India is probably the only country to have enacted corporate social responsibility (CSR) into a law. The world over CSR is all about business models and not philanthropy. It is internal and not external. It is only in India that it has been made external. Section 135 of the Companies Act, 2013 (“Act, 2013”) talks about spending 2% of the average net profits of the company in social activities as mentioned in Schedule VII of the Act, 2013
. Earlier the Section was a “comply or explain” (COREX) provision, wherein non-spending of the CSR amount was required to be reported by the company in the board’s report of the company.
In the United Nations and Europe, much attention has been devoted to defining CSR. The definition of CSR includes the following: guidelines, codes of conduct, or pledges encompassing positive corporate action across dimensions such as economic, social and environmental value creation, stakeholder relations and voluntariness). Among the most globally influential CSR guidelines or standards are the Organisation for Economic Co-operation and Development (OECD) Guidelines for multinational enterprises and the goals embodied in the United Nations Global Compact.
The OECD Guidelines, though intended to provide voluntary principles and standards, have been recognized by OECD “adhering countries” as well as other countries, as “recommendations jointly addressed by governments to multinational enterprises”. However, the guidelines are not intended to be legally binding or enforceable. The provisions of CSR have developed in the United Nations and Europe as a concept that is aimed at “business beyond compliance with the law and beyond shareholder wealth maximization
”, which means that it is a voluntary compliance by businesses.
Although the provisions have not been enforced currently, there are grey areas which are worth discussion by the ministry in due course of time.
Requirement under the Law after the Amendment
The revised Section 135 of the Act, 2013 requires the following:
a) Transfer of the unspent CSR amount to a Fund as specified in Schedule VII --Such as the Prime Minister’s National Relief Fund, Clean Ganga Fund etc. where it does not relate to any on-going projects within 6 months from the end of the financial year.
b) Transfer of the unspent CSR amount to Unspent Corporate Social Responsibility Account where it belongs to an on-going project, within 30 days of the end of the financial year.
Further, such amount is to be spent in the next 3 financial years, failing which the same shall be transferred to a Fund as mentioned in Schedule VII of the Act, 2013 after the end of the 3 financial years.
Transfer of Unspent CSR Amount to a Fund
The recent amendment to Section 135(5) of the Act, 2013 incorporating the “comply or be penalized” rule that requires the company to transfer the entire unspent CSR amount to a specified fund, means that once the financial year has ended, the company is straightaway obligated to transfer all the unspent CSR amount, except the ones which are being utilized for ongoing projects, to the Fund. Naturally, that would mean that all unspent CSR amount will switch from the company’s control to the Fund’s control which will be then utilized by the government in a centralized manner.
Transfer of the Amount Getting Utilized in On-going Projects to Unspent CSR Account
Section 135(6) of the Act, 2013 has been newly inserted to provide that where there are on-going projects in the company as per the conditions specified, the company needs to transfer the unspent amount in a special account to be opened by the company, named as “unspent corporate social responsibility account” within 30 days from the end of the financial year. Further, even after transferring the amount to the unspent corporate social responsibility account, the company needs to make sure about its spending within a period of 3 financial years, failing which it will be transferred to a fund as mentioned in Schedule VII of the Act, 2013 within the next 30 days from the date of completion of the 3rd financial year.
Impact of the Amendment and Grey Areas Left
The amended section says that there will be certain conditions prescribed, on the fulfilment of which a project shall be regarded as an on-going project. One will be able to determine a project as an on-going project, only once the rules are in place. Further, since the company is anyway required to spend the unspent amount in the next three financial years, whether that would mean that the maximum period for an on-going project will be 3 financial years upon which the amount will be transferred to the specified fund? Here, we may take an example of real estate projects such as building of a hospital or a school, where the expected time for completion of the project might be beyond 3 years depending on its size and the project cost.
However, this may not be surely the intent as the law cannot compel to complete projects within 3 years where the expected time for completing it goes beyond 3 years.
Whether Committed Disbursement Would Mean the Project Is ‘On-Going’?
There might be situations where a company has agreed for disbursement of an amount before the end of the financial year; however, due to practical difficulties, the actual disbursement has not been made or the project for which the disbursement has been committed has not started or initiated. In the former case, companies might be in a hassle-free situation as all they will be required to do is to identify projects and fix up an amount for spending towards it. On the contrary, where the latter is the case, and the project has not started, it will not be correct to regard the same as “on-going”. So, there might be several situations for considering a project as “on-going”, some of the illustrative ones are the following:
a. Where the company has identified projects and has committed a disbursement towards it but the actual disbursement is not made.
b. Where the company has identified projects and made the disbursement but the project has not started.
c. Where the company has identified projects, made the disbursement and the project has just commenced.
However, the actual meaning of “on-going” will be clear only once the rules are in place.
Difficulties In Case of Implementation through Trust or Implementing Agencies
Another major issue which the companies will face is companies spending the CSR amount through trusts or implementing agencies. Several companies have group-wide channelizing agencies where all the group companies transfer a lump-sum amount to the trust which in turn spend the amount into different CSR activities. Generally, the funds are co-mingled. Since, a trust is nothing but a conduit of channelizing funds, merely transferring the money to the trust is surely not the intent of law. Accordingly, any amount remaining unspent with the trust should be transferred either to the unspent corporate social responsibility account or to the Fund. Further, where the company does not have group-wise conduit in the form of a trust, the company makes CSR spending through implementing agencies, for example, the non-government organisations (NGOs). In case of spending through implementing agencies, companies do not have any control over the implementing agency. All that is required by the companies is to periodically monitor the spending by the implementing agency.
With the implementation of the new provision, such practice also needs to be reviewed.
Opening of Unspent Corporate Social Responsibility Account
The new provision provides no clarity on whether a company is required to open “Unspent Corporate Social Responsibility Account” project-wise or whether there will be a single account managed for all on-going projects.
With the switch from the corex to a “comply or be penalized” provision, any non-compliance with the new requirements of law would invite the following penalties:
i. Company to pay a fine of Rs50,000 - Rs25 lakh
ii. Every officer to pay a fine of Rs50,000- Rs5 lakh or imprisonment of up to 3 years, or both.
The provisions seem to be strictly levied on all companies but shall require a lot of clarity for its practical implementation. Till such time as the rules are in place and the amendment is made effective, the companies may plan accordingly in order to comply with the provision.
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(The writer is manager in corporate law division at Vinod Kothari & Co)