Corporate Social Responsibility: Giving Back to the Society

INTRODUCTION:

Introduction of Corporate Social Responsibility (CSR) is one of the greatest initiative by the Ministry of Corporate Affairs introduced on 1^st April, 2014. Through the emergence of a mandatory CSR expenditure and strict mechanism of law, Corporates are now entitled to look past their businesses & profits and are liable to give back to the society, environment, customers etc. CSR is an extremely important for sustainable development of all stakeholders. After enactment of Section 135 of Companies Act 2013 Corporate Social Responsibility expenditure is made mandatory for certain corporate.

INTERNATIONAL APPROACH:

Before the introduction of Companies Act, 2013 there was no awareness of Corporate Social Responsibility among the Indian Companies. CSR was more famous term in the European countries and then in United States. These countries were and are continuously implementing the CSR activities by taking various social initiatives. However in Asia, CSR is a late comer and few decades back there were only few corporates who were contributing to the society not for obligation but for passion to serve the society. But from the last decade and after the enactment of Companies Act, 2013 Indian Corporates are now serious towards the CSR activities. Indian corporates are implementing the CSR activities very actively and also it is impacting the society positively. Now the Indian businesses are more focused on sustainable development. The CSR initiative not only contributes towards the society but also increase the business efficiency. In the recent amendment, now an Indian company can engage international organizations 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.

OVERALL DEVELOPMENT:

Implementing the CSR activites by the Corporates not only benefits the outside world but also the inside environment of the organization. Contributions develops the sense of responsibility among the employees and staff of the organization that they are the part of the contribution. Each person of the organization is responsible for the achievement of the turnover, profits of the organization and which in return benefits the society by implementing the CSR activities. Employees develop a habit of working together for a social cause. The Organization which thinks about the development of the society builds the positive image among the employees which results in retention of the employees for a longer period of time and build their loyalty towards the Organization.

SCOPE FOR COMPANY SECRETARIES:

Company secretaries in India can be defined as a compliance watcher or law keeper. As the company secretary has an immense knowledge of the various laws other than the Company law. Be it a Company secretary in whole time employment or a practicing company secretary, the company secretary can play vital role in the development of CSR values and policy for an organization and also in implementation of various other laws significant from society perspective like, environment laws, competition laws etc. Being a compliance officer of the Company a company secretary can be an advisor to the Board of directors in drafting CSR policies, awareness for compliances regarding CSR. A practicing company secretary can check and verify all the compliances done by the Company with respect to CSR and also guide the Company to make proper planning for the CSR implementation and make it aware of the amendments made by the government in this regard.

SCENARIO UNDER COMPANIES ACT, 2013:

Original Provisions:

• CSR related section 135 of the Companies Act, 2013 made effective from 1st April, 2014
• Schedule VII of Companies Act, 2013 specifying list of CSR activities
• The Companies (Corporate Social Responsibility Policy) Rules, 2014 made effective from 1^st April, 2014

CSR provisions Applicability:

Every Company having:

• Net worth of Rs. 500 core or more; or
• Turnover of Rs. 1000 Crore or more; or
• Net profits of Rs. 5 Crore or more during the immediately preceding financial year

 Definitions under the Act:

“Administrative overheads” means the expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme;

“Corporate Social Responsibility (CSR)” means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these rules, but shall not include the following, namely:-

(i) activities undertaken in pursuance of 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 national level or India at 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 sponsorship basis for deriving marketing benefits for its products or services;

(vi) activities carried out for fulfilment of any other statutory obligations under any law in force in India;

 “Net Profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely: –

(i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

(ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act:

Provided that in case of a foreign company covered under these 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;

 “Net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits [securities premium account and debit or credit balance of profit and loss account], after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

“Turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

OBLIGATION ON COMPANIES:

 Constitution of CSR Committee:

•  Company should constitute a CSR Committee of Board of Directors to undertake and monitor CSR activities.
• The CSR Committee shall consist of three (3) or more Director, out of which at least one (1) director shall be an Independent Director.
• For any company which is not required to appoint an independent director, such committee shall be constituted without Independent Director.

