New Company Law: Doing Business with the "Compulsory" Corporate Social Responsibility

While Corporate Social Responsibility is meant to be a voluntary expression of a feeling of contribution, the new Companies Bill has made it compulsory for a large number of companies.

Hence it is important that we quickly go over the legal provisions.

Sections 135, Schedule III and Schedule VII of the Companies Bill 2012 deal with CSR.

To whom it will CSR be applicable

Section 135 of the bill defines the companies for whom formation of Corporate Social Responsibility Committee of the board is mandatory.

• Every company having net worth of INR 500 crore (INR 5 billion) or more, or
• Every company having turnover of INR 1,000 crore (INR 10 billion),
• Where the net profit has been greater than or equal to INR 5 crore in any financial year.

While this may not be critical to start-ups, every company hopes to be earning very well soon, so it may very quickly apply to young companies as well.

Formation and role of Corporate Social Responsibility Committee

The CSR Responsibility Committee of the Board will consist of 3 or more directors. Out of this at least 1 director shall be an independent director.

The Board of every company shall ensure this:

a. that the company undertakes activities as per CSR Policy and

b. spends, in every financial year, at least two per cent of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy.

What if the Company fails to spend the aforesaid amount?

If the company fails to spend such amount the company will have to specify the reasons for not spending the amount in the Mandatory Reporting required to be made under section 134 (3) of the Bill.

Activities to be included in CSR Policy

Schedule VII of the bill provides for following activities to be included in CSR Policy of the companies.

1. Eradicating extreme hunger and poverty
2. Promotion of education
3. Promoting gender equality and improving maternal health
4. Reducing child mortality and improving maternal health
5. Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
6. Employment enhancing vocational skills
7. Social business projects and
8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development and relief and fund for the welfare of the SCs, STs, OBCs, minorities and women.

Doing Business via CSR

Not to be cynical, but a business can get away by just focusing on Points 6 and 7 (which are essential to build your business anyway) and show it as CSR expenditure.

For all businesses worried about the compulsory investment of 2% of profits, this should come as some relief. For others, you have multiple other avenues to invest to promote social good.

- By Vedang Mishra and Hrishikesh Datar