Posted by: CS Shilpi Thapar
“Corporate Social Responsibility” may seem as easy to interpret. However, as we delve deeper into the matter we realize that CSR is not as simple as it appears. If we look at the history of development of corporate world of our country in reality on pretext of their development they have increased their indebtedness to the society & environment. This being the very true intent of the legislature mentioned by way of section 135 of The Companies Act, 2013.
If we understand in simple parlance , we can say that just as profits ploughed back in a corporation strengthens its internal base, wealth invested back in the society expands opportunity for a larger section of people and there by create an upward spiral of wealth and prosperity.
CSR is about conscience of a corporate in realizing itself to be a corporate citizen of our nation. However, to decode CSR consideration must be given in accordance with the provisions mentioned in Section 135 of the Companies Act, 2013 as well with certain very important questions & clarifications. Having mentioned about the true intention of the Section above it has got its own major visible infirmities which are worth to be taken into consideration.
Are CSR provisions in conformity with the principles of constitution?
To analyse this issue, we have to refer to Constitutional mandate containing Article 14, Article 19(1)(g) & Article 31(c).
Article 14 guarantees equality among class and also reasonable classification amongst it. Article 19(1) (g) deals with free trade business & activities without any unreasonable restrictions and Article 31 (c ) provides a saving passage to a statutory provision in a given case.
Now, Section 135 if to be read on the touchstone of these above mentioned constitutional principles in brief it suggests that section 135 requires a fresh look by the law makers.
Article 14 vis-à-vis section 135:
Article 14 of the Constitution guarantees to every person, equality before law and equal protection of law within the territory of India.
Article 14 however allows reasonable classification of the subjects of the legislation. The classification however must not be “arbitrary”, “artificial” or “evasive”. It must be based on a substantial ground having just and reasonable bearing to the object sought to be achieved by the legislation.
The Supreme Court has consistently ruled that classification is valid only if (i) it is founded on an intelligible differentia and (ii) the differentia has a rational relation to the object sought to be achieved by the statute in question.
There may be different situations amongst the companies where in a company may satisfy the criteria mentioned in section 135 on the basis of net worth or turnover yet at the same time not making profit & correspondingly incumbent upon a company to contribute as a part of the mandate. A loss-making company’s obligation to contribute to CSR is the same as that of a profit-making company. Therefore it leads to arbitrariness and showcasing lack of intelligible differentia, which in my humble opinion creates a situation resulting in violation of Article 14.
Article 19(1)(g) vis-à-vis section 135:
It is worthwhile to note that looking to salutary provision of Section 135 meant for casting a social responsibility upon the corporates unfortunately other forms of business organizations like LLP, Partnerships, AOP, BOI and other large sale business organizations though having bigger net worth, turnover or profits are not mandated for discharging social responsibilities.
This leads to unreasonable restriction upon only company form of organizations & thereby has got the effect of violation of 19(1) (g). Basically Seventh schedule related to this section 135 is akin to Directive Principles of State Policy which is primary responsibility of state to observe & therefore this section has got the effect of switching over state’s obligation to the Companies & it appears that it reflects an unreasonable restriction on the company to its free trade.
Article 31c vis-à-vis section 135:
Apparent wordings of Article 31c give an impression that section 135 is saved by this Article but an analytical view of section 135 reflects an altogether a different situation.
Article 31C validates laws made by the state for giving effect to the directive principles of state policy set out in Part IV of the Constitution, even where such laws infringe fundamental rights granted under Part III of the Constitution. However, the Act expressly does not clarify or signify as to whether Section 135 seeks to implement any directive principles of state policy. Even the statement of Object and reasons based on which the new Companies Act was passed never mentioned the object of furtherance of the duties laid down in directive principles of state policy. Therefore in such an ambiguous situation it does not seem to be safe to allow this provision to seek shelter of Article 31c.
Therefore in above mentioned circumstances, it creates a serious doubt about validity of section 135 which requires at an appropriate stage, a fresh look.
Does the Section provide effective mechanism for implementation & carrying out the object of section?
There is no independent agency to monitor effective implementation & the object of Section 135 & it appears that mechanism to implement or not is left to the discretion of the Directors. Therefore there is a serious possibility of provision to be frustrated at the behest of Directors. The Directors by giving fallible reasons in the Board Report may find the escape route and save the company from expense. This “comply or Explain” approach lessens the effect of the mandate. Therefore in the absence of independent check, in this situation, section itself can lose its true essence.
Is CSR distinguished from corporate philanthropy?
There is a thin line of difference between CSR & Corporate philanthropy. Corporate philanthropy is a company’s way of giving back to its community — local, regional, national or international. Corporate social responsibility not only deals with corporate philanthropy but also other issues that affect the environment, consumers, human rights, supply-chain sustainability and transparency for the greater good of the world at large.
Thus, Corporate Philanthropy is just a subset of Corporate Social Responsibility. Hence, companies to which the CSR provisions are applicable must keep in mind the wider picture as laid down by the section also keeping in mind the activities mentioned in Schedule VII. Also, in consonance with the activities laid down in Schedule VII, following things shall be taken into consideration for effective implementation of the Section.
CSR activities do not include activities undertaken in normal course of the business, any activity which is not in consonance to Schedule VII, Contributions directly/ indirectly to political parties & activities/projects/programs that benefit exclusively the employees of the company or their families.
Revenue generation from CSR activities:
The provisions and rules appear to be silent on the treatment of the revenues/surplus generated through CSR activities/projects/programs. Though generation of surplus from CSR activity/project/program is not intended but possibility thereof can’t be ruled out.
Certainly, CSR has the potential to become an Agent of transformation. Implementation of CSR provisions in itself is a noble initiative. But for Corporate Leaders to become front runners in this segment & for the fulfillment of the true purpose of the provisions laid down, the same shall, in my humble opinion, be free from above infirmities mentioned in this Article. Also, CSR provisions are more of rectifying the impairment caused to the environment & society at large while pursuing the normal business operations, a flat cost of 2% for it may become a cause of concern for many companies & at a higher level may become a point of debate.
For decoding CSR & for it to be implemented in true Letter & Spirit, it requires pondering on some very important questions rather than literal interpretation of the Section.
Contributed by: Ms. Palak Shastri, Secretarial Executive, Shilpi Thapar & Associates, Company Secretaries, Ahmedabad.
Disclaimer: The views mentioned in above articles are contributor personal views and M/s. Shilpi Thapar & Associates (STA) doesnot hold accept any responsibility. STA is not in any way responsible for the result of any action taken on the basis of views mentioned in this Article. This is not professional advice.