gov­ern­ment for re­ju­ve­na­tion of river Ganga; [v] pro­tect­ing na­tional her­itage, art and cul­ture, in­clud­ing restora­tion of build­ing and sites of his­tor­i­cal im­por­tance and works of art; set­ting up pub­lic li­braries; pro­mo­tion and de­vel­op­ment of tra­di­tional arts and hand­i­crafts; [vi] mea­sures for the ben­e­fit of armed forces vet­er­ans, war wid­ows and their de­pen­dents;

[vii] train­ing to pro­mote ru­ral sports, na­tion­ally recog­nised sports, Par­a­lympic sports and Olympic sports; [viii] con­tri­bu­tion to the Prime Min­is­ter’s Na­tional Re­lief Fund or any other fund set up by the Cen­tral Gov­ern­ment for so­cio-eco­nomic de­vel­op­ment and re­lief and wel­fare of the Sched­uled Castes, the Sched­uled Tribes, other back­ward classes, mi­nori­ties and women; [ix] con­tri­bu­tions or funds pro­vided to tech­nol­ogy in­cu­ba­tors lo­cated within aca­demic in­sti­tu­tions which are ap­proved by the Cen­tral Gov­ern­ment; [x] ru­ral de­vel­op­ment projects; and, [xi] slum area de­vel­op­ment. Given the fore­go­ing back­ground, Sec­tion 135 can be ap­praised whether it is achiev­ing the ob­jec­tives ex­pected from it. The benef­i­cent sec­tion has be­come a mere show­piece be­cause it has no pro­vi­sion to en­sure im­ple­men­ta­tion. The sec­tion con­tains no pe­nal or pros­e­cu­tion pro­vi­sion con­cern­ing its en­force­ment. Thus, af­ter al­lo­ca­tion of the amount, as per the le­gal re­quire­ments, the com­pa­nies can con­tinue to use the same for their busi­ness needs with­out be­ing li­able for any con­tra­ven­tion. The only re­quire­ment pre­scribed is that if the com­pany fails to spend the CSR amount, the Board shall give, in its re­port, the rea­sons for not do­ing so. But, there is no mech­a­nism to check the gen­uine­ness of the rea­sons given. There is no pro­vi­sion in the sec­tion to com­pel the com­pa­nies to spend the amount on the pur­poses spec­i­fied in the Sched­ule VII.

FUR­THER, no time limit has been laid down within which the amounts for CSR must be spent. Also, there is no re­quire­ment pre­scribed for the carry for­ward of the un­spent sums to the fol­low­ing year/ years for be­ing utilised in those years, though the com­pa­nies are fol­low­ing the prac­tice of carry for­ward and on that ground, con­tinue to use the CSR funds for their day-to-day func­tion­ing in­stead of spend­ing these in the pre­scribed spec­i­fied ac­tiv­i­ties. The travesty of the sit­u­a­tion is that de­spite amend­ment made to the 2013 Act since its en­act­ment – the lat­est be­ing the Com­pa­nies (Amend­ment) Act, 2017 – these as­pects have not been taken care of in­ad­ver­tently or know­ingly. The sit­u­a­tion needs to be reme­died if the leg­isla­tive in­tent be­hind Sec­tion 135 is to be achieved. Some sug­ges­tions for this are: [i] A sep­a­rate ac­count for CSR, which re­mains unutilised, can be opened on the lines of cap­i­tal gains ac­count scheme (CGAS) un­der the IT Act, 1961. The au­di­tor should con­firm in its re­port on the ac­counts of the com­pany that the un­spent amount, re­lat­ing to CSR, is kept sep­a­rately in an ac­count, which can­not be used by the com­pany for its own needs and with­drawals from it would be permissible only for be­ing spent on the items spec­i­fied in Sched­ule VII of the Act. [ii] Sec­tion 135 be amended to pro­vide for carry for­ward of un­spent amount and le­galise the prac­tice al­ready be­ing fol­lowed. The carry for­ward should be al­lowed for a lim­ited pe­riod of 2 or 3 years only. [iii] Pro­vi­sions to pe­nalise/ pros­e­cute com­pa­nies, who fail to com­ply with the pro­vi­sions re­lat­ing to CSR need to be in­cor­po­rated in Sec­tion 135. A so­cially ben­e­fi­cial le­gal pro­vi­sion has to be backed by ad­e­quate sanc­tions to en­sure com­pli­ance. En­act­ing the sec­tion, with­out ad­e­quate pro­vi­sion and ma­chin­ery to im­ple­ment it, serves no pur­pose. It re­mains like a g mere show­piece in the law.

It is sug­gested that Sec­tion 135 should be amended to pro­vide for carry for­ward of un­spent amount and thereby le­galise the prac­tice al­ready be­ing fol­lowed. The carry for­ward should be al­lowed for a lim­ited pe­riod of 2 or 3 years only

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