Q.

1 Explain principle of lifting of corporate veil

1. Abstract
2. Introduction
3. Corporate Personality
4. Limited Liability
5. Meaning of the Doctrine of Lifting the Corporate Veil
6. Statutory Provisions: The Companies Act, 2013
7. Judicial Interpretations
8. Conclusion
Abstract
The word ‘Company’ can be described as a collaboration of people who
come together to pursue the same goal or to carry out similar business
activities. A company is an artificial juristic person having characteristics
such as separate legal entity, limited liability of members, perpetual
succession, etc. The rules governing companies in India are prescribed
under the Companies Act, 2013. With the growing trend in the economy,
technology, and globalization, there is a tremendous increase in cases of
corporate frauds and insider trading worldwide. To overcome such
frauds there is a concept of ‘Piercing of corporate Veil’. The concept came
to uncover real offenders who hide behind the corporate shield. This
doctrine acts as a statutory privilege given to the companies. Persons
responsible shall not be allowed to take shelter behind the company
instead they will be held liable personally for their fraudulent acts. The
given article focuses on the concept of lifting the corporate veil and the
relevant case laws.
KEYWORDS: Corporate veil, Company, Separate legal entity, Perpetual
succession
Introduction
The concept of piercing the corporate veil for the first time was
introduced in the case of Salomon in 1897. This doctrine plays a vital
role in cases of corporate fraud because it is very important to punish
the real offender. In Salomon’s case, the characteristic of a company as a
separate legal entity was described and it was held that the company is
separate from its members and subscribers. Subscribers of a company
cannot be held liable just because they subscribed to the Memorandum
of Association or having majority shareholding. A person can be a
creditor and owner at the same time in a company. The benefits of
incorporation can be enjoyed only for the collective benefit of the
company and its members.
Some common examples where the veil may be pierced by the
courts:
• Inaccurate corporate records
• Poor corporate governance
• Manipulation of assets and liabilities
• Concealment of facts and disclosures
• Inappropriate accounting policies
Corporate Personality
Corporate personality means the company is having a separate legal
entity, distinct from its members and creators. A corporation is an
artificial juristic person having rights and liabilities such as:
• Right to possess the property in its own name.
• Right to sue and be sued in its own name.
• Like a natural person, the company is also liable to pay taxes and other
statutory duties.
• Right to contract in its own name.
• Liability to repay loans and creditors.
In Salomon v. Salomon and Co. Ltd.[1]
Facts: Salmon was a leather merchant and a boot manufacturer. He
formed a limited company consisting of himself, his four sons, his wife,
and his daughter as the shareholders of the company with total capital of
7 Pounds. Later on Salmon sold his solvent business to the limited
company which was formed by him for the sum of 38782 pounds; out of
this the Debentures of 10000 pounds were secured by floating charge on
the Company’s Assets. Later, the company ran into difficulties &
Debenture holders appoints a receiver and the company went into
liquidation.
Issue: Whether a shareholder or a controller of a company could be held
personally liable for the debts?
Judgment: The House of Lords decided that being a Separate Legal
identity, both the Shareholders and Company are different persons, they
are not the same in the eyes of law. So, Mr. Salmon will not be held
personally liable for all the debts of the company.
Limited Liability
Another important Characteristic of a Company or Corporation is Limited
Liability. This feature attracts investors to invest in a company. Under
this Principle, the liability of a member is limited up to the extent of
unpaid shares held by him. For example, if Mr. A holds 100 shares of Rs.
10 each at par and has already paid Rs. 5 on each, now his liability
extends to remaining Rs.500 only i.e., unpaid value of the shares held by
him.
Meaning of the Doctrine of Lifting the Corporate Veil
The statutory privilege of corporate personality given to the companies
must be used for legitimate purposes only. When the said privilege is
 used to hide wrongful or fraudulent conduct, the court shall remove the
veil or pierce the veil of the corporation. This concept is called piercing of
the corporate veil. Salomon’s case is a classic example of this doctrine.
Further in Lee v. Lee Air Farming Ltd., it was held that Lee was owner,
director, and worker in the company at the same time and the contract of
service between Lee and the company was valid. A person can be a
master and a servant at the same time in the company.
However, the shareholders are not allowed to take advantage of this
doctrine for their personal benefits. This was held in Premlata Bhatia v.
Union of India (2004).[2]
The Karnataka high court, in the case of tax evasion, used this doctrine
to look into the real nature of the case and the transactions involved
therein. [Richter Holding v. The Assistant Director of Income Tax][3]
The two circumstances under which the corporate veil of the company
may be lifted are:
• Statutory Provisions
• Judicial Interpretation
Statutory Provisions: The Companies Act, 2013
Reduction in Membership [Section- 3A]: If at any time, the minimum
requirement of members in a company as prescribed in section 3(1) is
reduced below its statutory requirement, the remaining members need to
fulfil the criteria of minimum requirement within six months. Otherwise,
the remaining members shall be severely liable for all the debts taken
after the expiry of six months from the date of reduction.
Misrepresentation in the prospectus: Under sections 34 and 35 of the
Act, there is civil and criminal liability for false representation in the
prospectus. Every director, promoter, and every other person who is in
charge of the issue of prospectus shall be held liable for such
misrepresentation.
Misdescription of name [Section-147]: If an officer of a company signs
any document such as bill of exchange, promissory note, hundi, cheque,
etc., on behalf of the company and the name of the company is not
mentioned in such document in a manner prescribed, then the person
signing shall be held personally liable to the holder of such
instrument.[4]
Failure to return Application money [Section-39]: If the minimum
subscription as stated in the prospectus has not been subscribed within
the prescribed time, the company must refund the entire application
money to the applicants. If the company fails to do so, the directors shall
be jointly or severely held liable to return interest and the application
money.
Fraudulent conduct [Section-339]: If at the time of winding-up of a
company, it come into view that any business of the company has been
carried on with intent to defraud creditors of the company, the person,
who is or has been a director, manager, or officer of the company or any
other person shall be personally responsible, without any limitation of
liability, for all the debts of the company as the Tribunal may direct.[5]
Conclusion
Whenever it is proved that the sole purpose for which the company is
formed is fraudulent, misrepresentation, or any other purpose like tax
evasion, the court will ignore the character of corporate personality and
make officers concerned liable for their actions. The corporate veil could
be lifted in cases allegedly opposed to justice and against public policy.
Corporate personality is a boon for the company and lifting of corporate
veil is like a shield that protects the identity of a company and helps in
punishing the real offenders.
[1] Salomon v. Salomon & Co. Ltd., [1897] AC 22

