Corporate Social Responsibility (CSR) under Companies Act 2013- Concept, Applicability, Provisions, Penalty

The Companies Act  1956 replaced by the new Companies Act 2013. There are so many changes that came into force and several provisions inserted the first time in the corporate world of India.

One of such new provisions is Corporate Social Responsibility (CSR) (section 135 of the companies act 13). The concept of CSR rests on the ideology of ‘give and take’.

CSR is a concept whereby companies not only consider their profitability and growth, but also the interest of society and the environment by taking the responsibility for the impact of their activities on stakeholders, environment, consumers, employees, communities, and all other members in the public sphere. The basic premise is that when the corporates get bigger in size, apart from the economic responsibility of earning profits, there are many other responsibilities attached to them which are more of non-financial /social nature.

Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014.

1. Applicability of Corporate Social Responsibility (CSR)

135(1) Section 135 is applicable to every Company including its holding or subsidiary having a net worth of Rs.500 Cr or more, OR turnover of Rs.1000 Cr or more OR a net profit of Rs. 5 Cr or more during the immediately preceding financial year.  ( It is clarified in FAQ issued by CSR that Net Profit means ‘NET PROFIT BEFORE TAX’)

2. Necessary Step to Be Taken to Implement CSR

Once a company is covered under the ambit of the CSR, it shall be required to comply with the provisions of the CSR -Section 135(1), required to do the following activities

  • Constitute CSR Committee
  • Board’s report shall disclose the compositions of the CSR Committee
  • Spend 2% of Average Net Profits of the last 3 years on CSR activities

3. CSR Committee

a. Constitution of CSR Committee

As company crosses the prescribed threshold limit as per section 135(1), the very first step to  constitute a CSR Committee of the Board consisting

  • 3 or more directors, out of which at least one director shall be an independent director. However, if a company is not required to appoint an independent director, then it shall have in 2 or more directors in the Committee
  • 2 directors in case of a private company having only two directors on its Board
  • at least 2 persons in case of a foreign Company of which one person shall be its authorized person resident in India and another nominated by the foreign company

b. Functions of the CSR Committee

The major function/role of the CSR committee are as follows

  • Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company in areas or subject, specified in Schedule VII
  • Recommend the amount of expenditure to be incurred on the activities referred to in CSR policy
  • Monitor the Corporate Social Responsibility Policy of the company from time to time.

4. Role Of Board Of Directors Of Companies to Which CSR is Applicable

The Board  of Directors of every company on which CSR is applicable shall,

  • Disclose the composition of the CSR Committee in Board Report
  • 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 such manner as may be prescribed.
  • Ensure that the activities as are included in the CSR Policy of the company are undertaken by the company

5. CSR Expenditure

The Board of every company on which CSR is applicable 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.

(*where the company has not completed the period of 3 financial years since its incorporation, during such immediately preceding financial years)

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR Activities.

6. CSR Policy

The CSR policy of the company mainly include such as,

  • Elaborates the activities to be undertaken by the Company subject to Schedule VII to the Act.
  • The activities mentioned in the policy must be undertaken by the company
  • The monitoring process of such projects or programs
  • A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company

7. CSR Activities

The CSR activities shall be undertaken by the company, should be recommended by CSR Committee & it should be mentioned  CSR Policy, excluding activities undertaken in pursuance of its normal course of business.

SCHEDULE VII (List of Permitted Activities for CSR)

Schedule VII of the Companies Act 2013, indicate the list of probable activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to,

  • Eradicating hunger, poverty, and malnutrition, promoting health care (including preventive health care) and sanitation (including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation) and making available safe drinking water.
  • Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently-abled and livelihood enhancement projects.
  • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, daycare centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining the quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga
  • 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 art and handicrafts;
  • Measures for the benefit of armed forces veterans, war widows, and their dependents;
  • Training to promote rural sports, nationally recognized sports, paralympic sports, and Olympic sports
  • Contribution to the prime minister’s national relief fund or any other fund set up by the central govt. for socio-economic development and relief and welfare of the scheduled caste, tribes, other backward classes, minorities, and women
  • 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), Defence Research and Development Organisation (DRDO), 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)
  • Rural development projects
  • Slum area development.

(Explanation.- For the purposes of this item, the term `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.)

  • Disaster management, including relief, rehabilitation, and reconstruction activities.

8. CSR Activities Through Trusts, Societies Or Section 8 Companies

The Board of Director may decide to undertake its CSR activities approved by the CSR Committee, through

  • a company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or along with any other company, or
  • 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 any entity established under an Act of Parliament or a State legislature
  • a section 8 company or a registered trust or a registered society, other than those specified in clauses (a) and (b) above, having an established track record of 3 years in undertaking similar programs or projects;

9. Activities Which Would Not Qualify As CSR Expenditure

The CSR projects or programs or activities NOT to be considered as CSR Activities:

  • The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.
  • One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programs etc. would not be qualified as part of CSR expenditure.
  • Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act, etc.) would not count as CSR expenditure under the Companies Act.
  • Contribution of any amount directly or indirectly to any political party shall not be considered as a CSR activity.
  • Activities are undertaken by the company in pursuance of its normal course of business.

