Impact of Companies Amendment Bill 2020 on the Corporate Social Responsibility

The article shall discuss the meaning of corporate social responsibility. It shall also discuss in detail the legal provisions governing the same and at the same time, the amendments that have been brought in respect of corporate social responsibility matters. The article aims to highlight the Companies Amendment act, 2019 and Companies Amendment Bill, 2020 along with their impact.
Estimated Reading Time: 9 minutes

Introduction

Through the Companies Act of 2013, the concept of corporate social responsibility was legalised in India, and then India became the first country which creates a mandate on fulfilment of corporate social responsibility by the companies or corporates. India is the first country to enact a law which governs corporate social responsibility matters. It is very important to ensure that companies are making a contribution towards society because every country’s goal is to achieve sustainable development. We all need to be aware of climate change and our responsibilities towards the same. Since the companies take many resources from society and at the same time their customers are also members of society, thus, the companies are required to give back or contribute towards society as well. Corporate social responsibility promotes this idea. This article shall discuss the meaning of corporate social responsibility. It shall also discuss in detail the legal provisions governing the same and at the same time, the amendments that have been brought in respect of corporate social responsibility matters. The article aims to highlight the Companies Amendment act, 2019 and Companies Amendment Bill, 2020 along with their impact.  

Meaning of Corporate Social Responsibility

The Companies are corporate structures, but it cannot be denied that they operate in the society and interact with the societal structures which make it important for these companies to make some contributions to the society as they use the resources from the society itself, for performing various business activities. Thus, the companies are expected to make investments in matters pertaining to the social and environmental benefit, since it is the people from the society who are stakeholders of the company. This allows companies to fulfil their commercial interests and at the same time, making a contribution towards society as well. These activities have a very broad scope and vary from activities like financing educational institutions, providing scholarships to students, arranging environment protection programmes and other philanthropic societies which are basically aimed at helping the society at large. The basic idea is that companies have to return the benefits they incur from society. The main aim is to ensure that the companies, while taking steps towards the benefit of society, are able to achieve the goal of sustainable development. The companies need to be ethical and focus at inclusive growth rather than focus on their personal growth at the cost of society. They should value their employees and members of the local community. [1]

Need of Corporate Social Responsibility

If any company fulfils its corporate social responsibility, then it earns a lot of respect and goodwill in the market. Since a company is addressing its responsibility towards the society, more people would be willing to associate themselves with companies and become employees of the company. They will prefer to work with companies in the long run. Even if the customer base is concerned, customers will be willing to purchase goods or services from a company which addresses its societal responsibilities. It will create a brand value for products being sold by the company. Also, when the companies are ethical and do not engage in activities that harm the society, then they will face very few legal barriers and challenges. The companies are able to help in the development of the nation by contributing towards the society. When the corporates will themselves protect the environment, then it will benefit nature as lesser harm is being inflicted, in the present scenario, everyone wants and wishes for a cleaner and greener environment. It also enables the companies to have and interaction with its employees and other stakeholders and thereby understand their needs. Thus, the companies are able to meet their stakeholder’s needs in a better way. The companies need to change their image from exploiters to facilitators of development, and corporate social responsibility provisions can help the companies in this image transformation. [2]

Companies Act, 2013 in respect of Corporate Social Responsibility

The fulfilment of CSR by companies was made mandatory by the Companies Act, 2013 through a notification issued on 27 February 2014. As per legal provision under section 135 of the Act, Companies which either have a net worth of the company as Rs. Five hundred crores or more, or, the company has an annual turnover of Rs. One thousand crores or more, or it has annual profits amounting to Rs. 5 crores, have to comply with the corporate social responsibility requirement. They have to mandatorily form a committee that will be aimed at fulfilling the CSR of the company, it shall consist of 3 directors, and one of them will be an independent director. This committee has to perform various functions. This committee has to create a policy to further the CSR objectives of the company. It is responsible for making the allocation of funds towards the fulfilment of corporate social responsibility. Then it is further responsible for auditing the funds to ensure they are properly used for the purpose they were designated. It will ensure that the company executes its CSR activities duly. The committee can make adviceto the board of directors in respect of CSR objectives of the company, and the board is bound to accept the advice given by the committee. The committee is also responsible for ensuring that the company is using funds to the extent of at least 2% of its net profits towards the fulfilment of corporate social responsibility activities.[3]

Features of Corporate Social Responsibility 

As per legal provisions, it is mandatory to include the amount spent by the company on performing CSR activities, in the profit and loss report of each year for the company. These rules pertaining to corporate social responsibility are applicable to all kinds of companies, including the holding companies, subsidiary companies along with foreign corporate organisations that carry out business functions in India. The schedule VII of Companies Act 2013 gives a detailed account of activities that can be performed by companies to discharge their CSR. It will include “eradicating hunger and poverty, promotion of education and employment, livelihood enhancement projects, promoting gender equality, women empowerment, hostels for women and orphans, old age homes, daycare, environmental sustainability, protection of flora and fauna, contributions to PM relief fund, measures to benefit armed forces veterans, war widows and dependants, promotion of sports, and rural development projects.” [4]

It is already known that every company has to make a contribution towards corporate social responsibility, of an amount that is at least 2% of company’s net profits, the company can calculate this net profit as per the provisions laid down under section 198 of Companies Act, 2013. A company is permitted to perform corporate social responsibility functions in any manner as have been discussed in the following paragraph. [5]