Q.2 What is Indoor Management ? Explain its exceptions ?

Contents hide
1. What is Doctrine of Indoor Management in Company Law?
2. Importance of Doctrine of Indoor Management
3. Position under the Indian Companies Act, 1956
4. Judicial Interpretation of Doctrine of Indoor Management in Company
Law
5. Origin of Doctrine of Indoor Management in Company Law
6. Exceptions to the Doctrine of Indoor Management in Company Law
6.1. Knowledge of Irregularity
6.2. Forgery
6.3. Negligence
6.4. Acts Beyond Apparent Authority
6.5. Representation Through Articles
7. Examples of Doctrine of Indoor Management in Company Law
8. Conclusion

What is Doctrine of Indoor Management in Company Law?

The Doctrine of indoor management protects the rights of third parties
dealing with a company or corporation. It essentially states that if
someone is dealing with a company in good faith and on the assumption
that the company’s internal affairs and procedures are being properly
followed, they should not be held responsible for irregularities within the
company’s internal management.
In other words, the Doctrine of indoor management in Company Law
allows third parties, such as customers, suppliers or anyone entering
into contracts or transactions with a company, to rely on the external
representation and documentation of the company without needing to
investigate or inquire into the company’s internal affairs. If a company’s
external documents, like contracts, appear valid and proper, a third
party can assume that the necessary internal processes have been
followed.

