The Companies Bill of 2009 and the latest Companies Bill of 2011 mandate that companies falling in a certain category allocate at least 2 per cent of their average profits over the previous three years to corporate social responsibility initiatives.
These initiatives include eradicating extreme hunger and poverty; promotion of education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating the human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; ensuring environmental sustainability; employment enhancing vocational skills; social business projects; contribution to the Prime Minister's National Relief Fund or any other fund set up by the Union Government or the State governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women. The CSR initiatives have to be mentioned in the financial statements.
The Companies Bill 2011 has proposed that the disclosure of the financial statements contain inter alia “the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year” [Clause 136 (6) (o)]
Every company having a net worth of Rs 500 crore or turnover of Rs 1,000 crore has to constitute a “CSR Committee of the Board” consisting of at least three directors and out of these three, one has to be an independent director.
This is a fool-proof provision ensuring that the committee is not just a quasi-committee addressing the whims of the board, but is in fact, taking up an initiative.
These companies have to spend minimum 2 per cent of “net profits” (average of last three years) towards CSR policy. If not spent, the board has to give detailed reasons for not spending on CSR in the Director's Report.
Duties of the committee as per Clause 135
The main role of the committee is to formulate and recommend to the board a Corporate Social Responsibility Policy which should indicate the activities to be undertaken by the company.
Additionally, the committee has to also recommend the quantum of expenditure to be incurred on these activities.
Finally, the committee has to monitor the Corporate Social Responsibility Policy of the company from time to time.
A critical look
This provision has come in for some serious criticism. First, it has been said that this provision is very taxing. Adding another committee to an already complex set of requirements is not going to make life any easier for companies.
Second, there is no clarity on the taxation angle. Will this amount (invested towards CSR) be eligible for tax deduction?
From a public policy angle, this is tantamount to the Government trying to ‘outsource' its responsibility towards our people.
When the Government is already severely taxing us for its social spending, why additionally burden corporations?
Why not let them focus on benefitting their stakeholders?
And many companies already do immense amounts of CSR without a debilitating regulation of this nature.
The best criticism is that there were simpler ways to incentivise companies to contribute to CSR than to add bureaucratic mechanisms such as CSR committees and mandatory CSR.
A simple tax-based incentive scheme might have worked much better.
Martin Luther King said that there was never a wrong time to do a right thing.
As India Inc is finally finding its feet, this is a classic case of the wrong thing being done at the wrong time.
(To be continued)
(This column has been contributed by vakilsearch ( >www.vakilsearch.com ), an online legal guidance and legal solutions provider.)