Monday, October 19, 2015

Report of the High Level Committee on CSR

[The following guest post is contributed by Suprotik Das, a 4th year law student at the Jindal Global Law School, Sonepat, Haryana.]

This post is with regard to the Report of the High Level Committee to suggest measures for improved monitoring of the implementation of Corporate Social Responsibility policies.

The Committee has suggested a number of measures and steps to bring out clarity to the erstwhile CSR regime of India. However, there remains no data on the implementation and impact of the new CSR rules in India. This should be made public around December or so. The Report does a good job of summarising the recommendations in Chapter IV on page 26.

At this juncture, it becomes pertinent to shed light on clause 4.7 of the recommendation dealing with penalty:

“As regards penalty for non-compliance with CSR provisions of the Companies Act, the present provisions in the law appear to be sufficient. However, the Committee is of the view that the leniency may be shown against the companies for non-compliance in [the] initial two/three years to enable them to graduate to a culture of compliance. This is being recommended because [the] initial three years will be a period of learning for all the stakeholders. This liberal view can at least be taken for smaller companies, which become eligible at the margin to take up CSR programme[s] under Section 135(1) of the Act.”

At present, India has adopted the oft-talked about ‘comply or explain’ approach and the present provisions are by no means sufficient or clear. Let us explore the current regime with regard to penalties and reporting under the Companies Act, 2013 (the “Act”) and The Companies (Corporate Social Responsibility Policy) Rules, 2014 (the “CSR Rules”).

1.         A company which is eligible to invest in CSR Activities does so and discloses the same in the Board’s Report under Section 134(3)(o) read with the second proviso to Section 135 and Rule 8 of the CSR Rules, the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year

This is the ideal situation that any company would want.

2.         A company does not invest in CSR Activities and discloses the reasons in the Board’s Report. Prima facie, the company will not incur any liability.

3.         A company neither invests in CSR Activities nor discloses the same in the Board’s Report. Section 134(8) will be made applicable –a fine shall be levied which shall not be less than Rs. 50,000 but which may extend to Rs. 25,00,000 and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000 or with both.

At the first blush, these provisions seem conclusive, as the Committee, in its report has suggested. However, consider the following scenarios:

4.         A company invests in CSR Activities but does not disclose this in the Board’s Report. Should the penalty clause in section 134(8) be made applicable? Section 134(8) starts with the words “If a company contravenes the provisions of this section…” This shows that it may be made applicable but has not been done till now.

Would a penalty in this scenario be a fair? The above 4 points assume that the company adheres to the 2% limit envisaged in Section 135(5).

5.         Suppose a company invests >2% of its average net profits of the last 3 financial years. Some observations arise:

(a)        As per item 6 of the Annexure in the Rules, the company, in the Board’s Report, will have to provide reasons for not spending the amount. If it does this, it seems by virtue of the current provisions, that the company will not be penalised.

(b)        However, if the company still does not disclose the fact that it spent lesser than the 2% limit, will it be liable? The answer seems to be yes, on the basis of the wordings of Section 135(5) read with Section 134(8). This is because the phrase ‘fails to spend such amount’ includes the range from 0 to 1.9%.

Now, taking scenarios 2, 3, 4 and 5 into account [where money has not been invested in CSR Activities or money lesser than 2% has been invested], the general penalty provision in Section 450 may be made applicable. Section 450 prescribes a fine which may extend to Rs. 10,000 and where the contravention is continuing, a further fine which may extend to Rs. 1,000 for every day the contravention continues. There has been no discussion on this matter till date.

Again, considering scenarios 2, 3, 4 and 5: can the Parliament consider this leniency aspect and somehow exonerate the company from liability by clarifying that Section 450 will not be made applicable if a company does not invest in CSR Activities and/or disclose the same in the Board’s Report? We will need to await further clarification.

One can see the various permutations and combinations that can occur with regard to the CSR structure of India – which in no way is sufficient. The Committee needs to further clarify several aspects. First, what is the ambit of this leniency to small companies? Second, why does this dichotomy exist for smaller companies? Third, will Section 450 be made applicable under any circumstance for not investing in CSR activities?

- Suprotik Das

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