Importance of Doctrine of Indoor Management

The Doctrine of indoor management in Company Law is crucial in
modern business transactions as it provides legal protection to innocent
third parties dealing with companies. It allows individuals and entities to
rely on external representations and documents of a company without
delving into its internal management.
Doctrine of indoor management fosters trust, streamlines commercial
interactions and promotes economic activity. It strikes a balance between
safeguarding the interests of companies and ensuring that those dealing
with them are not unduly burdened with verifying internal procedures.
By offering this protection, the doctrine maintains the fluidity of business
transactions, encourages investment and facilitates the growth of the
corporate sector, ultimately contributing to the stability and prosperity of
the business environment.
Position under the Indian Companies Act, 1956
Under the Indian Companies Act, 1956, the principles akin to the
Doctrine of indoor management are reflected in Section 290. This section
deals with the validity of acts carried out by directors of a company. It
stipulates that acts performed by a person in the capacity of a director
will be considered valid, even if it is later discovered that their
appointment was invalid due to disqualification or any defect or if it was
terminated in accordance with the provisions of the Act or the Articles of
Association of the company.
However, there is a limitation outlined in the section, stating that this
provision does not validate any acts performed by a director after it has
become known to the company that their appointment is invalid or has
been terminated.
In essence, Section 290 of the Indian Companies Act, 1956, aligns with
the principles of protecting third parties who deal with the company in
good faith and are not expected to investigate the internal management
of the company.
Judicial Interpretation of Doctrine of Indoor Management in Company
Law
The interpretation of the Doctrine of indoor management in Company
Law by the courts is seen in light of its underlying purpose. In the
business world, it’s essential to protect all parties involved in contractual
relationships. While this doctrine primarily aims to protect outsiders
dealing with a company, its more significant purpose is to encourage
investments in the business sector, thus balancing business and the
economy.
Investors are more likely to invest in companies when they feel secure in
all aspects. If investors lack this security, companies may struggle to
attract investments, which can have a negative impact on the overall
economy. Therefore, the protection afforded to investors under this
doctrine is a crucial step in promoting trade and commerce.
Origin of Doctrine of Indoor Management in Company Law
The doctrine of indoor management in Company Law, famously known
as ‘Turquand’s Rule,’ has its origins in the landmark case of Royal
British Bank v. Turquand (1856) 6 E&B 327. Here’s a summary of the
case: The company’s Articles allowed for borrowing money through
bonds, but it required a resolution passed in a General Meeting. The
directors obtained a loan without passing the resolution. When the loan
repayment defaulted, the company was held responsible. Shareholders
contested the claim due to the missing resolution. The court ruled that
the company was liable because those dealing with the company could
reasonably assume that the necessary internal procedures were followed.
The doctrine of indoor management in Company Law protects third
parties who enter into contracts with a company from any irregularities
in the company’s internal procedures. Third parties typically cannot
discern internal irregularities within a company, so the company is held
liable for any losses they may incur due to these irregularities.

In contrast, the Doctrine of Constructive Notice primarily safeguards the

company against claims by third parties, while the doctrine of indoor
management protects third parties from company procedural issues.
Exceptions to the Doctrine of Indoor Management in Company Law
The doctrine of indoor management, which is over a century old, has
gained significance in today’s world where companies play a central role
in economic and social life. However, it has evolved to accommodate
certain exceptions to prevent it from favouring outsiders to the detriment
of companies. Here are some of these exceptions:
Knowledge of Irregularity
When an outsider entering into a transaction with a company has either
constructive or actual notice of irregularities related to the company’s
internal management, they cannot seek protection under the doctrine of
indoor management. In some cases, the outsider might be involved in the
internal procedures themselves.
For example, in the case of T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon &
Co. Ltd., where Company A lent money to Company B for mortgaging its
assets, but the proper procedure outlined in the Articles was not followed
