Corporate Social responsibility (CSR) is continuing commitment by businesses to integrate social and environmental concerns in their business operations. India became the first country to legislate the need to undertake CSR activities and mandatorily report CSR initiatives under the new Companies Act 2013.
Prior to Companies Act 2013, CSR in India has traditionally been seen as a philanthropic activity. And in keeping with the Indian tradition, it was believed that every company has a moral responsibility to play an active role in discharging the social obligations, subject to the financial health of the company.
On 29th August 2013, The Companies Act 2013 replaced the Companies Act of 1956. The New Act has introduced far-reaching changes that affect company formation, administration, and governance, and incorporates an additional section i.e. Section 135 – clause on Corporate Social Responsibility obligations (“CSR”) for companies listed in India. The clause covers the essential prerequisites pertaining to the execution, fund allotment and reporting for successful project implementation.
In this write up, we will discuss about the provisions of CSR.
Applicability
Every Company, in its immediately preceding financial year having:
Net worth > 500 crore, or
Turnover > 1000 crore, or
Net profit > 5 crore
Every company, includes – Holding, Subsidiary or Foreign Company
Composition
At least 3 Directors, out of which one director shall be an independent Director.
Section 149(4) contains the mandatory requirement for appointment of independent director, which excludes unlisted public company and private company. So, an unlisted public company and a private company shall constitute a CSR committee without fulfilling the requirement of at least 1 independent Director.
√ Approve the CSR policy for the company
√ Disclose the contents of CSR policy in its report and also place it on the website of the Company
√ Ensure that the company spends, in every financial year, at least 2% of the average net profit of the company made during the 3 immediately preceding FY
Role of CSR Committee
√ Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company
√ Recommend the amount of expenditure to be incurred on the activities
√ Monitor the CSR Policy of the company from time to time.
Activities which may be included by companies in their CSR polices activities related to Schedule VII
(i) abolishing poverty, malnourishment and hunger, improvising health care which includes preventive health care and sanitation and making available safe drinking water
(ii) improvement in education which includes special education and employment strengthening vocation skills among children, women, elderly and the differently abled and livelihood enhancement projects
(iii) improving gender equality, setting up homes and hostels for women and orphans setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
(iv) Safeguarding environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining a quality of soil, air and water which also includes a contribution 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 arts and handicrafts
(vi) measures for the benefit of armed forces veterans, war widows and their dependents
(vii) training to stimulate 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 providing relief and welfare of the Scheduled Castes, the Scheduled and backward classes, minorities and women
(ix) Contribution to incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, and contributions to public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defense Research and Development Organization (DRDO), 7[Department of Biotechnology (DBT)], Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).]
(x) Rural development
(xi) slum area development where ‘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
(xii) disaster management, including relief, rehabilitation and reconstruction activities.
To sum up, Corporate Social Responsibility can be categoried into 4 types – philanthropy, environment conservation, diversity and labor practices, and volunteerism.
Spending of CSR Funds for COVID-19 is eligible CSR activity
> Contribution made to ‘PM CARES Fund’ shall qualify as CSR expenditure
> contribution to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ shall not qualify as admissible CSR expenditure
> Contribution made to State Disaster Management Authority to combat COVID-19 shall qualify as CSR expenditure
> If any ex-gratia payment is made to temporary / casual workers/ daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID 19, the same shall be admissible towards CSR expenditure
Minimum Expenditure Requirements for CSR Activities
Once a Company is eligible under the CSR guidelines, then the company shall ensure that every year it spends at least 2% of the average net profit of the company made during the three immediately preceding FY.
Any amount remaining unspent as discussed above shall be transferred (within a period of 30 days) to a special account (which is opened by the company in that behalf) in any scheduled bank to be called the unspent CSR account.
Transfer the unspent amount to a fund specified in Schedule VII
The above unspent amount shall be spent by the company in pursuance of its obligation towards the CSR within a period of three financial year from the date of transfer and if company fails to do so, the company shall transfer the same to a fund specified in schedule VII within a period of 30 days from the completion of third financial year.
Penal Provisions
If a company fails to spend and transfer the remaining unspent amount (as discussed above), then the company shall be punishable with:
A fine of Rs 50,000-25lakh, and every officer in default shall be punishable with imprisonment for maximum three years or with a minimum fine of Rs 50,000 which may increase to Rs 5 lakh, or with both.
Conclusion:
CSR activities are a critical part of the business strategy today and this assumes particular importance in India, since we are the first country to have legislated the need to undertake CSR spending and make CSR reporting mandatory under the Companies Act 2013. It gives the companies an opportunity to pay back to the community. A properly implemented CSR concept can bring along a variety of competitive advantages as well, such as enhanced access to capital and markets, increased sales and profits, operational cost savings, improved productivity and quality, efficient human resource base, improved brand image and reputation, enhanced customer loyalty, better decision making and risk management processes.
Disclaimer: The entire contents of this article is solely for information purpose and have been prepared based on relevant provisions and as per the information existing at the time of the preparation. It doesn’t constitute professional advice or a formal recommendation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information’s provided herein above.
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