10. Some Other Important Provisions On CSR        

  • Maximum 5% administrative overheads: Companies may build CSR capacities of their own personnel but such expenditure including administrative overhead shall not exceed 5% of total CSR expenditure of the company in one financial year
  • Surplus arising out of CSR activities: The CSR policy of the company shall specify that surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company.
  • Annual Report on CSR: The Board’ Report of the company shall include an annual report on CSR containing particulars as specified in Annexure under Companies(CSR) Rules, 2014.
  • Display CSR activities on the Website of the company, if any: The Board of Directors of the company shall approve CSR policy as recommended by the CSR committee and shall place the same on the website of the company, if any.

11. Penalty for Non-Compliance of CSR Provisions of Companies Act 2013

Section 135 does not lay down any penal provision in case a company fails to spend towards CSR activities. However, Section 135(5) provides that in case the company fails to spend such amount, the Board shall specify in its report reason for not spending the amount under Section 134(3)(o).

In case the company does not comply with Section 134, the company shall be punishable under Section 134(8).

1. Section 134(8): As per Section 134(3)(o) of the Companies Act, companies shall include in its Board Report the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year. If the company contravenes the provisions of Section 134:

  • The Company shall be punishable with fine which shall not be less than Rs.50,000/- but which may extend to Rs.25,00,000/-; and
  • Every officer in default shall be punishable with imprisonment for a term which may extend to three years OR fine which shall not be less than Rs.50,000/ – but which may extend to Rs.5,00,000/-; or – Both

2. Section 450: Where no specific penalty is provided, in case of contravention of any such provision, company, and every officer in default or such other person shall be punishable with:

  • Fine which may extend to Rs.10,000/-, and
  • Where contravention is continuing one, a further fine which may extend to Rs.1,000/- for every day after the first during which contravention continues.

12. MCA’S Initiatives Or Crackdown To Facilitate CSR Compliance

In view of the use of the words “Shall ensure that the company spends” under Section 135 of the Act, it is mandatory for eligible companies covered under Section 135(1) to mandatorily spend the prescribed amount and non-spending of CSR amount shall attract penal action as mentioned in the Act unless the regulatory authority accepts the reasons given in the Board reports of the companies. Since the coming into force of this provision i.e. from 01st April 2014, it has been observed that most of the companies are still not spending towards CSR. In order to ensure compliance of Section 135, MCA has taken the following steps:

1. National CSR Data Portal- Ministry has launched the National CSR Data Portal on 19th January 2018 for driving accountability and transparency in Corporate India. This portal has been created with the objective of achieving high level of compliance as well as transparency towards CSR activities of companies. The CSR data portal is showing the data on the basis of the Director’s Report and Forms filed on MCA Portal.

2. Show Cause Notices to companies: The Show Cause Notices have been issued to more than 1000 companies for initiating prosecution for non-compliance of Section 135 read with Section 134(3)(o). However, as per Section 135, if company fails to spend the CSR amount, it has to give reason under Section 134(3)(o), hence if a company is giving its reason in the Board Report then it is complying with the provisions of Section 135 and Section 134(3)(o). Further, Section 450 will also not be attracted, since Section 135 and Section 134 cannot be considered as contravened if the company has provided its reasons for nonspending of the amount. Hence, this action of MCA can be questioned on behalf of the industry because the law should be clear that if companies do not spend or less spend towards CSR, then it can be prosecuted if the reasons given by them in Board Reports are not acceptable.

3. Unspent CSR amount to be transferred to designated Central Government Funds: In the report of Legal Sub-committee on Corporate Social Responsibility submitted to Ministry of Corporate Affairs on 26th April, 2018, it has been recommended that in order to ensure that companies become complaint of CSR, the Ministry may issue a circular stating that in case a company is not able to spend the entire prescribed CSR amount by end of the financial year, then the balance remaining unspent should be transferred to designated Central Government Funds as listed in Schedule VII of the Act i.e. Prime Minister’s National Relief Fund or Swachh Bharat Kosh or Clean Ganga Fund etc. It is also recommended that companies who have either less spent or not spent and after issuance of show cause notice in case such companies deposit such amount to the Central Government Fund as per Schedule VII, the Central Government shall not file prosecution against such companies

13. Recent Updates on CSR under CARO 2020

Further, as recently the Ministry of Corporate Affairs (MCA) notified the Companies (Auditor’s Report) Order 2020, Auditor has to give their opinion on CSR in reference to section 135(5) & 135(6) of the Companies Act 2013. These two sections pertain to transferring unspent CSR money to PM National Relief Fund.

13. Conclusion

In the present scenario, companies are complying with Section 135 and Rules made thereunder as per their literal interpretation by disclosing their reasons for not spending the CSR amount in their Board Reports. Further, if companies are giving reasons under Section 134(3)(o) for not spending the CSR amount, companies are duly complying with the provisions of CSR under Section 135 and Section 134 because it is unwritten in the law that the submitted reasons shall be cross re-validated or verified by either accepting the reasons or set aside the same; and initiate the prosecution for recovery of unspent CSR amount for specified activities as mentioned in Schedule VII. If based on this unwritten law, Ministry is issuing notices to companies, then Companies should stand for it and question it before the Court of Law for making the law clear so that better compliance of law be possible in the future.CSR Provisions

Author Bio

Qualification: CMA
Company: PARAMETRO ADVISORY LLP
Location: SURAT, Gujarat, IN
Member Since: 03 Jul 2019 | Total Posts: 4
A Qualified Cost Accountant by Profession and Founder of "Parametro Advisory LLP" which is a well diversified Multidisciplinary Professional firm having Chartered Accountants, Cost Accountants, Company Secretary , MBA & Advocates in our team. The firm covering verticals such as Taxation Matters View Full Profile

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