and both companies had the same directors. The court held that the
lender was aware of the irregularity, making the transaction non-
binding.
Another example is when two directors, X and Y, approve a transfer of
shares, but it turns out that X was not validly appointed and Y was
disqualified due to being the transferee. If the transferor of the shares
knew these facts, the transfer of shares would not be binding.
Forgery
The doctrine of indoor management in Company Law does not apply
when an outsider relies on a document that is forged in the name of the
company. A company cannot be held liable for forgeries committed by its
officers.
For instance, in the case of Ruben v. Great Fingall Ltd., the plaintiff
received a share certificate issued under the company’s seal. The
certificate had been issued by the company’s secretary, who had forged
the signatures of two company directors and affixed the company’s seal.
The plaintiff argued that whether the signatures were forged or genuine
should be considered an internal management matter, making the
company liable. However, the court ruled that the doctrine of indoor
management does not extend to cover forgeries. Lord Loreburn explained
that outsiders dealing with companies are not obligated to inquire into
the company’s internal management and are not affected by irregularities
of which they are unaware.
There are additional exceptions to the doctrine of indoor management,
which have evolved over time to address specific situations and ensure a
balanced approach to legal protections:
Negligence
If an outsider entering into a transaction with a company could have
discovered irregularities in the company’s management through proper
inquiries, they cannot seek protection under the doctrine of indoor
management. Similarly, if the circumstances surrounding the contract
are highly suspicious and invite inquiry and the outsider fails to make
appropriate inquiries, the remedy under this doctrine may not be
available.
For instance, in the case of Anand Bihari Lal v. Dinshaw & Co., the
plaintiff accepted a transfer of a company’s property from the company’s
accountant. The court held the transfer void because it was beyond the
scope of the accountant’s authority and the plaintiff should have checked
the power of attorney granted to the accountant by the company.
Acts Beyond Apparent Authority
Acts performed by a company officer that exceed their apparent authority
will not make the company liable for any resulting defaults. The doctrine
of indoor management in Company Law may not provide a remedy if the
officer’s actions are outside the authority that could reasonably be
assumed from their position. The outsider can only sue the company
under this doctrine if the officer has the delegated power to act in such a
manner.
For example, in the case of Kreditbank Cassel v. Schenkers Ltd., a
branch manager endorsed bills of exchange in the company’s name in
favour of a payee to whom he was personally indebted, without any
authority from the company. The court held that the company was not
bound by this act. However, if an officer commits fraud within their
apparent authority on behalf of the company, the company may be held
liable for the fraudulent act.
The same principle applies in the case of Sri Krishna v. Mondal Bros. &
Co., where the manager of the company had apparent authority to
borrow money but did not place the borrowed amount in the company’s
strongbox. The court held that the company was bound to acknowledge
the debt due to the creditor’s bona fide claim resulting from the
fraudulent acts of the company’s officer.
Representation Through Articles
This exception is somewhat complex and controversial. Articles of
Association often contain clauses related to the “power of delegation.” In
cases where the Articles authorise directors to borrow money and
delegate this power to one or more of them, a company can be bound by
a loan even if a specific resolution wasn’t passed directing such
delegation.
For example, in the case of Lakshmi Ratan Cotton Mills v. J.K. Jute
Mills Co., a director of the company borrowed money from the plaintiff.
The company argued that it was not bound by the loan because there
was no resolution directing the delegation of borrowing power to that
director. However, the court held that the company was indeed bound by
the loan since the Articles of Association authorised such delegation of
authority.
Examples of Doctrine of Indoor Management in Company Law
Example 1: ABC received a cheque from XYZ company and the cheque
was issued in violation of the Xyz company’s Articles of Association
because the directors and the secretary who signed the cheque were not
properly appointed, ABC is entitled to relief. The irregularity in the
appointment of directors is considered an internal management matter of
the company. According to the doctrine of indoor management, a person
dealing with the company is not required to inquire into such internal
management issues. Therefore, ABC can seek relief and the company
must pay the amount of the cheque.

