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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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