Corporate Social Responsibility (CSR) & related provisions

Corporate Social Responsibility

CSR in relation to a Company means a social responsibility of a company towards the society or in the area, in which it operates its business.

Further, “Corporate Social Responsibility (CSR)” means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Companies Act, 2013, but shall not include the following, namely:-

1. Activities undertaken in pursuance of normal course of business of the company;

2. 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;

3. Contribution of any amount directly or indirectly to any political party;

4. Activities benefitting employees of the company;

5. Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;

6. Activities carried out for fulfilment of any other statutory obligations under any law in force in India;

Applicability of the CSR provisions:

Every Company having- –

• Net worth of ₹500 crore or more, or –
• Turnover of ₹1000 crore or more, or –
• Net profit of ₹5 crore or more

During the immediately preceding financial year, shall constitute CSR Committee of the Board and undertake CSR activities.

However, if the amount required to be spent as CSR is 50 Lacs or less, requirement to constitute a CSR committee shall not be applicable and its functions shall be discharged by the Board of Directors. Further, the CSR provisions would also apply to section 8 companies registered under the Act, and foreign companies registered in India.

Requirement of CSR Committee Constitution:

Every company to which CSR criteria is applicable and the amount to be spent by a company is more than Rs. 50 lakh shall be required to constitute a CSR committee of the Board.

• Corporate Social Responsibility Committee of the Board shall consist of 3 or more directors, out of which at least 1 director shall be an independent director, However companies including private company which does not require to appoint the independent directors, shall constitute CSR Committee without such directors.
• In case of a foreign company, the CSR Committee shall comprise of at least 2 persons of which one person shall be as specified under section 380 (1) (d) of the Companies Act, 2013 and another nominated person by the foreign company.

Responsibilities of CSR Committee

The CSR Committee shall ensure the following responsibilities:

• Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the Company in areas or subjects, described in ‘Schedule VII’ of the Act.
• Recommending the amount of expenditure to be incurred on the CSR activities.
• Monitoring the CSR Policy of the Company from time to time.
• CSR committee shall formulate and recommend to the Board an Annual Action Plan in pursuance of its CSR Policy, which shall include the following namely;

1. the list of CSR projects or programmes that are approved by BoD to be undertaken in areas or subjects specified in Schedule VII of the Act;

2. the manner of execution of such projects or programmes, the modalities of utilisation of funds and implementation schedules for the projects or programmes;

3. monitoring and reporting mechanism for the projects or programmes; and details of need and impact assessment, if any, for the projects undertaken by the company:

Board may modify such plan at any time during the financial year, as per the recommendation of its CSR Committee, based on the reasonable justification to that effect.

Functions of Board:

The Board of Directors of every company shall:

Sl. No.                                Functions of Board of Directors of a Company

1. After taking into account the recommendations made by the CSR Committee,
approve the CSR Policy for the company,

2. Further, the Company shall mandatorily disclose the composition of the CSR Committee, CSR Policy and Projects approved by the Board on their website, if any.

3. Ensure that the activities which are included in CSR Policy of the company are undertaken by the company;

CSR expenditure :

Ensure that the company spends in every financial year, at least 2% of the average net profits made during the 3 immediately preceding financial years [or where the company has not completed the period of 3 financial years since its incorporation, profit made during such immediately preceding financial years].

In absence of CSR Committee, the BoD will discharge the functions of CSR committee also.

Provisions regarding spending CSR expenditure:

While considering any activity for CSR expenditure following provisions should be taken care of:

• 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.
• Administrative overheads incurred by the Company shall not exceed 5% of total CSR expenditure of the company for the financial year.
• Any surplus arising out of the CSR activities shall not form part of the business profit and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in accordance of CSR policy and annual action plan or transfer such surplus amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

Disclosure Requirement:

The Board shall disclose in its Board Report & on website of the Company, if any:

• The composition of the CSR Committee.
• CSR Policy
• In case CSR spending does not meet 2%, the reasons for the unspent amount, and details of the transfer of unspent amount relating to an ongoing project to a specified fund.

Excess Spending:

If a company spends an amount in excess of the prescribed CSR expenditure, such excess amount may be carried forward to be set off from expenditure requirement of succeeding financial years subject to following conditions:

1. the set-off can be claimed up to next 3 financial years only;

2. the excess amount available for set off shall not include the surplus arising out of the CSR activities.