Q.3 Discuss the Liability for misstatement in Prospectus.

Contents hide
1. Misstatement or Untrue statement
2. Liabilities in case of Mis-statement or Untrue statement
2.1. Criminal Liability
2.2. Civil Liability
3. Defences against Misstatement
4. Conclusion

Misstatement or Untrue statement

If a company provides for misleading statement or omits any matter
which misleads, then this shall constitute as an untrue statement or a
mis-statement.[1]The Companies Act does not provide any exact
definition of such untrue statement in its definition clause, it can be
understood through the medium of various precedents.
For the purpose of holding a prospectus fraudulent, it’s not necessary for
a false representation to be present, the mere suppression of facts
renders the whole prospectus fraudulent. To know the effect of it, the
prospectus should be read as a whole.[2]
Liabilities in case of Mis-statement or Untrue statement
Untrue statement accounts for two kinds of liabilities:
1.Criminal liability, and
2. Civil Liability
Criminal Liability
Any prospectus which is untrue is a mis-statement then every person
who authorises it would be liable under section 447 of the act.[3]
Section 447 of the act states that any person guilty of fraud shall be
punishable with an imprisonment for a term not less than six months
 but may extend to ten years and shall also be liable to a fine which shall
not be less than the amount of the fraud and can be extended to three
times of it.[4]
Although a person can defend himself if he can prove the following
things:
• Omission or the untrue statement was immaterial
o There were reasonable grounds to believe that the statement was true
and the grounds continued up to the time of the issue of the prospectus.
o The inclusion or the omission was necessary.
Civil Liability
The following civil remedies are available for mis-statement or untrue
statement:
1. Recission of the contract
An original allottee can rescind the contract if it has been made by mis-
statement be it innocent or fraudulent. By the essential requirement s of
this would be:
• There is a false representation in the prospectus
• The false representation is of fact and not that of law
• The allottee must have relied and acted on the false statement
• The prospectus was issued by the company or with someone with the
authority of the company.
In R v. Kylsant, the whole prospectus was held to be false not because of
what is stated but due to the things it did not state.[5]
Limits of recession and loss of right
Although the option of rescinding is available but there can be a loss of
this right, if
• The allottee with the knowledge of misrepresentation affirms the contact.
• If There is an unreasonable delay in rescinding the contract.
• If there is commencement of winding up of the company.
• If the company has become insolvent, irrespective of whether winding up
has commenced or has not.
2. Damages for deceit
An original allottee can claim damages for the loss caused due to the
untrue statement of misrepresentation.
To claim damages on the basis of deceit, fraud must be proved which can
be proved by showing that the false representation has been made:
a. Knowingly
b. Without belief in truth
c. Recklessly, whether true or false, as said by Lord Herschell in Derry v.
Peek[6]
3. Liability for omission under section 26
 Section 26 states the particulars to be stated in the prospectus and
imposes penalty for its contravention. The section does not entitle an
allottee to rescind the contract by reason merely of the omission of any of
the facts required to be disclosed by the section provided there is no
fraud or misrepresentation within the meaning of section 17 and 18 of
the Indian Contract act, 1872.
If the prospectus is issued in contravention of Section 26 (it does not
contain the particulars which have to be stated in the prospectus) , the
company shall be punishable with fine which shall not be less than
rupees fifty thousand but can be extended to three lacks rupees and a
person who knowingly is a party to such prospectus shall be punished
with an imprisonment for three years or with fine which shall not be less
than fifty thousand rupees and can be extended up to three lacks rupees
or can be punished with both imprisonment and fine.
4. Compensation for untrue statement under section 35
Persons mentioned under section 35 are personally liable to compensate
the investor for any loss sustained by due to untrue statement in the
prospectus. Those people are:
1. Ever person who is a director of the company at the time of the issue of
the company.
2. Every person who has authorised himself to be named and is named in
the prospectus as a director of the company, or has agreed to become
such director, either immediately or after an interval of time.
3. Every promoter of the company
4. Every person who authorised the issue of the prospectus, and
5. An expert
Defences against Misstatement
Although the following defences are available to these people:
1. Withdrawal of consent:
A person who has consented to become director will not be liable if he
proves that he withdrew his consent before the issue of the prospectus
and it was issued without his authority or consent.
2. Issue without knowledge:
A person will not be liable if he proves that the prospectus issued
without his knowledge or consent, and that on becoming aware of its
issue, he forthwith gave reasonable public notice that it was issued
without his knowledge or consent.
3. Reasonable ground for relief
A person will not be liable if he proves that he had reasonable ground to
believe that the statements were true and believed them to be true.
4. Statement of experts
A person will not be liable if he proves that the statement was correct
and fair summary of an expert report.
5. Fair copy or fair extract from an official document:
A person will not be liable if he proves that the statement represented a
fair copy or fair extract from an official document or from the statement
made by an official person.
Conclusion
Hence, it can be seen that the prospectus of the company is a very vital
document for a company. And a lot of factors have been considered by
the law makers to make sure that there is no scope for any individual or
the company for that matter to escape any liability which make take
place.
Thus, the prospective of the company makes sure that there is effective
and efficient working in the company.

Q.4 What is meant by "Debenture"? What are the kinds of

debentures mentioned under the
Companics Act, 2013?

Meaning of Debenture
Debenture is used to issue the loan by government and companies.
The loan is issued at the fixed interest depending upon the reputation of
the companies. When companies need to borrow some money to expand
themselves they take the help of debentures. There are four different types
of debentures. Let us learn the Debenture, features of debentures,
advantages, and disadvantages of debentures in detail.

Debenture

The word ‘debenture’ itself is a derivation of the Latin word ‘debere’ which
means to borrow or loan. Debentures are written instruments of debt that
companies issue under their common seal. They are similar to a loan
certificate.

Debentures are issued to the public as a contract of repayment

of money borrowed from them. These debentures are for a fixed period and
a fixed interest rate that can be payable yearly or half-
yearly. Debentures are also offered to the public at large, like equity
shares. Debentures are actually the most common way for large companies
to borrow money.

Let us look at some important features of debentures that make them

unique,

• Debentures are instruments of debt, which means that debenture

holders become creditors of the company
• They are a certificate of debt, with the date of redemption and amount
of repayment mentioned on it. This certificate is issued under the
company seal and is known as a Debenture Deed
• Debentures have a fixed rate of interest, and such interest amount is
payable yearly or half-yearly
• Debenture holders do not get any voting rights. This is because they
are not instruments of equity, so debenture holders are not owners of
the company, only creditors
• The interest payable to these debenture holders is a charge against
the profits of the company. So these payments have to be made even
in case of a loss.