The company can set up a trust that will perform the functions towards the fulfilment of corporate social responsibility on behalf of the company, and such trust can be established under section 8 of Companies Act, 2013. Such a trust will be under the direct control of the company. Apart from this, the companies may even choose to outsource their corporate social responsibility to organisations that are engaged in not-for-profit activities and supervise these organisations which have been entrusted with the responsibility by company. The companies are also allowed to work collaboratively with other companies towards the fulfilment of corporate social responsibility. However, there are some rules which need to be kept in mind by the companies. If any member of a company makes charity on a personal basis then such charity will not be counted in activities performed to discharge corporate social responsibility. If any activity is conducted outside the territory of India, then it shall not qualify to be a corporate social responsibility activity validly. [6] Now, in order to build the trusts and outsource agencies for fulfilling corporate social responsibility, the company is permitted to make an expenditure amounting to a maximum 5% of the company’s total expenditure. The activities which cannot be considered as valid corporate social responsibility activities include, activities related to operations and administration of the company’s business, the activities which are not carried out within the territory of India. Activities carried out by the company with the objective of welfare of the employees of the company, financial help provided by companies to political organisations are not included in corporate social responsibility activities, any lawful duty performed by companies in compliance to provisions of statutes such as the Labour act, or Land Act etc.[7]

Companies (Amendment) Act, 2019

The amendment in respect of CSR of companies had aimed to ensure compliance with corporate social responsibility activities by making the norms stricter and more tightened. The companies, through this amendment, could make a transfer of the amount that they could not spend towards fulfilling corporate social responsibility in the particular year, in a separate account and the amount has to be duly spent within three years from the date of transfer to separate account. After this amendment, if any company is not complying with the provisions of company law pertaining to corporate social responsibility and not discharging functions in that respect, then the Registrar of companies is permitted to take action against such company and remove its name from the register of companies. [8]

Companies (Amendment) Bill, 2020

The Companies (Amendment) Bill was laid before the parliament on 17 March 2020. It is known that the companies are required to set up committees consisting if three directors one of whom shall be an independent director, in order to discharge their CSR as has been imposed on them through Companies Act, 2013. However, this amendment has changed the rule, now the companies which have an obligation of spending an amount up to 50 lakhs towards their CSR, are not required to set up such committees mandatorily. Such companies are exempted from the requirement through this amendment. This provision has created a relaxation for companies falling under this category, at the same time, the responsibilities that had to be performed by the committee will now be performed by the board of directors. Apart from that, the companies which are eligible for performing CSR functions under section 135 of Companies Act, 2013 are allowed to set off any excess expenditure. It means that in case if a company spends extra amount over and above the amount of 2% of net profit, towards its CSR, then it can set off this excess amount from the liability in respect of corporate social responsibility in the subsequent financial years. The main purpose of the amendment was to allow such companies to recover any extra expenditure made by them towards CSR in a particular year, in the following financial years. [9]

Apart from these two changes as above the amendment has increased the penalty that can be imposed on companies, on their failure to comply with corporate social responsibility provisions from Rs. 25,00,000 to Rs. 1,00,00,000, on the other hand, imprisonment has been struck down or removed for officers to fail to comply with corporate social responsibility provisions. A greater punishment has been proposed through this amendment bill, and it will inflict a greater financial burden on companies if they escape from their responsibility towards the nation and society. This will ensure that the companies are taking their responsibility towards society seriously and are willing to contribute towards the benefit of society, it either may be from the fear of sanction or voluntarily. [10]

Conclusion

It is essential to ensure that the companies are acting as facilitators of development rather than being exploiters only. The companies need to become aware of their responsibility towards the society at large. The concept of CSR ensures the same by imposing penalties on companies that do not fulfil corporate social responsibility. The amendment as has been proposed through a bill in 2020 aims to reduce the burden to a certain extent and at the same time, ensuring greater compliance by imposing greater financial penalties.


[1] Dr. G.K. Kapoor; Dr. Sanjay Dhamija, Company Law-A Comprehensive Text Book on Companies Act 2013 118 (22nd ed. Taxmann, 2019).

[2] B.K. Goyal, Company Law 201 (13th ed. Singhal Law Publications, 2018).

[3] Avtar Singh, Company Law (17th ed. Eastern Book Company, 2018).

[4] P.P.S. Gogna, Textbook of Company Law 208 (11th ed. S. Chand & Co, 2015).

[5] Avtar Singh, Supra, 185.

[6] Saurabh Kumar, Corporate Social Responsibility under Companies Act,IPleaders (28 June 2018), https://blog.ipleaders.in/csr-laws-india/.

[7]Anupriya Saxena, Companies Amendment Bill 2020: Proposed changes in Corporate Social Responsibility, CAclubindia (19 March 2020), https://www.caclubindia.com/articles/companies-amendment-bill-2020-proposed-changes-in-corporate-social-responsibility–40774.asp. 

[8] Saurabh Kumar, Corporate Social Responsibility under Companies Act,IPleaders (28 June 2018), https://blog.ipleaders.in/csr-laws-india/.

[9] Divesh Goyal, Key Takeaways from Companies (Amendment) Bill, 2020, Taxguru complete tax solutions (17 March 2020), https://taxguru.in/company-law/key-takeaways-companies-amendment-bill-2020.html.

[10] Shubhangi Pathak, India: The Companies (Amendment) Bill 2020 – A Welcome Change To Business And Commerce?,Mondaq (5 May, 2020), https://www.mondaq.com/india/corporate-and-company-law/928620/the-companies-amendment-bill-2020-a-welcome-change-to-business-and-commerce

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