By Meher Sunil Dabrai
Introduction
It is an established principle of law that a citizen has certain duties towards the country. In the same way, when a company is set up in a particular country, it becomes the duty of the company to take responsibility for the activities which have an impact on the society and the environment.
A company is responsible for the repercussions that its activities have on the community, and it has to take responsibility for the same. This concept is known as Corporate Social Responsibility.
It is a self- regulating business model that helps the company be socially answerable to itself, its stakeholders and the public at large. Corporate Social Responsibility is based on the principles of give or take.
The concept of Corporate Social Responsibility is also known as corporate citizenship. While practicing corporate social responsibility, the companies are supposed to be conscious of the kind of impact that they are having on all aspects of the society, including economic, social and environmental.
Corporate Social Responsibility is important to both consumers as well as companies. Corporate responsibility programs are a great way to raise the morale of the employees in the workplace.
For example, Starbucks has been well known for its sense of Corporate Social Responsibility and its commitment to the welfare of the community and welfare.
Provisions regarding Corporate Social Responsibility under Companies Act, 2013
Every Company that is incorporated under the Companies Act, 2013 will have to report the net profits accrued by it during the financial year for the purpose of ascertaining the criteria stated under Section 135(1) of the Companies Act 2013.
The rules that govern Indian companies incorporated within the act are different from the rules governing Foreign Companies in this aspect.
- For an Indian Company
The computation of the net profit in of a company is done in accordance with Section 198 of the Companies Act 2013 which is mainly calculated as net profit before tax. The method that is used for the calculation of net profit has been explicitly provided under the Corporate Social Responsibility Rules.
According to the Corporate Social Responsibility Rules, the company profits made by the company from its overseas branches or dividends from other companies are disregarded while calculating the ‘net profit’ made by the company.
The fund allocated to Corporate Social Responsibility, that is, 2% is be computed as 2% of the average profits made by the company during the last 3 financial years.
- For a Foreign Company
The Rules state that the net profit of a foreign company that has been incorporated in India shall be determined in conformity with the profit and loss accounts balanced sheet of a foreign company which will be formulated according to Section 381(1)(a) read with Section 198 of the Companies Act.
According to Section 135 of Companies Act 2013 the provisions for Corporate Social Responsibility will be applicable to the Private Limited and Public Limited Companies as well as their holding companies and subsidiary companies or foreign companies that have offices in India and meet any of the criteria:
- Company must have a net worth of Rs. 500 crore or more in any financial year;
- The Company must have an annual turnover of Rs. 1,000 crores or more in any financial year;
- The Company must have a net profit of Rs. 5 crore or more during any financial year.
If any company meets any of the aforementioned criteria, they must spend at least two percent of their average net profits made during the previous three financial years on activities related to Corporate Social Responsibility.
What is the scope of activities under Corporate Social Responsibility?
Schedule VII of the Companies Act 2013 provides a wide spectrum of activities which may be undertaken by the body corporates in India. The Government has the power to prescribe any other activity which it thinks proper to be included within the ambit of Corporate Social Responsibility.
The activities that companies can do in order to achieve their obligations towards Corporate Social Responsibility include:
- Contributing to the eradication of extreme hunger and poverty;
- Promotion of education;
- Promoting gender equality and empowering women;
- Contributing towards maternal health and reducing child mortality;
- Ensuring environmental sustainability;
- Contribution to various relief funds in the country;
What are the penalties for contravention of Corporate Social Responsibility?
Section 134(3)(O) of the Companies Act 2013 provides that the board of directors need to mandatorily disclose all the relevant information regarding the Corporate Social Responsibility (Corporate Social Responsibility) policy that they implement every year.
Section 134(8) of the Act states that if the company fails to comply with the provisions mentioned above then it shall be liable to pay a fine that should not be less than Rs.50,00,000 but may extend to Rs. 25,00,000.
Moreover, every defaulting officer shall be punishable with an imprisonment for a term not more than 3 years or with a fine which shall not be less then Rs. 50,000 but may extend to Rs. 5,00,000 or both. It infers that the Act penalizes the company for failure to disclose information about its Corporate Social Responsibility policy, but the Act does not provide any provisions to hold them liable for not undertaking such activities or initiatives.
According to Section 451 of the Act, where the defaulter is punished either with fine or with imprisonment and where the identical offence is committed for the second or successive occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.
Case Laws
- Technicolor India (P) Ltd. Vs. Registrar of Companies[1] – A situation where a Company spent less than the threshold on Corporate Social Responsibility
The Company met the profit criteria that has been prescribed under Section 135 of the Companies Act 2013 and had a Corporate Social Responsibility committee, but it spent a certain amount as per the company’s policy in the year 2017-2018 which remain below the threshold under the Section 135(5) of the Act.
The company has provided the reason for the same in its report, but the court found that the amount spent on the Corporate Social Responsibility and associated detail was mentioned incorrectly in the report that had been provided by the director and the company had to forward an application to an NCLT that was situated in Bangalore.
The application was allowed, and the company was told to revise its report and given the liberty to file for compounding under Section 441 of the Companies act.
- Billfinger Neo Structo Limited[2] – Criteria for Corporate Social Responsibility not fulfilled
The Corporate Social Responsibility provisions would not be applicable to the company where the three criteria under the Companies Act such as the net worth or turnover nor net profit are not considered fulfilled.
- M/s Hira Power and Steels Limited[3] – Furnishing false reports
The Company had violated Section 134(8) of the Companies Act 2013. It had also been noticed that the Company had constituted a Corporate Social Responsibility committee and furnished the false Director’s Report for the financial years 2015-2016.
It was observed that though the compounding offences had been committed under Section 134(3)(o) the default had been made good and therefore it had its merits for consideration and was not penalized for the same.
- Pan Asia Logistics India Private Limited[4] – Failure to comply with corporate Social Responsibility provisions
The Company and its officers failed to comply with their Corporate Social Responsibility for the financial year 2014-2013 and were in violation of the provisions of Section 135 read with Section 450 of the Companies Act 2013. The Company was directed to remit penalty from its accounts and the two directors were remitted to pay the penalties from their own resources.
Conclusions
It has often been heard that many corporate companies have taken initiatives such as building schools, providing health care facilities, sanitation etc. In India, companies like Tata, Starbucks and a few other companies are the biggest contributors to the Corporate Social Responsibility in the country.
Since the year 2020, in lieu of Covid-19, many companies have included health care facilities in their Corporate Social Responsibility agendas and have also provided funding and substantial donations to organizations dedicated to the same purpose.
References
- .investopedia.com
- blog.ipleaders.in
- blog.ipleaders.in
- legalservicesindia.com
- axguru.in/income-tax
- Companies Act 2013
- Technicolor India (P) Ltd. Vs. Registrar of Companies 2020 (7) TMI 423 ↑
- Billfinger Neo Structo Limited 2019 SCC OnLine NCLT 108, CP No. 54/441/NCLT/MB/MAH/2018 ↑
- M/s Hira Power and Steels Limited CP No.: 2707/441/NCLT/MB/MAH/2018 ↑
- Pan Asia Logistics India Private Limited 2018 SCC OnLine NCLT 11589, CA/80/(441)/CB/2018 ↑