Advantages of Debentures

• One of the biggest advantages of debentures is that the company can

get its required funds without diluting equity. Since debentures are a
form of debt, the equity of the company remains unchanged.
• Interest to be paid on debentures is a charge against profit for the
company. But this also means it is a tax-deductible expense and is
useful while tax planning
• Debentures encourage long-term planning and funding. And
compared to other forms of lending debentures tend to be cheaper.
• Debenture holders bear very little risk since the loan is secured and
the interest is payable even in the case of a loss to the company
• At times of inflation, debentures are the preferred instrument to
raise funds since they have a fixed rate of interest

Browse more Topics under Issue And Redemption Of Debentures

• Issue of Debentures
• Terms of Issue, Interest on Debentures
• Redemption of Debentures

Disadvantages of Debentures

• The interest payable to debenture holders is a financial burden for the

company. It is payable even in the event of a loss
• While issuing debentures help a company trade on equity, it also
makes it to dependent on debt. A skewed Debt-Equity Ratio is not
good for the financial health of a company
• Redemption of debentures is a significant cash outflow for the
company which can imbalance its liquidity
• During a depression, when profits are declining, debentures can prove
to be very expensive due to their fixed interest rate
Types of Debentures

There are various types of debentures that a company can issue, based on
security, tenure, convertibility etc. Let us take a look at some of these
types of debentures.

• Secured Debentures: These are debentures that are secured against

an asset/assets of the company. This means a charge is created on
such an asset in case of default in repayment of such debentures. So
in case, the company does not have enough funds to repay such
debentures, the said asset will be sold to pay such a loan. The charge
may be fixed, i.e. against a specific assets/assets or floating, i.e.
against all assets of the firm.
• Unsecured Debentures: These are not secured by any charge against
the assets of the company, neither fixed nor floating. Normally such
kinds of debentures are not issued by companies in India.
• Redeemable Debentures: These debentures are payable at the expiry
of their term. Which means at the end of a specified period they are
payable, either in the lump sum or in installments over a time period.
Such debentures can be redeemable at par, premium or at a discount.
• Irredeemable Debentures: Such debentures are perpetual in nature.
There is no fixed date at which they become payable. They are
redeemable when the company goes into the liquidation process. Or
they can be redeemable after an unspecified long time interval.
• Fully Convertible Debentures: These shares can be converted to
equity shares at the option of the debenture holder. So if he wishes
then after a specified time interval all his shares will be converted
to equity shares and he will become a shareholder.
• Partly Convertible Debentures: Here the holders of such debentures
are given the option to partially convert their debentures to shares. If
he opts for the conversion, he will be both a creditor and a
shareholder of the company.
• Non-Convertible Debentures: As the name suggests such debentures
do not have an option to be converted to shares or any kind of equity.
These debentures will remain so till their maturity, no conversion will
take place. These are the most common type of debentures.

Q.5 What is Corporate Governance? State its importance

Contents hide
1. What is Corporate Social Responsibility?
2. Laws dealing with Corporate Social Responsibility
3. Advantages of Corporate Social Responsibility
4. Corporate Social Responsibility committee
4.1. Constitution of CSR Committee
4.2. Functions of CSR Committee
5. Examples
5.1. Pfizer
5.2. Netflix and Spotify
6. Judgments related to Corporate Social Responsibility
7. Conclusion

What is Corporate Social Responsibility?

Every individual living in society has certain commitments towards it.
This is especially significant in instances of organizations, which are
viewed as artificial people’s according to law. Any business association
should target operating in manners that help it to satisfy the
expectations of society. A Firm is allowed by society to complete its
financial exercises and procure benefits, however, it ought to likewise
refrain from exercises that are undesirable from the general public’s
viewpoint

Corporate Social Responsibility (CSR) can be said to mean the

accomplishment of commercial achievement in a manner that honors
morals and regards individuals, communities, and the climate. It
additionally includes tending to several lawful, moral, and business
expectations that society has from corporates, whose decisions should
aim to adjust the requirements of each one of those groups which have
any interest in the existence of the body corporate.
CSR is named as “Triple-Bottom-Line-Approach“, which is intended to
assist the organization with advancing its commercial interests alongside
the obligations it holds towards the general public.
Companies (Corporate Social Responsibility Policy) Rules, 2014 defines
Corporate Social Responsibility under section 2(d) as[1] –
“Corporate Social Responsibility (CSR) means the activities undertaken by
a Company in pursuance of its statutory obligation laid down in section
135 of the Act in accordance with the provisions contained in these rules,
but shall not include the following, namely: –
(i) activities undertaken in pursuance of normal course of business of the
company:
Provided that any company engaged in research and development activity
of new vaccine, drugs and medical devices in their normal course of
business may undertake research and development activity of new
vaccine, drugs and medical devices related to COVID-19 for financial years
2020-21, 2021-22, 2022-23 subject to the conditions that –
(a) such research and development activities shall be carried out in
collaboration with any of the institutes or organisations mentioned in item
(ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual
report on CSR included in the Board’s Report;
(ii) any activity undertaken by the company outside India except for
training of Indian sports personnel representing any State or Union
territory at national level or India at international level;
(iii) contribution of any amount directly or indirectly to any political party
under section 182 of the Act;
iv) activities benefitting employees of the company as defined in clause (k)
of section 2 of the Code on Wages, 2019 (29 of 2019);
(v) activities supported by the companies on sponsorship basis for deriving
marketing benefits for its products or services;
(vi) activities carried out for fulfilment of any other statutory obligations
under any law in force in India;”
The World Business Council for Sustainable Development defined
Corporate Social Responsibility as, “Corporate Social Responsibility is the
continuing commitment by business to behave ethically and contribute to
economic development while improving the quality of life of the workforce
and their families as well as of the local community and society at
large.”[2]