In case of Private Companies having two (2) directors, the committee will be constituted with only two (2) such Directors. [Rule 3 of The Companies (Corporate Social Responsibility Policy) Rules, 2014]

• Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.

 Formation of CSR policy:

• The CSR Committee shall,-

(i) formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII read with Annexure referred to at para (i) of General Circular No. 21/2014 dated 18th June, 2014;

(ii) recommend the amount of expenditure to be incurred on the activities referred  and

(iii) monitor the CSR Policy of the company from time to time.

Policy Disclosure requirements for company:

• The Board of every company shall:

(i) after taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in the form of Annual Report on CSR activities; and

(ii) ensure that the activities as are included in CSR Policy of the company are undertaken by the company

CSR Implementation:

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

a) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company, or

b) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or

c) any entity established under an Act of Parliament or a State legislature; or

d) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities.

• Every entity, who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the Registrar, with effect from the 01st day of April 2021
• 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.
• 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.
• 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.

CSR spending by Company:

• Responsibility of the Board of every company to ensure that the company spends, in every financial year, at least two (2) percent of the average net profits of the company made during the three (3) immediately preceding financial years, in pursuance of its CSR Policy.
• The board shall ensure that the administrative overheads shall not exceed five percent 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 of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
• Where a company spends an amount in excess of requirement provided under sub-section (5) of section 135, such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up to immediate succeeding three financial years.
• The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by –

(a) a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number under sub-rule (2) of rule 4; or

(b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or

(c) a public authority:

Provided that any capital asset created by a company prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, shall within a period of one hundred and eighty days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than ninety days with the approval of the Board based on reasonable justification.]

• No penalty prescribed for non-contribution to CSR however it has to report the said facts with reasons to all stake holders through Board reports.

CSR Activities to be undertaken by the Company:

• The list of CSR activities indicated in schedule VII which generally includes eradicating extreme hunger and poverty, promotion of education, gender equality & empowering women, ensuring environmental sustainability, employment enhancing vocational skills around the local area/s around the Company where it operates.
• The activities included in Schedule VII read with Annexure referred to at para (i) of General Circular No. 21/2014 dated 18th June, 2014 are to be given liberal interpretation.
• The CSR activities shall be undertaken by the 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.

CSR vehicle’s company can use:

• The Board of a company may decide to undertake its CSR activities on its own
• Or 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 (erstwhile Section 25) of the Act.
• Or through an outside registered trust or a registered society or a company established under section 8 (erstwhile Section 25) having an established track record of three years in undertaking similar projects or programs.
• Further, a company may also collaborate with other companies for undertaking CSR activities such that the CSR Committees of the respective companies are in a position to report separately on such CSR Activities in accordance with the CSR Rules.

Annual CSR Reporting:

CSR Rules provides that the companies upon which the CSR Rules are applicable on or after 1^st April, 2014 shall be required to incorporate in its Board’s report an annual report on CSR containing the following particulars:

• The Board’s Report of a company covered under CSR applicability pertaining to any financial year shall include an annual report on CSR containing particulars as specified in the 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 containing particulars as specified in the rules.
• Every company having average CSR obligation of ten crore rupees or more in pursuance of subsection (5) of section 135 of the Act, in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one 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 Corporate Social Responsibility for that financial year, which shall not exceed five percent of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is less.
• The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website, if any, for public access.
• Until a fund is specified in Schedule VII for the purposes of subsection (5) and(6) of section 135 of the Act, the unspent CSR amount, if any, shall be transferred by the company to any fund included in schedule VII of the Act.
• Every company covered under the provisions of sub-section (1) to section 135 shall furnish a report on Corporate Social Responsibility in Form CSR-2 to the Registrar for the preceding financial year (2020-2021) and onwards as an addendum to Form AOC-4 or AOC-4 XBRL or AOC-4 NBFC (Ind AS), as the case may be.

CONCLUSION:

Introduction of the concept of CSR as a mandatory provision through the Companies Act, 2013 is one of the greatest step taken by the Indian Government which is a progressive concept for sustainable development and growth of the country. We as a professional and a legal advisor to the Organizations should promote and guide them to contribute towards the society ethically and help them in strengthening the social responsibility of businesses.