Corporate Social Responsibility-An Overview

The concept of Corporate Social Responsibility (CSR) is not new in India, companies have been voluntarily contributing towards CSR. However, with the enactment of Companies Act, 2013 it has become mandatory for some companies to contribute towards CSR from the date on which provisions relating to CSR which are governed by section 135 of Companies Act, 2013 has been notified i.e. 01.04.2014.

1. Applicability of Corporate Social Responsibility

The provisions of CSR will be applicable for every company whether private/public company(listed/unlisted) or foreign companies having branches or project offices in India which meet any of the three specified criteria mentioned below during any of the three preceding financial years:

• Having net worth of rupees five hundred crore or more or
• Having turnover of rupees one thousand crore or more or
• Having a net profit of rupees five crore or more

2. Formation of CSR Committee

Every company to which the provisions are applicable must formulate a CSR Committee of the Board.

a. Composition of the Corporate Social Responsibility Committee:

• The Committee must consist of three or more directors, out of which at least one director shall be an independent director

• In case of unlisted public company or a private company which is not required to appoint an independent director on the Board, the Committee shall be formed without an independent director

• In case of a private company having only two directors on its Board the Committee shall be constituted with two such directors

• In case of foreign company the Committee shall comprise of at least two directors of which one should be a person who is a resident in India and has been authorized on behalf of the company to accept service of process and any notices or other documents required to be served on the company and another person shall be nominated by the foreign company

b. Duties of the Corporate Social Responsibility Committee

It shall be the duty of the Committee to —

• Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company

• Recommend the amount of expenditure to be incurred on the activities referred above and

• Monitor the Corporate Social Responsibility Policy of the company from time to time

3. Formulation of CSR Policy

The CSR Policy will be formulated and recommended by the CSR Committee to the Board which shall indicate the activities to be undertaken by the company in areas or subject, as specified in Schedule VII of the Companies Act, 2013.The Board would consider the same in its meeting and approve the same with or without modifications, as the case may be and the final policy should be displayed on the website of the company, if any.Further, it will be the duty of Board to ensure that the activities as included in Corporate Social Responsibility Policy of the company are undertaken by the company.

Activities which have been specified in Schedule VII of Companies Act, 2013 which may be included by companies in their Corporate Social Responsibility Policies are as follows:

Activities relating to:—

(i) Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation [including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation] and making available safe drinking water.

(ii) Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

(iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.

(iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resources and maintaining quality of soil, air and water [including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga].

(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional art and handicrafts.

(vi) Measures for the benefit of armed forces veterans, war widows and their dependents.

(vii) Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports.

(viii) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women.

(ix) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.

(x) Rural development projects.

(xi) Slum area development.

The term ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

The activities mentioned above should be interpreted liberally so as to capture the essence of the subjects enumerated.

4. Disclosure in the Boards’ Report

Every company to which the provisions relating to CSR is applicable must disclose the following in its Board’s Report which is prepared in accordance with section 134(3) of Companies Act, 2013:

• Composition of CSR Committee
• Disclosure of the contents of the CSR Policy
• Reason for non-spending of minimum CSR Expenditure, in case the minimum amount required to be spent towards CSR have not been fully spent

5. Expenditure to be incurred on CSR Activities

Following may be noted with regard to CSR Expenditure and the CSR Activities:

• Every company to which the provisions is applicable must spend at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of the CSR Policy

• No upper limit has been specified with regard to CSR expenditure which basically means that the company can even spend more than the minimum requirement

• Average net profit shall be calculated on the basis of provisions of Section 198 which is primarily “Profit before Tax”. Further, the profit so calculated shall not include the profit from overseas branch and any dividend received from other companies in India which are covered under Section 135 of Companies Act, 2013

• The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities

• A company may carry out CSR activity either at its own or through implementing agencies or by collaborating with other companies subject to the conditions as may be laid down

• Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of Indian subsidiary if, the CSR expenditure are routed through Indian subsidiaries and if the Indian subsidiary is covered under the CSR provisions

6. Expenditure not considered as part of CSR Expenditure

• Expenditure incurred on CSR projects or programs or activities undertaken outside India

• Expenditure exceeding five percent of total CSR expenditure of the company in one financial year spent by the company on building CSR capacities of their own personnel as well as those of the implementing agencies through institutions with established track records of at least three financial years

• Expenditure on activities undertaken by the company in the ordinary course of business

• Expenditure on activities that benefit only employees of the company and their families

• Any contribution directly or indirectly to political party

• Expenditure on any one-off events like marathons/awards/charitable contributions/advertisement/sponsorship of TV programmes, etc

• Expenditure incurred by companies for the fulfilment of any Act/Statute or regulations

7. Penalty in case of non-compliance

Though it is mandatory to contribute a specified amount towards CSR activities, however, if the company fails to contribute, it is only required to specify reasons in its Board’s Report for that failure. There is no fine or penalty provided in the section for its failure to contribute towards CSR activities. Further no penalty has been specified for non-compliance of any of the provisions of section 135 of Companies Act, 2013 in the said section. However, in case of non-compliance of provisions there may be a penalty imposed on the company and every officer who is in default as per section 450 of the Companies Act, 2013 which deals with punishment where no specific penalty or punishment is provided.

Section 450 reads as follows:

“If a company or any officer of a company or any other person contravenes any of the provisions  of this Act or the rules made there under, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.”

8. Exemption from complying with provisions of Corporate Social Responsibility

The provisions of section 135 shall not be applicable for a period of five years from the commencement of business to following class of companies:

• To an unlisted public company which is licensed to operate by the Reserve Bank of India or the Securities and Exchange Board of India or the Insurance Regulatory and Development Authority of India from the International Financial Services Centre located in an approved multi services Special Economic Zone set-up under the Special Economic Zones Act, 2005 (28 of 2005) read with the Special Economic Zones Rules, 2006                     
• To a private company which is licensed to operate by the Reserve Bank of India or the Securities and Exchange Board of India or the Insurance Regulatory and Development Authority of India from the International Financial Services Centre located in an approved multi services Special Economic Zone set-up under the Special Economic Zones Act, 2005 (28 of 2005) read with the Special Economic Zones Rules, 2006

9. Amendments as per Companies (Amendment) Act, 2017

The amendments which have been brought about are as follows:

• While deciding whether provisions of CSR would be applicable to a company or not now the net profit or net worth or turnover of preceding financial year is to be checked and not of preceding three financial years
• In case of a company which is not required to appoint independent director under sub-section (4) of section 149, the CSR Committee may be formed with two or more directors
• The entire CSR policy need not be given only the salient features of the policy and any change therein shall be specified in brief in the Board’s report and the web-address indicating therein at which the complete policy is available should be mentioned.
• for the purpose of Section 135 “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198