Laws dealing with Corporate Social Responsibility

India’s new Companies Act 2013 (Companies Act) has presented certain
guidelines for Corporate Social Responsibility (CSR). The notion behind
CSR lays in the theory of compromise. Organizations take assets as raw
materials, HR, and so forth from the general public. By fulfilling the task
of CSR exercises, the organizations are giving something back to the
general public.
Section 135of the Companies Act 92013) definesCorporate Social
Responsibility as[3]–
“(1) Every company having a net worth of rupees five hundred crores or
more, or turnover of rupees one thousand crores or more or a net profit of
rupees five crores or more during any financial year shall constitute a
Corporate Social Responsibility Committee of the A board consisting of
three or more directors, out of which at least one director shall be
an independent director.
(2) The Board’s report under sub-section (3) of section 134 shall disclose
the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall, —
(a) formulate and recommend to the Board, a Corporate Social
Responsibility Policy which shall indicate the activities to be undertaken
by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities
referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from
time to time.
(4) The Board of every company referred to in sub-section (1) shall, —
(a) after taking into account the recommendations made by the Corporate
Social Responsibility Committee, approve the Corporate Social
Responsibility Policy for the company and disclose contents of such Policy
in its report and also place it on the company’s website, if any, in such
manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social
Responsibility Policy of the company are undertaken by the company.
 (5) The Board of every company referred to in sub-section (1), shall ensure
that the company spends, in every financial year, at least two per cent. of
the average net profits of the company made during the three immediately
preceding financial years, in pursuance of its Corporate Social
Responsibility Policy:
Provided that the company shall give preference to the local area and
areas around it where it operates, for spending the amount earmarked for
Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board
shall, in its report made under clause (o) of sub-section (3) of section 134,
specify the reasons for not spending the amount.
Explanation. —For the purposes of this section ‘average net profit’ shall
be calculated in accordance with the provisions of section 198.”
Section 135 of the Companies Act 2013 gives a threshold limit to the
appropriateness of the CSR to a Company:
(a) total assets of the organization to be Rs 500 crore or more; or
(b) turnover of the organization to be Rs 1000 crore or more; or
(c) the net benefit of the organization to be Rs 5 crore or more.
Further according to the CSR Rules, the arrangements of CSR are
relevant to Indian organizations, also addition pertinent to branch and
extend workplaces of a foreign organization in India
The activities (in areas or subject, specified in Schedule VII) that
can be done by the organization to accomplish its CSR
commitments include: Schedule VII of Companies Act 2013
• Eradicating hunger, poverty, and malnutrition, advancing medical care
including preventive medical services and sanitation including a
commitment to the ‘Swachh Bharat Kosh’ set up by the Central
Government for the advancement of sterilization and making easy access
to safe drinking water
• Advancing education, including special curriculum and employment
improving vocation abilities especially among kids, ladies, older, and the
disabled.
• Encouraging sex equality, women empowerment, setting up homes and
lodgings for women and orphans; setting up old age homes, daycares,
and such different facilities for senior residents and measures for
lessening disparities faced by SEBCs
• Guaranteeing ecological sustainability, environmental equilibrium,
conservation of widely varied vegetation, protection of resources, and
keeping up nature of the soil, air, and water including a commitment to
the ‘Clean Ganga fund’ set up by the Central Government for restoration
of waterway Ganga;
• Measures to assist military veterans, war widows, and their wards;
• To promote Rural and National sports
• Funding to the Prime Minister’s National Relief Fund or some other fund
set up by the Central Government
• Projects for the development of rural areas
• Development of Slum vicinities
Advantages of Corporate Social Responsibility
• If the creative capacity of a business suffers social issues, resistance can
be changed into assets and the useful limit of assets can be expanded
ordinarily.
• A stable society would deliver a stable work environment wherein the
business may acquire long-term profit. A company that is delicate to
public needs would in its capability like to have a stable community to
continue its business. To accomplish this it would carry out friendly
projects for social welfare.
• Productivity and Quality: Improved working conditions, diminished
ecological effects, or rising worker contribution in decisions would result
in – expanded efficiency and blemished rate in an organization.
• It would also lead to improvement in the financial performance
