Individual assignment 2 | Section 135 | DCCI | Tanushree Barua | 0076/57

Question A: What changes have been made in the CSR regulation and rules, i.e,
Section 135 of Companies Act since 2014?

About
What is CSR? It’s a concept where companies consider the interests of the society and the
environment other than profit and growth as a part of their answerability towards various
stakeholders, employees, consumers, environment, communities, etc. India became the first
country to legally mandate corporate social responsibility on April 1, 2014, before that
companies used to term it in very vague terms like ‘A way of life’. It was introduced as a
statutory obligation for all the companies by enacting the Companies Act 2013 - Section 135.

Regulations before
Companies having either of the following are mandated to form CSR committee with Board
of Directors Companies -

1. Net worth > 500 crores

2. Turnover > 1000 crores
3. Net profit > 5 crores

Also, the provisions of CSR applies to:

● Every company
● Its holding company
● It’s subsidiary company
● Foreign company

The CSR committee aids in formulating, recommending and monitoring CSR policies and is
required to clearly mention the activities, projects that will be undertaken under the purview
of Schedule VII of the Act. In addition to this, an estimate on the amount of expenditure to
be incurred in functioning of these activities is also to be stated. Under this umbrella,
following activities can be conducted which are enumerated in Schedule VII as follows:

Additionally, it requires the board of directors to ensure a spending of at least two percent
(2%) of the average net profits made by it during the three (3) immediately preceding
financial years in pursuance of its CSR Policy. On failure to do the same, the companies
were also required to specify in the annual report filed by it in its general meeting, the
reasons for not being able to spend the stipulated amount.

Critique
● The activities listed which may be included by companies in their CSR policies seem
vague and unclear paving way for both confusion and fraud.
● Technically these issues are taken up by the govt for the welfare of its people, it
might hint at shrugging off the responsibility or incapability to take care of its people.
● Some argue these investments are mere drops in the ocean which might not lead to
sustainable improvement in the chosen sectors, the part the government hasn’t been
able to achieve uptill now.
● Benefits are reaped by the already industrialised areas as corporates spend only
where they are already invested. The regulation relates to the linking of a company’s
profit-making with the development of local areas around which they operate.
● Focusing only on local areas would lead to an increase in inter-state disparities in
social indicators.
● Losses bring down the number of companies mandated to participate in CSR which
is a drawback in times of recession, when it is an urgent need for help for the
disadvantaged.

New amendments
The Companies Amendment Acts of 2019 and 2020 have resulted in some considerable
changes in the CSR provision as per Section 135. New rules -
● Mandated for companies of a certain turnover and profitability to spend at least two
percent of their mean net profit for the last 3 years on CSR.
● Inclusion of companies which haven’t completed the period of three (3) financial
years from their incorporation.
● Unspent amount from the total dedicated amount for CSR remains, pursuant to any
ongoing CSR project in accordance with its CSR policy, the company is then required
to transfer this amount to a special account within a span of 30 days from the end of
the financial year. A special account is required to be opened in the name of Unspent
Corporate Social Responsibility Account in any scheduled banks. The amount that
has been carried forward to the CSR Account must be spent in accordance with the
CSR policy within the stipulated time period of three (3) financial years starting from
the date of such transfer. The company should transfer this unspent amount to a fund
specified under Schedule VII of the Act[2] on failure to do the same.
● Penalty for Non-compliance invites a fine of minimum 50,000 rupees and can go up
to 25,00,000 rupees. The managers involved in the offence will be punished with
imprisonment which might get extended to 3 years or a fine not less than 50,000 to
25,00,000 rupees, or with both.
● To ensure compliance of the provisions of Section 135, the Central Government has
the authority to give general/special directions to a company or a class of companies.
● Amid the COVID-19 pandemic, the Ministry of Corporate Affairs has informed that
companies' expenditure to fight the outbreak will be viewed as valid under CSR activities.

Conclusion
These strict penalties introduced to ensure the proper implementation of the CSR related
provisions have left some companies in a state of panic. Some reports suggest that the
Central Government won’t operationalize the CSR provisions mentioned in the Amendment
Act that make violations punishable by imprisonment. A high-level committee on CSR has
been set up according to which the penalty might be increased to two-three times the default
instead of imprisonment. It is further suggested by the Committee to include limited liability
partnership firms as well as banks under the CSR provisions.

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Question B: How have companies fared on spending on CSR since the introduction of
Section 135?

● It has been observed that the Companies in India respond better to the mandatory
CSR with the almost Rs. 8800 Crore in the 1st reporting year. The total amount of
investment in Indian Companies was predicted to cross Rs.50,000 Crore by the year
31st March 2019 with the mandate.
● The number of companies disclosing their CSR policies to the public has increased
from 95% to 98%.

● The increase in companies disclosing their information is from 79% (2014-15) to 94%
(2018-19) – they are more strengthened under the governance structure that both
manages and aligns the CSR funds.
● In 2018-19, the companies disclosing their CSR spends in their annual reports
increased from 36% in 14-15 to 99% in 18-19.

● The mandate of formation of Board-level committee may result in rise from 10 % from
2014-15 to 100% in 2018 – 19 indicating good governance at board level.
● Only 22% of companies failed to spend the amount as prescribed in the annual
report in 2018-19 from 60% in 2014-15, showing an improvement
It can be said that CSR Practices are strengthened in India year by year since implementation.

Examples of successful CSR activities -

● ITC Group was successfully able to create job opportunities for over 6 million people
through its CSR activities; it introduced the E-Choupal platform for the farmers
through which, using the internet, they can sell their produce to get a better profit
margin for their crops.
● Tata Group has been famous for its comprehensive CSR projects ranging from
poverty alleviation, societal development, women empowerment, income generation,
spreading awareness, setting up education institutes, hospitals, etc - has been a role
model to many when it comes to CSR.
● Ultratech Cement has done considerable work in various villages in the country
aiming to cultivate self-sustainability and independent life. CSR activities also in
healthcare, poverty alleviation, education, infrastructure, environment, etc.
● Mahindra & Mahindra formed an educational trust to promote education. It’s main
aim is to provide economic aid to socially disadvantaged communities through
education through scholarships, livelihood training, etc.

Sources –
• https://www.thehindubusinessline.com/opinion/a-flaw-in-the-csr-design/article20801239.ece1
• https://www.legalserviceindia.com/legal/article-4543-impact-of-csr-on-indian-companies.html
• https://www.mondaq.com/india/corporate-and-company-law/839500/amendments-to-the-
laws-related-to-corporate-social-responsibility-in-india
• https://timesofindia.indiatimes.com/business/india-business/drop-prison-clause-give-tax-
credit-for-csr-panel/articleshow/70667503.cms
• https://blog.saginfotech.com/changes-csr-section-135-companies-act-2013
• https://www.natlawreview.com/article/india-amendments-to-csr-rules-game-changer
• https://taxguru.in/company-law/csr-policy-provision-recent-changes-amendments.html
• https://www.researchgate.net/publication/341110321_Improvement_of_CSR_Activities_in_Ind
ian_Companies_after_theAmendment_of_Companies_Act_2019
• https://www.obhanandassociates.com/blog/amendments-to-the-laws-related-to-corporate-
social-responsibility-in-
india/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration