CSR Under Companies Bill 2012

CSR Under New Company Bill 2012:

The Companies Bill 2011 was introduced in the month of December, 2011 in the Parliament and referred to Parliamentary Standing Committee on Finance  which submitted its report in June, 2012 based on which the Bill of 2011 was amended on recommendations of the said committee. It was passed by Lok Sabha on 18th of December, 2012 subsequently by Rajya Sabha on 8th of August, 2013. It will be called the Companies Act,2013 after presidential assent is accorded to it. It is awaiting the assent of the President to become an Act whereupon the dates shall be notified by the Central Government so that the Act comes in to force from such date. But in the meanwhile, wait is not far from over as MCA will need to frame rules which it has to formulate to make the law finally operational. There are still certain Acts which await rules being framed but remains in abeyance to be operationalised though such a fate is not in the slightest doubted even remotely in this important piece of legislation.

The new Companies Bill  2012 with twenty nine chapters, 470 clauses against 658 Sections in the present Companies Act, 1956, and seven schedules provides for certain modern day corporate practices and realities with a separate miscellaneous section to deal with many matters that may not find recourse in other chapters on punishments on false evidence, general penalty where no penalty is provided elsewhere, wrong use of private or public limited, condonation of delays besides others with power of central government to remove difficulties and make rules.

Under the new mandate which awaits the formal signing by the President of India after having been approved by both the Houses of Parliament, the companies would now be required to spend towards corporate social responsibility.

Under Section 135, the companies with a net worth of Rs. 500 crore or more or turnover of more than Rs. 1000 crore or net profit of Rs. 5 crore or more during any financial year, would ensure that it spends at least 2 percent of their past three immediate preceding years' average net profit towards CSR in pursuit of their corporate social responsibility policy as laid down by the CSR committee of the Board every year. The said committee duly constituted by the Board shall consisting of three or more directors out of which one director shall be an independent director. The committee shall formulate CSR Policy indicating the activities to be undertaken as specified in Schedule VII. The profits for this purpose shall be calculated as per Section 198 which in fact stipulates the calculation of profits for the purposes of total managerial remuneration payable by public company to its directors and managerial personnel under S.197 subject to the provision of Schedule V specified percentage of profits.

The activities included in the schedule VII referred to above relates to eradication of hunger and poverty, promotion of education, empowering women and improving maternal health, child mortality, combating HIV, AID, ensuring environmental sustainability, vocational skill enhancement, social business projects, contributing to PMNRF or other funds etc., and such other matters as may be prescribed. These activities read like a wish list of any government willing to undertake upon being elected to power like eradication of poverty and hunger, a slogan handed out to us since the days of Indira Gandhi regime but still unmet, to be met now by corporates under the new dispensation.

The total spend based on registered companies in India would tantamount to about Rs. 18000 crore according to some estimate by a think tank. There are companies which still spend on such activities though this would now increase the amount spent on such activities and the major chunk of these expenditure would come from public sector undertakings. It is estimated that top hundred companies would spend Rs.5611 crore as per a report published by the Forbes India magazine.

The new dispensation does not stipulate any penalties for not spending on CSR activities but are required to justify their non compliance in this regard. The rules being framed in this regard are expected to specify ten to fifteen such activities which could possibly include spends on education, rural skill development and sports within built in safeguards.

There are quite many such initiatives already undertaken not only in India by Wipro's Premji, Birlas and Tatas but outside India by the like of Bill Gates under his charitable initiative namely Malinda Foundation doing commendable work in India too besides Warren Buffet, Ford Foundation and others of the ilk.

There is a lurking fear that what is started as non punitive measure may not become mandatory later on. There are other concerns which need to be visualised as under:

The CSR activities should not involve any activity having any political leanings in the shape of charitable activities otherwise the whole concept of lofty philanthropy would get frustrated. There is S.182 for donation to political parties slithering silently in to the body of the Bill and embodied in to the Act providing for contribution directly or indirectly to any political parties up to seven and a half percent of its net profits of last three years. This may be require many professionals to look into it to pass critical judgment or comments in view of electoral reforms in the political system, the crying need of common citizen where illicit funds enter into election fray. The said expenditure is not mentioned in the expenditure allowable for computation of net profit for CSR under S.198. The Income Tax Act with effect from 1st of April, 2010 allows donations to political parties as well as political trust under S.80GGB or 80GGC by companies or persons respectively in income computation. Jayantilal Ranchchoddas Koticha v. Tata Iron & Steel Co. Ltd. (1957) 27Comp.Cas.604 disfavoured it with castigating remarks rendered in the judgment by Chagla CJ that such contributions pose inherent danger.

The law is there finally arriving after a decade of dilly dallying stuck up in the throes of procrastination which initially was referred to JJ Irani committee.

The law fixes the responsibility which otherwise is appropriately that of the union government. The government too should devote the tax payers' money to the issues which it tries to get addressed through the companies after sixty six years of independence than fritter away the precious resources in freebies instead of using the same for health, education and upliftment of the masses through development projects roads, bridges connecting the rural areas to the markets. The activities now ladled on to the plate of companies, falls essentially in government's domain.

There may be an attempt by those who are already spending hugely through their trust or institutions to stop it largely and source it through the companies they hold to meet the requirement of law. In this case of the matter the very purpose shall be defeated.

The CSR initiative needs to be backed up in DTC which is also likely to be made applicable in the year to follow and even in the present I.Tax Act, 1961 so as to avoid any denial of the expenditure incurred which may not have direct nexus with the business expediency even though statutorily allowed under the new Companies Bill 2012.

The government of the day may also be aware that there are companies which operate on wafer thin margin of just two to five percent besides paying for the huge debt burden and to ask them to meet CSR obligations would be too much for the asking as they may be earning more than five crore  net profit but that is paltry considering the huge investment made requiring cash flows to service the debt instalments besides interest or considerable low margins which may be needed to be retained for being ploughed back to sustain growth. Would it then be a suitable reason for refraining from the onerous obligation of CSR?

The computation of net profits is to be arrived at on different parameters as cited above under S.198 which allows or disallows items to be taken into account for arriving at the net profits. It allows item of sub- section 2 for credits to be taken while disallowing credits enumerated in sub-section 3 principally the capital nature receipts including premium on shares or debenture. Further, it allows sums mentioned in sub section 4 all the usual working charges, directors remuneration, interest on debentures and mortgages, loans, contribution made bonafide towards charitable and other funds under S.181 up to certain limits, depreciation to the extent specified in S.123, bad debts etc., but disallows items in sub section 5 being income tax and loss of capital nature and any voluntary damages imposed by the company on itself.

It appears that after debiting of directors remuneration which in some cases is huge say in JSW or JSPL, the profits left would be quite substantially lower as the remuneration to all managerial personnel could go up to eleven percent of the net profits before debiting this expense. Such remunerations could go further up subject to approval of Central Government.

The CSR should continue to be voluntary and it should not be mandatory as it may not be a matter of litigation where companies may come with the argument that they are spending or being forced to spend on matters which under the statue falls in government's domain or under the relevant Articles 43 to 47 of the Directive Principles of State Policy falling under Part IV of the Constitution of India and the latter is appropriating companies profit in the disguise of CSR amounting to a tax on profits or violating of Article 19(1)(g) of the Constitution of India.

Contributed By: CA. V.K.Kalia