• An organization considered socially mindful can profit both from its
improved standing with the general population as well as in the business
community by expanding the organization’s capacity to pull in investors.
• The development of socially investing ideas implies organizations with
solid CSR execution have expanded admittance to capital that may not in
other cases have been accessible.
Corporate Social Responsibility committee
Constitution of CSR Committee
The CSR Committee of the Board usually comprises at least three
directors, amongst which, one will be an independent director.
Section 5 of the Companies (Corporate Social Responsibility Policy)
Rules, 2014 states that A Foreign organization must comprise of a CSR
Committee with a minimum of two people where one should be a
resident, approved to acknowledge notices /archives served on the
foreign organization and the other as named by the foreign organization.
And in the case of a Private Company, which just has two directors on
its board will have the said two directors in the CSR committee.
Functions of CSR Committee
The CSR Committee drafts the conclusive CSR strategy, the ultimate goal
for all the enterprise’s activities on corporate obligations, focus sector,
standards, and qualities. Proposals for the CSR strategy are presented to
the corporation’s Board of directors. The Board speculates every one of
the projects before supporting the policy report. The CSR strategy is
unveiled in the yearly report which is published on the organization’s
site.
The CSR Committee is likewise dependent on defining CSR projects or
programs that are approved to be undertaken in areas or subjects
specified in Schedule VII of the Act; It is a comprehensive plan and
includes all the costs to be incurred along with the name of the
stakeholders. It lists out how the activity would be conducted along with
its impact on the company.
Examples
Pfizer
Pfizer utilizes the term corporate citizenship to coin their CSR drives and
sees it as a central piece of their organization and ‘simply how they
work”. Across the globe, they conduct organization drives that bring
issues such as non-infectious diseases to light and also provide medical
care to needy women and children. One illustration of this is the
decrease in the cost of their Prevnar 13 vaccine (for pneumonia, ear and
blood diseases) for those who cannot afford it and in circumstances like
displaced people and emergency circumstances.
Netflix and Spotify
From a social point of view, organizations, for example, Netflix and
Spotify offer incentives to help their workers and families. Netflix
provides 52 weeks of paid parental leave, which can be taken whenever,
whether it is the intermediate year of the kid’s life or some other time
that suits their requirements as compared to other tech organizations,
which usually has 18 weeks.
Judgments related to Corporate Social Responsibility
In Technicolor India (P.) Ltd. v. Registrar of Companies[4] the
Company met the net profit models, under section 135 of the Companies
Act, 2013, and had a CSR committee as well. Yet, during the financial
year 2017-18, the company spent less than the limit referenced in
Section 135 (5) of the Act, for which an explanation was appropriately
given by the organization in its Director’s Report. However, it was tracked
down that the sum spent on the CSR and related detail is inaccurately
mentioned in the Director’s report, subsequently to which the
organization sent an application to NCLT Bangalore. The court permitted
the organization to reconsider its report, offering freedom to the
organization to file for compounding under section 441 of the Act.
Alok Pharmaceuticals and Industrial Company Private
Limited[5], Rapid Estates Private Limited[6], Avinash Developers
Private Limited[7] where a Compounding Application was filed before
the Registrar of Companies and the NCLT. According to the ROC, the
application was filed because the Company abused the guidelines of
Section 134 (3) (o) of the Companies Act, 2013 read with Rule 8 of
Companies (Corporate Social Responsibility Policy) Rules, 2014 wherein
the Company neglects to give justification for the non-spending of the
CSR sum for the Financial Years 2011-12 to 2013-14 in Director’s
Report.
Conclusion
Society’s expectations for the developmental growth of the country by
companies are increasing day by day. In this way, it has gotten essential
for organizations to exercise social duties to boost their appearance in
the general public. CSR does not only create a brand building of the
company on the outside, but it also makes an inside reputation among
its representatives. some of their drives without a doubt make shared
worth; a few, however, expected to do as such, make more incentive for
society than for the firm; and some are planned to make value
fundamentally
for society. Reveling into practices that help society build adds to the
goodwill of an organization. CSR can’t be extra – it should run as the
foundation of each business’s morals, and its treatment of workers and
clients. Thus, CSR is turning into an emerging and progressively
competitive field. Being a respectable company is progressively
significant for business success and the source lies in adhering with
public expectations and needs, and in conveying contributions and
accomplishments generally and effectively.