Tuesday, September 10, 2013

Draft Rules under the Companies Act; CSR

The Ministry of Corporate Affairs, Government of India (MCA) has published a set of draft rules required to make the Companies Act, 2013 operational. This first set has been posted on the MCA website. Comments are due on October 8, 2013.

This post briefly considers the draft Corporate Social Responsibility Rules issued under section 135 of the Companies Act, 2013. In a previous post, we had set out some general comments about section 135 (of the Companies Bill as it then stood) as follows:

1.      The Bill requires large companies (determined with reference to net worth, turnover or profit) to constitute a Corporate Social Responsibility Committee consisting of at least one independent director. The role of the committee is to formulate and recommend to the board a CSR policy for the company. Once the board approves the policy, it must be announced by placing it on the company’s website. The CSR activities may comprise a number of activities listed in Schedule VII. The fairly general nature of the list in that Schedule does not provide assurance that the CSR spending may indeed always be directed to the achievement of the intended purposes. However, it is certainly the case that the more reputed and socially-oriented companies would be more focused in their approach in order to satisfy their social obligations, but then they would do so irrespective of any legal obligation (or persuasion) that serves no additional purpose.

2. Companies must “make every endeavour” to ensure that they spend a minimum amount (2% of the average net profits for preceding 3 years) on activities pursuant to their CSR policy. Since a move to impose a mandatory requirement for CSR has come under severe criticism, the Ministry seems to have adopted a half-way house approach, short of making CSR mandatory. Ultimately, the nature of the obligation, if any, will boil down to semantics and interpretation of the expression “every endeavour”, and it is unlikely that such an obligation is capable of being enforced to any level of specificity.

3. In case companies do not spend the requisite amounts on CSR activities, they must specify reasons in the board’s report annually sent to shareholders. This incorporates the “comply-or-explain” approach typically adopted for corporate governance (e.g. under the Corporate Governance Code in the UK and the Voluntary Guidelines in India).

The draft Rules essentially elaborate on the legislative provision and seek to operationalize the same with some details. At the outset, the CSR activities of the company are to be carried out through projects or programmes for the purposes detailed in Schedule VII to the Act. However, CSR excludes “activities undertaken in pursuance of the normal course of business of the company”. This appears somewhat paradoxical in that the companies’ normal business conduct will not be taken into account for CSR. This is because the Companies Act’s focus on CSR as a matter of expenditure of funds by companies rather than as a matter of conduct or corporate behaviour. It must be re-emphasized that CSR goes beyond mere spending, and must also promote social responsible and sustainable business practices.

The draft Rules contain some details on how the companies can undertake CSR activities. For example, CSR can be implemented through trusts or section 8 companies set up for the purpose. The company may itself set up such entities or may use entities set up by other persons for CSR programmes.

There are some limitations by which certain activities would not count towards CSR. First, only CSR spending within India would be recognized under the Act. Any activities undertaken outside India will be excluded. This may have some impact on Indian companies having international operations, where CSR activities conducted in other jurisdictions would not be taken into account for the purpose of fulfillment of obligations under section 135. Second, activities which are solely for the benefit of employees or their family members are excluded from the scope of CSR activity. Understandably, this is a measure to ensure that CSR obligations are more widely undertaken, but it undermines the general principle that employees are a key stakeholder in the entire scheme of things. This should not result in a scenario where companies carry out CSR activities that benefit other stakeholders, but their own employees are unable to enjoy these benefits.

Overall, barring the few issues discussed above, the draft Rules merely expand or elaborate a few aspects set out in section 135 of the Act. It does not seem to entirely deal with or address the several concerns that have been voiced over the last couple of years in India regarding how CSR activities would be accomplished from an operational standpoint such as the true goals of this concept are realized rather than an effort that amounts to mere lip service.


vswami said...

Plain Speak:
To take a leaf from the memorable thoughts of,'nani', the great in many respects, but echoing the self-same underlying message herein -

if impartially but mindfully looked at, without having to embark on any in-depth application of mind, in one's perceptive view, this enactment is bound to stand out as one of those numerous examples which go to infallibly demonstrate that , by and large, what is being practiced, as has been our propensity, can only be regarded as sheer “gestures”, in its true (but derog.) sense, - by any standard unfit/inappropriate to be named “policies” in its true sense or intimate perspective.
Ultimately, the succeess or failure of the idea of CSR now brought within the legal frame work of corporate law is going to entirely depend on how kindly and charitably each and every 'company' takes it and is mentally prepared to sincerely pursue as a welfare measure aimed at reaching the society at large, primarily for their collective benefit- not just limited to the selected group called 'stake holders' .

Anonymous said...

Will the calculation for csr (net profits, net worth and turn over) be on a consolidated or stand alone basis? Only profits from offshore companies have been excluded specifically. Is there any guidance on this? Thank you.

Umakanth Varottil said...

It is my understanding that there is no clarity yet on whether the profits are to be calculated on a consolidated basis or on a stand-basis. Other readers may weigh in if they have any information or guidance. Thanks.

Anonymous said...

Is the Companies Act clear as to if employees are to be considered as a stakeholder? Thank You.

V. Umakanth said...

@Anonymous. The Companies Act implicitly treats employees as stakeholders. For example, section 166(2) provides: "A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment."

K Sivananda Kumar said...

Is the CSR is an absolute remedy for Corporate crime?