A new Companies Act has been in the pipelines for several years in India. The Companies Bill 2012, (the “Bill”) was finally passed on 18 December 2012 by the Lok Sabha, and is required to be passed by the Rajya Sabha and receive the assent of the President before it can come into effect.
The Bill revolutionizes several aspects of corporate governance including policies related to audit, transparency, requirement for independence of directors etc. One such pertinent change is the introduction of a mandatory corporate social responsibility (“CSR”) investment of 2% provided in Section 135. While the concept of CSR is centuries old in India, there has been little legislation to enforce this responsibility. The only prominent CSR legislation, India has seen prior to this Bill, is the Corporate Social Responsibility Voluntary Guidelines 2009.
What is CSR?
CSR has many interpretations but is understood to impose a liability on the Company to contribute to the society, (whether towards environmental causes, educational promotion, social causes etc.) along with the reinforced duty to conduct the business in an ethical manner.
The European Commission explains CSR as follows:
“By stating their social responsibility and voluntarily taking on commitments which go beyond common regulatory and conventional requirements, which they would have to respect in any case, companies endeavour to raise the standards of social development, environmental protection and respect of fundamental rights and embrace an open governance, reconciling interests of various stakeholders in an overall approach of quality and sustainability,”
Section 135 of the Bill:
As per Section 135 (“Section”) of the Companies Bill, the following companies will have to abide by this requirement:
– Companies having a net worth of Rupees five hundred crore or more
– Companies have a turnover of Rupees one thousand crore or more
– Companies have a net profit of Rupees five crore or more
Implementation: Committee and Policy
To ensure that the company is setting off this requirement as per the rules framed in this Section, the companies will have to constitute a Committee consisting of at-least 3 directors, one of whom shall be an independent director.
The Committee shall also initiate a CSR Policy (“Policy”), which shall stipulate how, where, and when they want to invest their funds with respect to this requirement. If the company does not abide by this stipulation, the Board directors (“Board”) must provide an explanation for the same.
Given that this is the first time that the Indian corporate sector is seeing such a requirement, Schedule VII (“Schedule”) provides some direction on what will constitute as valid expenditure under this Section.
As per this Schedule of the Bill, social causes such as promotion of education, and welfare funds such as and the Prime Minister’s National Relief Fun etc. may be included in the Policy of the Company. This Schedule aims only to give examples of options companies can pursue under this Section.
Evolution of this Requirement:
Previously when the compulsion of corporate social responsibility investment was pitched the hesitation of the legislature was evident in the way the section was framed. It imposed a compulsory measure, yet the liability of the company, was only to make ‘best endeavor’ to comply. This contradiction had led many to believe that in practice we would not see much of a change and that companies would find loopholes around the investment requirements. However in the version most recently passed by the Lok Sabha, we see that this contradiction has been removed and now it is the responsibility of the Board of directors (Section 135(5)) to ensure that 2% of the average net profits of the previous three financial years is spent according to the Policy of the company.
Although the Indian companies seem wary of this new regulation, not wanting to be forced to do ‘charity’ or finding themselves unequipped to deal with the implementation of such a CSR Policy, there are numerous positives to this coin:
– Development of ‘reputation capital’ for capturing and sustaining markets. Therefore corporate social responsibility has developed as a new business strategy to reduce investment risks and maximize profits by taking all the key stakeholders into confidence. 
– Long term gains as opposed to short term profits, which are the outcome of good CSR policies
– Environmental stability and sustainability – being an important resource for companies is ensured
– Social Stability
– With globalization the negative aspects of businesses have been intensified, and exploitation is widespread – CSR Policies may work to counter this effect
Lastly, a successful company cannot exist in society that fails, and therefore a company being a member of the society is required to contribute.
 Promoting a European Framework for Corporate Social Responsibility, Green Paper, p.4, Brussels, 18.7.2001,
Sneha Agnihotri [firstname.lastname@example.org]