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CSR: Mandatory or Optional

Rohit Jain  
on 29 August 2015

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The preamble to the constitution of India describes it as a ‘ sovereign socialist secular democratic republic’. Since independence, India has followed a mixed pattern of economy wherein the sovereign as well as the private sector contribute and compete equally. Corporates have been said to deploy and utilize resources from the society. They are therefore required to provide quality products and employment to the society.

Corporate Social Responsibility, introduced in the Companies Act 2013 is a step in this direction.

The United Nations Industrial Development Organization defines Corporate Social responsibility as ‘a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders’. With the passage of the Companies Act, India became the first country in the world to mandate CSR spending for a certain criteria of companies. While many companies in India were practicing CSR works even before the passage of Companies Act, it is for the first time that the law mandates CSR spending. Section 135 of the Companies act, read along with section 198, Schedule 7 & Companies (Corporate Social Responsibility Rules) 2014 mandates CSR spend for companies having profit above 5 crores OR Net worth of 500 crore. These companies are required to spend 2% of average net profits for last three years as CSR.

Section 135 is subject to wide interpretations by different stakeholders. The interpretations range from a ‘comply or explain basis’ to ‘additional tax’. The language and the style in which the section is drafted leaves scope for wide interpretations.

A question that always keeps popping up is whether CSR is mandatory or optional.

Literal interpretation – Literal interpretation of a statute involves interpreting the meaning of a statute in strict literal sense, matching the scope of the statute, without diverting from the scheme of the statute being interpreted.

Sub Section 1 of Section 135 of the Companies Act, 2013 reads –

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 any 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.

Black’s Law dictionary (4th Edition, Page 4288), defines the word ‘shall’ as a word meaning

• Has a duty to; more broadly, is required to
• This is the mandatory sense that drafters typically intend and that courts

Typically uphold
Will do

The word shall is used by drafters to assert the requirements of a particular section. The word ‘may’ gives or speaks of a discretion whereas shall is a strict directive. The word ‘shall’ has been used around 2622 times in the Companies act, 2013. Every mandatory section of the Companies act including Section 2 & 12 uses the word ‘shall’. Therefore the scheme of the act is quite clear with the distinction between ‘Shall’ and ‘May’. ‘Shall’ is used for mandates whereas may is used for discretions.

However the interpretation of the word ‘shall’ has been subject to wide interpretations by Indian courts.

In Re: M/S. Sainik Motors, Jodhpur vs The State of Rajasthan (1961 AIR 1480), the Supreme Court while explaining the difference between the two words opined ‘The word "shall" is ordinarily mandatory, but it is sometimes not so interpreted if the context or the intention otherwise demands.

In Re: Nasiruddin & Others vs Sita Ram Agarwal (Appeal 5077 of 1988), the Supreme Court equated the meaning of the word ‘shall’ with ‘may’ while interpreting the provisions of Rajasthan Premises (Control of Rent & Eviction) Act, 1950.

While interpreting the use of the word shall in terms of a contract, the High court of Karnataka in Re: Tam Tam Pedda Guruva Reddy vs State Of Karnataka opined:

‘The use of the word 'shall' is ordinarily mandatory but it is sometimes not so interpreted if the scope of the enactment, on consequences to flow from such construction would not so demand. Normally, the word 'shall' prima facie ought to be considered mandatory’

Going by the ‘scope of the enactment’ test propounded by the Supreme Court, following reasoning can show that CSR is indeed mandatory

a. The inclusion of the provision in the act itself shows that the government wants companies to spend on CSR.

b. If it had to be optional, then CSR might not have been included in the act at all.

c. Although there is no strict penal provision for not spending CSR money, Section 450 of the Companies act 2013 acts as a residual section giving powers to the government to impose penalty on matters where there is no specific penalty in the act.        

The prevailing confusion is mainly on account of loose drafting made in the Companies act. Many companies are still confusing CSR to be optional and some are not showing willingness to CSR money. Purely from a legal perspective, it is safe to conclude that CSR is indeed mandatory.

- Rohit Jain
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