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Every business works within the society, earns from the society and utilises resources of the society. In return, it is the responsibility of every business to cater the society. Corporate Social Responsibility (CSR) is one such term given to the obligation of every business towards society. It requires management to be accountable to the full range of stakeholders. It is the constant commitment by the business to operate ethically and make a contribution to the economic development of the country while improving the quality of life of the workforce and their families and local community and society at large. It is a way of integrating the economic, social and environmental imperatives of business activities.
So far India is probably the only country to have enacted Corporate Social Responsibility (CSR) into a law. The world over CSR is all about business models and not philanthropy. It is internal and not external. It is only in India that it has been made external. Section 135 of the Companies Act, 2013 (“Act”) and the Companies (Corporate Social Responsibility Policy) Rules, 2014 (Rules”) deal with the Corporate Social Responsibility. As per the Rules, the term ‘”Corporate Social Responsibility” means and includes, but is not limited to-
- Projects or programs relating to activities specified in Schedule VII of the Act; or
- Projects or programs relating to activities undertaken by the board of directors of a company in pursuance of recommendations of CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover such subjects enumerated in Schedule VII of the Act.
Click here to check the activities specified in Schedule VII of the Act.
Applicability of Corporate Social Responsibility
The law has made certain criteria for the applicability of CSR provisions on the companies. Although it is applicable to every company registered under the Act and any other previous Company Law, companies falling within the following criteria are mandatorily required to perform the obligation of CSR.
As per Section 135 of the Act, CSR is applicable on a company which as at the end of the previous financial year has:
- Networth of Rs. 500 Crore or more OR
- Turnover of Rs. 1000 Crore or more OR
- Net Profit of Rs. 5 Crore or more.
Companies falling within the above criteria shall spend on CSR activities at least 2% of the average net profit for the immediately preceding three financial years. This should not be undertaken in the normal course of business and must be in respect of the activities mentioned in Schedule VII of the Act.
Calculation of net profit to compute CSR spend
Net profit should not include such sums as may be prescribed (mentioned below) and should be calculated in accordance with the provisions of Section 198 of the Act.
As per the Rules, net profit means the net profit of a company as per its financial statements prepared in accordance with the applicable provisions of the Act, but would not include the following:
- Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
- Any dividend received from other companies in India, which are covered under and complying with Section 135 of the Act.
In case of a foreign company covered under CSR rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381 read with section 198 of the Act.
- CSR Policy relates to the activities to be undertaken by a company as specified in Schedule VII of the Act and the expenditure thereon, excluding activities undertaken in pursuance of the normal course of business of the company.
- The CSR policy of a company shall include the following:
- A list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same;
- Monitoring process of such projects or programs; and
- Any other matter related to the CSR activities of the company.
- The CSR activities shall be undertaken by a company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.
- The Board shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included in Schedule VII.
- The CSR Policy of a company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company.
Corporate Social Responsibility Committee
Every company falling within the criteria of Corporate Social Responsibility as envisaged under section 135 of the Act shall constitute a Corporate Social Responsibility Committee. The Corporate Social Responsibility Committee (“Committee”) is appointed by the Board of Directors to promote a culture that emphasizes and set high standards for corporate social responsibility, review corporate performance against those standards and recommend amount of expenditure to be incurred on CSR activities.
CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
Time Limit for the constitution of the committee – There is nothing mentioned in the Act. But it is advisable to constitute the committee in the first board meeting once the provisions of section 135 of the Act are applicable to a company
Composition of CSR Committee – CSR Committee shall consist of three or more directors, out of which at least one director shall be an Independent director.
Where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.
- Listed Company – three or more directors (at least one should be an independent director)
- Unlisted Public Company – two or more directors (if the company is not required to appoint an independent director under sub-section (4) of section 149)
- Private Company – two or more directors
- Foreign Company – two or more persons (one nominated by the foreign company and one director shall be a resident of India)
Essentials of Corporate Social Responsibility Activities
- The Board of a company may decide to undertake its CSR activities approved by the CSR committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise: Provided that-
- If such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects;
- The company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.
- A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
- The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.
- Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure shall not exceed five per cent of total CSR expenditure of the company in one financial year.
- Contribution of any amount directly or indirectly to any political party under section 182 of the Act shall not be considered as CSR activity.
CSR expenditure shall include all expenditure including contribution to the corpus, for projects or programs relating to CSR activities approved by the Board of Directors on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.
- The Board’s Report of a company covered under these rules pertaining to a financial year commencing on or after the 1st day of April, 2014 shall include an annual report on CSR particulars.
- In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (l) of section 381 shall contain an Annexure regarding the report on CSR.
Display of CSR activities on the website
The Board of Directors of a company shall, after taking into account the recommendations of CSR Committee, approve the CSR Policy for the company and disclose the content of such policy in its report and the same shall be displayed on the company’s website, if any
Companies (Amendment) Act, 2019
The new amendment act i.e. the Companies (Amendment) Act, 2019 was enacted on 31st July, 2019. The amendment act envisages the following changes in the principal act.
- Insertion of penal provisions for non-compliance of CSR spending: –
- Company – shall be punishable with fine – Rs 50,000 (minimum) – Rs 25 lakh (maximum)
- Officer in default – 3 years’ imprisonment or with rigorous fine (Rs 50,000 (minimum) – Rs 25 lakh (maximum) or both.
- Transfer of the unspent CSR amount to a fund as specified in Schedule VII, Such as the Prime Minister’s National Relief Fund, Clean Ganga Fund etc. where it does not relate to any on-going projects within 6 months from the end of the financial year.
- Transfer of the unspent CSR amount to Unspent Corporate Social Responsibility Account where it belongs to an on-going project, within 30 days of the end of the financial year. Further, such amount is to be spent in the next 3 financial years, failing which the same shall be transferred to a fund as mentioned in Schedule VII of the Act after the end of the 3 financial years.
The recent amendment to Section 135(5) of the Act, 2013 incorporating the “comply or be penalized” rule that requires the company to transfer the entire unspent CSR amount to a specified fund, means that once the financial year has ended, the company is straightaway obligated to transfer all the unspent CSR amount, except the ones which are being utilized for ongoing projects, to the fund. Naturally, that would mean that all unspent CSR amount will switch from the company’s control to the fund’s control which will be then utilized by the government in a centralized manner.
The intent of the lawmakers is clear in terms of spendings related to CSR. Companies have to mandatorily spend the CSR amount, either by itself or by transferring the unspent amount to various government-operated funds. Else, they will have to pay heavy penalties.
It clearly shows the thought process and the intent of the government. In order to make the CSR provisions more stringent, the government of India has now introduced another bill namely Companies (Amendment) Bill, 2020. The bill is yet to be passed, thus, we are not covering this bill under this article.
Click here to read various FAQs on Corporate Social Responsibility.
The article is written only for the purpose of providing information and knowledge related to CSR. This article is based on the provisions in force as on date and our interpretation of the law. Kindly check the relevant laws and provisions before relying on this article.