IMPACT OF CSR MANDATE ON INDIAN COMPANIES
1. INTRODUCTION
The activities of organizations affect consumers, shareholders, suppliers, employees, and society at large. Corporations completely depend on and draw from society in the form of infrastructure, labour, educated workforce, railways, electricity, water resources, and land. Thus, it is their responsibility to contribute to society too. Such responsibilities of businesses are referred to as corporate social responsibility.
In recent years, corporate social responsibility (CSR) has become very crucial. It refers to strategies and initiatives that companies implement as part of corporate governance that are designed to ensure the company’s operations are ethical and beneficial for society.
It is a type of international self-regulating business model that helps a company be socially accountable- to itself, its stakeholders, and the public. By practicing corporate social responsibility, companies can perceive the kind of impact they are having on all aspects of society, including economic, social, and environmental.
Nowadays, consumers, employees, and stakeholders prioritize CSR when choosing a brand or company therefore, it is becoming increasingly important to have a socially conscious image. Corporations are being held accountable for effecting social change with their business beliefs, practices, and profits. Through CSR programs, such as philanthropy, and volunteer efforts, business can benefit society, all while promoting their brands.
To engage in CSR means that, in the ordinary course of business, a company is operating in way that add to the betterment of society and the environment, instead of contributing negatively to them. As important as CSR is for the community, it is equally pivotal for a company’s success. A strong and effective CSR program is an opportunity for companies to demonstrate their good corporate citizenship.
II. CSR IN INDIA
The concept of CSR is not new in India. What is new is the mandate on CSR by companies meeting a specific criterion. In India many business houses have traditionally associated money making with a philanthropic activity side by side. It was more about giving donations and taking up activities for uplifting the poor. The idea was to use the society’s resources to make money and thereafter giving away some of it back to the society in the name of charity. Over the years, this sort of funding also came to be seen as a means of creating goodwill and reputation in market. Companies are increasingly coming up with advertising their activities in media, gatherings and their website to this end. The concept of CSR introduced by the act has more to do redistribution of wealth in the society rather than philanthropy and CSR has been emphasized as an organizational objective.
III. COMPANIES ACT, 2013 AND CSR
After decades of debate, the Indian Parliament finally passed its first update of the country’s corporate law since the Companies Act, 1956. Modifying the nearly six-decade-old Companies Act, the new Companies Act included several provisions that seek to modernize corporate governance rules. Making it more strict in the country. It also gives relief to social development by making it mandatory for certain class of profitable enterprises to spend some percentage of profits on social welfare activities.
By passing the new provisions, the Companies Act, 2013 has become the first in the world to make CSR mandatory. The relevant section 135 of the Act has seen extensive public consultations, opinions and debates and although the new Act introduces CSR as a ‘perform or explain’ concept, the idea has generally been accepted well in business circle. The Act provides a list of activities which may be taken up as a CSR project, but the decision to pick up a certain activity has been left to the direction of the good minds in the company’s Board of Directors. The BOD has been entrusted with the responsibility of identifying avenues for proper utilization of CSR funds. The pathways can be a religious trust, a sustainable development project, education or any other charitable purpose.
IV. SPECIFIC REQUIREMENTS UNDER THE COMPANIES ACT, 2013
With the passing of Companies Act, 2013, the CSR activities henceforward come to be governed by the section 135 of the Act read with Companies (Corporate Social Responsibility Policy) Rules, 2014.
i. Applicability
As per section 135 of the Companies Act 2013, the CSR provision is applicable to companies which fulfils any of the following criteria during the immediately preceding financial year –
According to the CSR Rules, the CSR provision will also be applicable to every company including its holding or subsidiary, and a foreign company having its branch office or project office in India having net worth of Rs 500 Crore or more, or turnover of Rs 1000 crore or more or a net profit of Rs 5 Crore or more during any financial year.
The CSR Rules specify that a company which does not satisfy the specified criteria for a consecutive period of 3 financial years is not required to comply with the CSR obligations.
ii. CSR COMMITTEE
1. Section 135 of the 2013 Act requires the CSR Committee to consist of at least 3 directors, including at least 1 independent director. Where a company is not required to appoint an independent director, it shall have in its Corporate Social Responsibility Committee 2 or more directors.
2. Further, the CSR Rules have relaxed the requirement regarding the presence of 3 or more directors on the CSR Committee of the Board, in case where a private company has only 2 directors on the Board, the CSR Committee can be constituted with these 2 directors.
3. The CSR Committee of a foreign company shall comprise of at least 2 persons wherein one or more persons should be resident in India and the other person nominated by the foreign company. The Board’s report shall disclose the composition of the Corporate Social Responsibility Committee.
iii. THE FUNCTIONS OF CSR COMMIITTEE
1. To formulate and recommend to the Board, a CSR Policy which would indicate the activities to be undertaken In areas or subject, specified in Schedule VII of the Act.
