Section 172 of Companies Act 2006 under the UK law provides that a director of a company must act in good faith, in a manner which is most likely to promote the success of the company for the benefit of its members as a whole. This section also provides that if there is a conflict of various interests then preference is to be given to shareholder interests. This section is also known as Enlightened Shareholder Value (ESV). As against the UK law, section 166 (2) of The Companies Act 2013 (Act) in India provides that the director is to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, shareholders, the community and for the protection of the environment. Thus, from the plain reading of the law, it is seen that shareholders and stakeholders are given equal protection under the Indian law and there is no express preference of one over the other. However, in practice, shareholder preference will out way stakeholder preference for a director executing its duties even in the Indian context. Further, with promoter-driven businesses and the real decision-making of a company being held in a few hands, decisions more often than not seem to be taken for the benefit of shareholders. To ensure that a company above a certain threshold makes some mandatory contribution to stakeholders, Indian law has section 135 of the Act on Corporate Social Responsibility (CSR).
As per section 135 of the Act, every company has a net worth of Rs.500 crore or more, or turnover of Rs.1000 crores or more, or a net profit of Rs.500 crores or more during the immediately preceding financial year is to constitute a CSR committee of the Board consisting of three or more directors, out of which at least one director is required to be an independent director. The Board of such a company is required to ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during three immediately preceding financial years in pursuance of its CSR policy. The law also provides that the company is required to give preference to the local area and areas around which it operates for spending the amount earmarked for CSR activities.
Schedule VII of the Act delineates the activities which may be included by companies in their CSR policies. Activities such as eradicating hunger, poverty, and malnutrition, promoting healthcare including preventive healthcare, promoting education, including special education and employment enhancing vocational skills, promoting gender equality, empowering women, ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, protection of national heritage, art and culture, etc. are mentioned in this Schedule. By the Companies (Corporate Social Responsibility Policy)Rules, 2014 it stands expressly provided that CSR activities undertaken by a company will exclude activities undertaken in pursuance of its normal course of business. These Rules also enunciate that CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered CSR activities.
Thus, under Indian law, companies above a certain turnover/ net profit threshold are mandatorily required to sponsor/ spend/ undertake activities for the benefit of the larger society/ stakeholders. This is a beneficial mechanism given in Indian law for larger stakeholders notwithstanding section 166 (2) of the Act. In this manner, section 135 of the Act is an independent provision from section 166 of the Act.
As is seen, promoting healthcare including preventive healthcare is an express CSR activity enunciated in law. These words are required to be interpreted in a wide manner as CSR is a beneficial legislation. The Ministry of Corporate Affairs (MCA) itself clarified that entries in Schedule VII of the Act must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule (General Circular no. 21/2014 dated 18 June 2014). In any case, MCA clarified that spending of CSR funds for Covid 19 is an eligible CSR activity (General Circular no. 10/2020 dated 23 March 2020). The MCA also clarified that setting up makeshift hospitals and temporary covid care facilities is an eligible CSR activity (General Circular no. 05/2021 dated 22 April 2021). Consequently, facilities for makeshift hospitals, temporary covid care facilities, vaccination programs set up by companies for the society to deal with the pandemic will qualify as CSR activity.
Further, captains of India inc. had requested Government of India for permitting companies to vaccinate their employees as CSR activity. A vaccination drive undertaken by a company for public at large/local community including its employees should qualify as CSR activity.In fact, in my view, even if vaccination programme is undertaken by a company exclusively for its employees then also benefit of utilising CSR fund should be permitted. Employees and their families are part of the society. Given the present pandemic and it being a notified disaster, the entire CSR programme is required to be interpreted holistically and not simply by the barring provision. So long as the company does not seek to make any unilateral gain from the employee for having vaccinated him/her; benefit of CSR should be extended.
Notwithstanding the above,section 166 (2) of the Act entrusts the director to actin the best interest of the company, its employees, shareholders, the community and for the protection of environment. The duty of a director is on a higher pedestal than simply ensuring profitability. Thevaccination drivesappear an essentiality of present timesfrom this perspective.While CSR fund is effectively restricted to profit making companies above a certain threshold, duties of directors under this section apply irrespective of the size or profit &loss account of the company. The directors are therefore required to fulfil their duty under this section to their employees and the community.
Lastly, article 21 of the Constitution of India, a guaranteed fundamental right, provides that no person shall be deprived of his life or personal liberty except according to the procedure established by law. The Supreme Court has held that the right to life includes the right to health [State of Punjab v. Mohinder Singh Chawla (1997 (2) SCC 83]. Article 21 is said to be the ‘heart and soul’ of fundamental rights [Mohd. Sukur Ali v. State of Assam 2011 (4) SCC 729]and it is for the State to ensure the protection of the fundamental rights. The State here means the Government of India and the Government of each of the States (article 12 of the Constitution). Given the scale of the pandemic and apathy of the State, it is incumbent on all to ensure that the ‘heart and soul’ of the Constitution is protected.
Vivek Sharma is an Advocate.
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