[Case Study] Consequences of Non-constitution of CSR Committee under Companies Act

[2022] 145 taxmann.com 7 (Article)

1. Corporate Social Responsibilities (CSR)

Corporate social responsibilities is a self-regulatory business model that helps a company be socially accountable to itself, its stakeholders, and the public. The concept of corporate social responsibilities has evolved over the years, and it is now used as a strategy and a business opportunity to earn stakeholders’ goodwill. Corporate social responsibilities is generally understood as being the way through which a company achieves a balance of economic, environmental, and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders. Corporate social responsibilities is the heart and soul of modern corporations and is an important standard for corporate governance.

The companies in which the corporate social responsibilities provisions are applicable, is required to constitute a corporate social responsibilities Committee which shall have to formulate corporate social responsibilities policy and recommend activities to be undertaken by the company, amount to be sent in such policy and also monitor the corporate social responsibilities policy of the company.

2. Legal Framework of CSR under Companies Act 2013

It may be recalled that in 2014, India became the second country (after Mauritius) in the world to mandate spend on corporate social responsibilities by introducing specific provisions in company law and the following are the rules and regulations governing the corporate social responsibilities.

(a) Section 135 of the Companies Act 2013
(b) The Companies (CSR Policy) Rules 2014 and
(c) Schedule VII of the Companies Act 2013.

3. Relevant provision on constitution of CSR committee under Companies Act 2013

Sub-section (1) of section 135 of the Companies Act 2013 provides that every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a corporate social responsibility committee of the board consisting of three or more directors, out of which at least one director shall be an Independent director.

4. Penal provisions for non-compliance/default

In terms of the provisions of section 450 vide The Companies (Amendment) Act, 2020 amendment which is effective from 21st December, 2020 punishment where no specific penalty or punishment is provided: If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

5. Consequences of default/violation – action from the Regulator

To understand the consequences of any default in complying with the constitution of the CSR Committee under section 135 of the Companies Act 2013, let us go through one of the decided case law on this matter on 18th February 2022 by the Registrar of Companies of Pune of Maharashtra state.

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