The Companies Act, 2013, has become the most talked about topic in the corporate sector due to the new corporate social responsibility (CSR) regulations. The government announced CSR voluntary guidelines in 2009, afterwards incorporating these guidelines in the act itself and providing legal sanctity to these provisions.
Section 135 of the act says that every company having a net worth of Rs 500 crore, a turnover of Rs 1,000 crore and a profit of Rs 5 crore or more is required to form a CSR committee encompassing a minimum of three directors, out of which at least one should be an independent director, for contriving policies on CSR affairs and set aside two per cent of the average net profit made during the three immediately preceding financial years.
The most applauded aspect of these provisions is the required commitment of the companies not only towards environment but also for the society they operate in. Companies are encouraged to integrate their societal responsibilities with their overall business strategy, enabling them to build up a sustainable businesses.
Despite of the efforts made in legalising the concept of corporate social responsibility which earlier found itself only on papers, there are numerous shortcomings which thwart it from becoming an ideal one. A few of them are:
The profits of the parent company does not include the profits of its foreign branch(es) for ascertaining the two per cent contribution, which goes against the core provision of Section 135.
The list of social activities still remains in shades of grey, as the activities mentioned are illustrative not exhaustive.
The act expects the company to give preference to the area in which it operates, but what if company operates in more than one area? Another point of consideration is the meaning of the term ‘operation’, which is ill defined and does not specify whether a factory set-up or a corporate office constitutes the operation of a company.
The exclusion of contributions made directly or indirectly to a political party will have no significance, as no clarification has been provided in the act about the institutions affiliated to a party or a politician.
But, of late, the government has issued certain clarifications on what constitutes CSR activities. For example, holding events, such as marathons and awards ceremonies, making charitable contributions, sponsorships of events, etc. are excluded from the ambit of social activities for CSR purposes. Any expenses incurred for the purpose of executing CSR policy will not be characterised as a CSR expenditure. Moreover, the expenditure incurred by a foreign holding company for CSR activities in India will qualify as the CSR spend of the Indian subsidiary if the CSR expenditures are routed through the Indian subsidiary.
In respect to the fourth point above, a clarification has been issued by the government recently which provides that any contribution towards any institution will qualify as CSR expenditure if it is exclusively incorporated for the purpose of CSR activities.
However, under the act, no obligation has been imposed on companies to conform, as by giving a valid reason, a company can be exempt from fulfilling its societal responsibility. Through these provisions, the government has adopted the approach of ‘spend and explain’, which may require revisiting, as it is susceptible to abuse.