2018 (2) TMI 2134 - HC - Companies Law

Compliance with Corporate Social Responsibility u/s 135 of the Companies Act 2013 - HELD THAT - When the grievance raised on behalf of the petitioner is tested on the anvil of the stand of Central Government there is substantial force in the contentions on behalf of the petitioner that respondent no.3 has not carried out its statutory obligation in letter and spirit. Collector of the Districts in the State of M.P. is directed to take stock of the situation to ascertain as to whether respective companies covered by the provisions contained under section 135 of the Companies Act 2013 are actually discharging their responsibilities in consonance therewith on field and if it is found that no such activities are being carried out or activities are being carried out is not up to the percentage as warranted under section 135 of the Act of 2013 they are further directed to inform the same to the Registrar of the Companies for appropriate action against the respective company under the law. Let a copy of order be sent to the Chief Secretary Govt. of M.P. to ensure its proper implementation so that scope and object set forth with an introduction of section 135 of Companies Act 2013 is meted out to its hilt and in letter and spirit.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the respondents, particularly the solar power plant at Vijaypur, have complied with their statutory obligations under Section 135 of the Companies Act, 2013 concerning Corporate Social Responsibility (CSR).
What measures have been taken by the Central Government to ensure compliance with Section 135 of the Companies Act, 2013?
Whether there is a need for a mechanism to monitor the actual implementation of CSR activities on the ground, beyond the statutory framework provided by the Companies Act, 2013.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Compliance with Section 135 of the Companies Act, 2013

Relevant legal framework and precedents: Section 135 of the Companies Act, 2013 mandates that companies meeting certain financial criteria must establish a CSR Committee and spend at least 2% of their average net profits on CSR activities. The section emphasizes disclosure and accountability through the Board's report.
Court's interpretation and reasoning: The court noted that the petitioner alleged the respondents had not fulfilled their CSR obligations. It examined whether the activities reported by the company were genuinely executed or merely documented on paper.
Key evidence and findings: The petitioner claimed that the reported CSR activities, such as sanitation and educational improvements, were not visible on the ground. The court considered the lack of a monitoring mechanism as a potential issue.
Application of law to facts: The court found merit in the petitioner's argument, suspecting that the CSR activities might not have been implemented as claimed. It highlighted the need for verification of compliance with Section 135.
Treatment of competing arguments: The respondents argued that CSR activities were conducted, but the court was persuaded by the petitioner's evidence suggesting otherwise. The court also considered the Central Government's stance on the non-monitoring of CSR activities.
Conclusions: The court concluded that there was a substantial possibility that the respondent had not fulfilled its CSR obligations in practice, despite claims to the contrary.

Issue 2: Measures by the Central Government

Relevant legal framework and precedents: The Companies Act, 2013, and the Companies (Corporate Social Responsibility Policy) Rules, 2014, provide the framework for CSR activities but do not include a direct monitoring role for the government.
Court's interpretation and reasoning: The court acknowledged the Central Government's amendments to Schedule VII of the Act, which expanded the scope of CSR activities but noted the absence of a monitoring mechanism.
Key evidence and findings: The Assistant Solicitor General informed the court that the government does not directly monitor CSR activities, relying instead on corporate self-regulation and mandatory disclosures.
Application of law to facts: The court recognized that while the legal framework encourages CSR, the lack of monitoring could lead to non-compliance or superficial compliance.
Treatment of competing arguments: The government's position was that the law aims to create a conducive environment for CSR rather than enforce strict monitoring. The court found this approach inadequate for ensuring actual compliance.
Conclusions: The court concluded that the absence of a monitoring mechanism could result in CSR activities remaining unexecuted, despite being reported.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "These contentions made on behalf of the Central Government brooks possibility that the Corporate Social Responsibility if not monitored on the field will only remain on paper rather than being executed in the field."
Core principles established: The judgment underscores the importance of actual implementation of CSR activities beyond mere documentation and the need for mechanisms to verify compliance.
Final determinations on each issue: The court directed the Collector of the Districts in the State of M.P. to verify whether companies are genuinely executing their CSR obligations as per Section 135 of the Companies Act, 2013, and to report non-compliance to the Registrar of Companies for appropriate action.

This judgment highlights the challenges in enforcing CSR obligations and the necessity for effective monitoring mechanisms to ensure that companies fulfill their social responsibilities in practice, not just in reports.

← Previous Next →