3. Board Resolution shall be passed in this regard.

Surplus arising out of CSR projects:

Any surplus arising out of the CSR activities shall not form part of the business profit of a company and:

1. It shall be ploughed back into the same project; or

2. It shall be transferred to the Unspent CSR Account, and shall be spent in pursuance of CSR Policy and annual action plan of the company; or

3. It shall be transferred to a fund specified in Schedule VII to the Act, within a period of 6 months of the expiry of the financial year.

4. Further such surplus amount, ploughed back into the same project, shall not be included:

• • in calculation of excess amount by the company, carried forward for claiming set off in succeeding three financial years.
  • as part of 2% CSR obligation of the company for the financial year in which it is spent.

CSR Reporting:

The Board’s Report of a company pertaining to any financial year shall include an annual report on CSR in a specified format given under CSR Rules.

In case of a foreign company, the balance sheet filed under clause (b) of sub-section (1) of section 381 of the Act, shall contain an annual report on CSR in a specified format given under CSR Rules.

• Every company having average CSR obligation of 10 crore or more in the 3 immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of 1 crore or more, and which have been completed not less than 1 year before undertaking the impact study.
• The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.
• A Company undertaking impact assessment may book the expenditure towards CSR for that financial year, which shall not exceed 2% of the total CSR expenditure for that financial year or 50 lakh rupees, whichever is higher.

Implementation of CSR:

The Board shall ensure that the CSR activities are undertaken by the company itself or through –

1. a section 8 company or a registered public trust or a registered society, established by the company, either singly or along with any other company; or

2. a section 8 company or a registered trust or a registered society, established by the Central or State Government; or

3. any entity established under an Act of Parliament or a State legislature; or any other company established under section 8 of the Act, or a registered public trust or a registered society, and having an established track record of at least three years in undertaking similar activities; or

(Every entity mentioned above, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar. Further, on the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically.)

• However, a company may engage international organisations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy as well as for capacity building of their own personnel for CSR.
• Further, a company may also collaborate with other companies for undertaking projects or programmes 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 programmes.
• Further, the Board of a company shall satisfy itself that the funds so disbursed have been utilised for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to the effect.
• In case of ongoing project, the Board of a Company shall monitor the implementation of the project with reference to the approved timelines and year wise allocation and shall be competent to make modifications, if any, for smooth implementation of the project within the overall permissible time period.
• The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by –

1. a section 8 company or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number; or

2. beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities;

3. a public authority.

CSR implementing agency:

CSR implementing Agency refers to agencies which take up social, educational and other welfare work. The CSR activities can be carried out by the company either directly or through any implementing agency or through a combination of both methods. CSR implementing Agency shall have a CSR Registration Number. CSR Implementing Agency may get registered with CG by filling form CSR-1.

Criteria to register an entity as CSR implementing Agency

1. Entity should be, either: a company established under section 8, or a registered public trust, or a registered society, or any entity established under an Act of Parliament or a State legislature;

2. In case of other than govt. established entities, it shall be registered under section 12A and 80G of the Income Tax Act, 1961.

3. It shall have an established track record of at least 3 years in undertaking similar activities. Requirement of track record is exempted if such entity is established by the Company whether singly or jointly.

Important terms:

• On-going project:  “On-going Project” means a multi-year project undertaken by a company in fulfillment of its CSR obligation, which is started in current FY and will be completed within next 3 FY (maximum) and it includes such projects that were initially not approved as a multiyear project but whose duration has been extended beyond 1 year by the Board based on reasonable justification.
• Administrative overheads:  “Administrative overheads” means the expenses incurred by the company for ‘general management and administration’ of CSR functions but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular CSR project.”

Treatment of unspent amount:

If the company fails to spend amount required to be spent as CSR:

1. If there is no ON-GOING PROJECT : Transfer such unspent amount to a Fund specified in Schedule VII, within period of 6 months from expiry of the financial year or

2. If there is ON-GOING PROJECT : Amount remaining unspent, shall be transferred by the company within a period of 30 days from the end of the FY to a special account the “Unspent Corporate Social Responsibility Account”, and such amount shall be spent within a period of 3 financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of the third financial year.

3. Where a company spends an amount in excess of requirement, such excess amount may be set off against the requirement to spend up to next 3 financial years.

Conclusion:

Corporate Social Responsibility (CSR) is often considered at the organizational level as a strategic activity that contributes to a brand’s reputation. CSR strategies encourage the company to make a positive impact on the environment and stakeholders including consumers, employees, investors, communities, and others. So, Corporate social responsibility is more than just a business trend. Businesses that want to stay relevant to new generations and who want to help people in need around the world while increasing their own revenue and efficiency will benefit from embracing CSR.