2. To recommend the amount of the expenditure to be incurred on the activities undertaken in pursuance of the CSR policy.
3. To institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
4. To monitor the CSR policy of the company time to time.
iv. CSR EXPENDITURE
1. The Board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. This amount will be CSR expenditure.
2. If the company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount.
3. 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.
4. Expenditure incurred on specified activities that are carried out in India only will qualify as CSR expenditure. Such expenditure includes contribution to the corpus or on projects or programs relating to CSR activities.
5. Expenditure incurred in undertaking normal course of business will not form a part of the CSR expenditure. Companies would need to clearly distinguish those activities which are undertaken specifically in pursuance of normal course of business and those that are done incrementally as part of the CSR initiatives.
6. Any surplus arising out of CSR activities will not be considered as business profit for the spending company.
7. Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.
v. COMPUTATION OF NET PROFIT
“Net profit” means that net profit shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198. Every company will have to report its standalone net profit during a financial year for the purpose of determining whether or not it triggers the threshold criteria as prescribed under Section 135(1) of the Companies Act.
NOTE:- Computation of net profit for section 135 is as per section 198 of the Companies Act, 2013 which primarily is NET PROFIT BEFORE TAX.
vi. ACTIVITIES NOT AMOUNTING TO CSR
As per Rule 4 and Rule 6 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, Following shall not amount to CSR activities for the purpose of section 135
a) The CSR projects or programs or activities undertaken outside India.
b) The CSR projects or programs or activities that benefit only the employees of the companies and their families.
c) Contribution of any amount, directly or indirectly, to any political party under section 182 of the Companies Act, 2013.
d) Any activities undertaken in pursuance of normal course of business of a company.
vii. DISPLAY OF CSR POLICY ON THE WEBSITE
As per Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, and Rule 6 of the Companies (Accounts) Rules, 2014, the CSR Policy and its contents shall be displayed on the company’s website, if any, as per the particulars specified in the Annexure to the Companies (Corporate Social Responsibility Policy) Rules, 2014.
v. Analysis on CSR PROVISION UNDER COMPANIES AMENDMENT ACT, 2020
1. If the company spends an amount in excess of the requirement I.e. 2% of average net profits, such company may set off such excess amount against the requirement to spend for such number of succeeding financial years and in such manner as prescribed
2. As per the amendment in section 135 (6), the unspent amount, if any, for ongoing projects, shall be transferred in a separate bank account for the period of three financial years and failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
3. Unless the unspent amount relates to any ongoing project referred to in section 135 (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
4. Every company having minimum 10 crore of average CSR obligation in last 3 years shall have to undertake mandatory 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 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 CSR for that financial year, which shall not exceed 5% of the total CSR expenditure for that financial year or Rs. 50 lakhs, whichever is less.
5. Where the amount to be spent by a company under on CSR Activity does not exceed fifty lakhs rupees, the requirement for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall be discharged by the Board of Directors of such company.
VI. LIST OF SPECIFIED ACTIVITIES
Schedule VII of the Companies Act, 2013, as amended on 27th February 2014 prescribes the following activities for proposed CSR projects of companies,
1. Eradicating extreme hunger, poverty and malnutrition, promoting preventive health care and sanitation and availability of safe drinking water;
2. Promotion of education, including special education and employment-enhancing vocation skills especially among children, women, elderly and the differently-abed and livelihood enhancement projects;
3. 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;
4. 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;
5. 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;
6. Measures for the benefit of armed forces, veterans, war widows and their dependents;
7. Training to promote rural sports, nationally recognised sports, Paralympics sports and Olympic sports;
8. 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 Scheduled Castes, Scheduled Tribes, OBCs, minorities and women;
9. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
10. Rural development projects.
CSR of Indian Companies
India is the first country that has mandated CSR for companies in an amendment to the Companies Act, 2013. The CSR spending by top Indian companies in 2018 was 47% higher after the mandate than in 2014. The power and energy sector contributed over 2400 crore, the banking and financial services sector contributed 1353 crore while in IT industry generated about 1100 crore for corporate social responsibility.
It is gratifying to know that numerous Indian companies have taken a step towards the development of the country. Data shows that about 460 companies have been listed as CSR contributors for the country. Some of the famous corporates are ITC, Tata Group, Infosys, Mahindra & Mahindra, Tata Chemical and Bharat Petroleum Corporation Ltd.
Indian companies that topped CSR chart in 2021:
VIII. CONCLUSION
As important as CSR is for the community, it is equally valuable for a company. CSR activity can help forge a stronger bond between employees and corporations boost morale and help both employees and employers feel more connected with the world around them. A number of recent developments in 2021, as India finds itself in the midst of the second wave of the COVID-19 pandemic, has set the stage for major shifts in the way companies view social responsibility and work with the social sector.
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