Corporate Social Responsibility (CSR) means the voluntary contributions made by companies to a better society and a cleaner environment. It is a concept whereby companies integrate social and other useful concerns in their business operations for the betterment of their stakeholders and society in general.
However, Section 135 of the Companies Act, 2013 (“Act”) provides that certain companies must mandatorily contribute a certain amount towards CSR activities.
CSR Applicability in India
The provisions of CSR apply to every company fulfilling any of the following conditions in the preceding financial year:
- Net worth of more than Rs.500 crore
- Turnover of more than Rs.1000 crore
- Net profit of more than Rs.5 crore
The Board of Directors of every company for which the CSR provisions apply must ensure that the company spends in every financial year at least 2% of its average net profits made during the immediately preceding three financial years as per its CSR policy.
Suppose the company has not completed three financial years since its incorporation. In that case, it must spend 2% of its average net profits made during the immediately preceding financial years as per its CSR policy.
List of Permitted CSR Activities Under Schedule VII
The Board of Directors shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included in Schedule VII of the Act.
i) Eradicating poverty, hunger and malnutrition, promoting health care which includes sanitation and preventive health care, contributing to the Swach Bharat Kosh set-up by the Central Government for the promotion of 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, empowering women, setting up old age homes, daycare centres and 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, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
vii) Training to stimulate rural sports, nationally recognized sports, Paralympic sports and Olympic sports.
viii) Contribution to the Prime Minister’s National Relief Fund, Prime Minister’s Central Assistance and Relief in Emergency Situations Fund (PM CARES 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, other backward classes, minorities and women.
ix) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government, State Government, Public Sector Undertaking or any agency of the Central Government or State Government.
x) Contributions to publicly funded Universities, IITs, National Laboratories and autonomous bodies established under DAE, DBT, DST, Department of Pharmaceuticals, Ministry of AYUSH, Ministry of Electronics and Information Technology and other bodies, namely DRDO, ICAR, ICMR and CSIR, engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
xi) Rural development projects.
xii) Slum area development. Slum area means 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.
xiii) Disaster management, including relief, rehabilitation and reconstruction activities.
Non- Permitted CSR Activities
As per (Rule 2(d) of Companies (Corporate Social Responsibility Policy) Rules, 2014) the Government also specified the activities that shall not be covered under the ambit of CSR contribution.
(i) Activities are undertaken in pursuance of the 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 the national level or India at the 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 a sponsorship basis for deriving marketing benefits for its products or services;
(vi) Activities carried out for the fulfilment of any other statutory obligations under any law in force in India;
Penalties for Companies
- Failure to Spend CSR Funds:
Companies that fail to spend at least 2% of their average net profit over the preceding three years on CSR activities are liable to a penalty of twice the amount required to be spent, or ₹1 crore, whichever is less.
- Failure to Transfer Unspent CSR Funds:
If a company fails to transfer unspent CSR funds to specified funds or the Unspent Corporate Social Responsibility Account, they are liable to a penalty of twice the amount required to be transferred, or ₹1 crore, whichever is less.
- Non-compliance with Reporting Requirements:
Companies that fail to disclose details about their CSR policy and initiatives in the Board’s report face a penalty of ₹3,00,000.
- Non-Payment of Penalty:
If a company fails to pay the penalty within the prescribed time limit, they can face a fine ranging from ₹25,000 to ₹5,00,000.
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