Section 135 of the Companies Act: Corporate Social Responsibility

“Corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large, to improve their lives in ways that are good for business and development.” – World Bank

Overview:

Business Dictionary defines CSR as “A company ’s sense of responsibility towards the community and environment (both ecological and social) in which it operates. Companies express this citizenship (1) through their waste and pollution reduction processes, (2) by contributing educational and social programs and (3) by earning adequate returns on the employed resources.” The spirit of CSR embraces humanitarian, corporate, moral, environmental and lawful as well as economic accountability. Another tantamount to CSR is “people, planet and profit” also known as “triple bottom line”.

India has become the first nation to make CSR mandatory under Section 135 of the Companies Act, 2013 for companies with a turnover of more than 1000 crore and net worth of at least 500 crores.

Related Laws and Statutes:

Section 135 of the Companies Act 2013 along with Companies (Corporate Social Responsibility Policy) Rules, 2014 deals with the concept of Corporate Social Responsibility.

How CSR works?

The law requires companies with a net worth of over Rs 500 crore ($US80million), turnover of over Rs 1,000 crore ($US160million), or net profit of more than Rs 5 crore ($0.8mn), to spend at least 2 per cent of the average net profit in the immediate three preceding years on CSR activity. However, it isn’t mandatory, and boards of the companies will only have to report how much they spent on CSR and explained why they couldn’t meet the commitment. The CSR policy and spending have to be put on the website and in the directors’ report along with all the relevant information have to be put in the public domain by the

The Act promotes companies to spend at least 2% of their average net profit in the previous three years on CSR activities. The indicative activities which can be undertaken by a company under CSR have been specified under Schedule VII of the Act:

Surplus arising out of CSR activities to be reinvested into CSR initiatives, and this will be over and above the 2% figure
The company can implement its CSR activities through the following methods: Directly on its own
Through its non-profit foundation set- up to facilitate this initiative Through independently registered non-profit organisations that have a record of at least three years in similar such related activities
Collaborating or pooling their resources with other companies
Only CSR activities undertaken in India will be taken into consideration
Activities meant exclusively for employees, and their families will not qualify
A format for the board report on CSR has been provided which includes amongst others, activity-wise, reasons for spends under 2% of the average net profits of the previous three years and a responsibility statement that the CSR policy, implementation and monitoring process complies with the CSR objectives, in letter and spirit

The National Voluntary Guidelines On Social, Environmental and Economic Responsibilities Of Business Voluntary

The nine principles of National Voluntary Guidelines are:

Principle 1: Businesses should conduct and govern themselves with ethics, transparency and accountability.

Principle 2: Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle.

Principle 3: Businesses should promote the well-being of all employees.

Principle 4: Businesses should respect the interests of, and be responsive toward all stakeholders, especially those who are disadvantaged, vulnerable and marginalised.

Principle 5: Businesses should respect and promote human rights.

Principle 6: Business should respect, protect, and make efforts to restore the environment.

Principle 7: business, when engaged in influencing public and regulatory policy, should do so in a responsible manner.

Principle 8: Businesses should support inclusive growth and equitable development

Latest Judgement by NCLT, Chandigarh

DR I T M Ltd and Ors. v. Registrar of Companies, Punjab & Chandigarh[1]

Judgement delivered on 20.03.2018

The petitioner-company received a show cause notice dated 28.09.2017 from the Registrar of Companies, Chandigarh for contravention of the provision of Section 135 read with Section 134(3)(o) of the Act. The show cause notice was issued to the company itself and Mr.Sameer Mahajan, Managing Director of the company. The attention of the petitioners was also drawn to the provisions of Section 441(6) of the Act which relates to the composition of the offences and the disclosure as per Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (for brevity, the ‘Rules’) was not made in the Board’s Report for the financial year 2014-15. The NCLT, Chandigarh Bench compounded the offence for which the show cause notice was issued and a penalty of Rs. 2.5 lacs was imposed on the company and Rs 1 lacs on the Managing Director of the company. The tribunal further directed that the amount shall be paid by the Managing Director from his pocket and not from the funds of the petitioner company.[2]