CSR which stands for Corporate Social Responsibility is a very related and relevant point of discussion amongst the professionals in the current scenario of the world specially in India. It has become a jargon amongst the companies.

Through CSR, Companies can help the whole world sincerely and positively during the pandemic time as well as in capacity building.

Now the main question, which arises is “What is CSR”.

Section 135 of the Companies Act, 2013 covers the provisions related to CSR, it stands for Corporate Social Responsibility and in general terms it means the responsibility of the companies towards its society and environment both socially and ecologically. Basically, CSR is for social good and not charity.

APPLICABILITY –

Section 135 of the Companies Act, 2013 is applicable on every company having a

  • net worth of rupees five hundred crore or more; or
  • turnover of rupees one thousand crore or more; or
  • net profit of rupees five crore or more.

during any of the financial year and shall constitute a Corporate Social Responsibility Committee, consisting of three or more directors, out of which at least one director shall be an independent director.

In case of Private Companies, where appointment of Independent Director is not mandatory, then in that case CSR Committee can be formed without an Independent Director on the Board that is it can be formed only with two or more directors.

In case of foreign company, the CSR committee shall comprises of at least two person one of them shall be a specified person under Section 380 clause 4 sub-section (1) and other person as nominated by the foreign company.

Section 380 clause 4 sub-section (1) states the name and address of one or more person resident in India and authorized to accept on behalf of the company service of process and any notice or any other documents required to be served on the company.

If the amount to be spent does not exceed rupees 50 lakh in a year then the constitution of CSR committee is not require and the board can discharge the same.

ROLE OF THE CORPORATE SOCIAL RESPONSIBILITY COMMITTEE –

The Corporate Social Responsibility Committee shall –

(a) formulate and recommend to the Board, a policy to be called as a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII.

(b)  recommend the amount of expenditure to be incurred on the CSR activities; and

(c) have the task of formulating and recommending to the Board an annual action plan in pursuance of its CSR policy. The aforesaid plan shall include the following:

  • list of CSR projects to be undertaken under Schedule VII of the Companies Act;
  • manner of execution of such projects;
  • modalities of utilization of funds and implementation schedules;
  • monitoring and reporting mechanism for the projects; and
  • details of need and impact assessment, if any, for the projects undertaken.

The Board of every company shall –

(a) 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; and

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

(c) ensure that administrative overheads incurred in furtherance of CSR do not exceed 5% of company’s total CSR expenditure.

Explanation – “Administrative Overheads” refer to expenses incurred by the company for ‘general management and administration’ in relation to its CSR functions. However its excludes expenses directly incurred for designing, implementation, monitoring, and evaluation of a particular CSR project from the definition of administrative overheads.

The composition of Corporate Social Responsibility Committee should also be mentioned in the Board’s Report of the Company.

The Board has the power to alter the annual action plan in accordance with the CSR Committee’s recommendation based on reasonable justification

The board report shall include an annual report on CSR containing particular specified in annexure.

In case of foreign company, balance sheet shall contain an annexure regarding report on CSR, also display of the CSR report should be on the company’s website as well, if any.

AMOUNT TO BE SPENT ON CSR ACTIVITY –

Every Company crossing the threshold limit of net worth, turnover or net profit in any Financial Year has to spend at least 2% of the Net Profit of the immediately preceding three financial year and the Board shall ensure the same.

If the company has not completed 3 years from incorporation, the amount to be spent on a CSR fund will be equivalent to 2 % of the net profits made by the company in the previous financial years (as against average net profits made by the company in 3 immediately preceding financial years).

Explanation – “NET PROFIT” means the aggregate value of the paid up share capital, all free reserves created out of the profit, securities premium account & debit or credit balance of profit/loss account after deducting the aggregate value of the accumulated losses, deferred expenditure & miscellaneous expenditure not written off, as per the audited balance sheet of a company, but does not include reserves created out of revaluation of assets, write back of deprecation & amalgamation.

The Board of a company shall satisfy itself that the funds so disbursed have been utilized 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.

The activities/ areas/ subjects on which Company should spend their Corporate Social Responsibility Expenditure are specified under “Schedule VII”.

Companies should firstly prefer their local areas for CSR expenditure and the CSR activity should not be the one to be undertaken in its normal course of business, However, in view of the COVID pandemic, an exception to this is created by which companies engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business to undertake such research and development in relation to COVID-19 as their CSR obligation for three financial years (from 2020 to 2023). This exception is subject to the following conditions –

  • Such research and development activities shall be carried out in collaboration with any of the institutes or organizations mentioned in item (ix) of Schedule VII to the Act including Public funded universities, Indian Council for Medical Research (ICMR) etc.
  • Details of such activity shall be disclosed separately in the Annual report on CSR to be included in the Board’s Report of the company.

Any contribution to any fund (for example – PM CARES fund, etc) set up by the Central Government for socio-economic development and relief qualifies as CSR expenditure or any spending of CSR Funds for COVID-19 is considered as an eligible CSR activity, funds may be spent for various activities related to COVID-19 under item nos. (i) to (xii) of schedule VII relating to promotion of health care including preventive health care and sanitation, disaster management.

Further, spending of CSR Funds for carrying out awareness campaigns/ programmes or public outreach campaigns on COVID-19 Vaccination programme is also an eligible CSR activity under item no. (i), (ii) & (xii) of Schedule VII of the Act relating to promotion of health care, including preventive healthcare and sanitization, promoting education, and, disaster management respectively, subject to fulfillment of Companies (CSR Policy) Rules, 2014 and Circulars related to CSR issued from time to time.

Also Spending of CSR Funds for –

  • setting up of makeshift hospitals and temporary Covid care facilities.
  • creating health infrastructure for COVID care, establishment of medical oxygen generation and storage plants, manufacturing and supply of Oxygen concentrators, ventilators, cylinders and other medical equipment for countering COVID-19’ or similar such activities.

are eligible CSR activities under item nos. (i) and (xii) of Schedule VII of the Companies Act, 2013 relating to promotion of health care, including preventive health care, and, disaster management respectively.

CSR IMPLEMENTATION –

As per the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, Companies can have its CSR implementation by 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, 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 the similar activities.

The Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 further require all such implementing entities intending to undertake CSR activities have to register themselves with the Central Government by filing form CSR-1 electronically for all CSR projects effective from 1st April, 2021. A unique CSR Registration Number will be generated for the companies after submitting Form CSR-1.

As per the CSR Rules, a company is further allowed to spend the CSR amount for creation or acquisition of a capital asset held by:

(a) company established under section 8 of the Act, a registered public trust or a registered society, having charitable objects and CSR Registration Number;

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

(c) a public authority.

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 may build CSR capacities of their own personal or those of their implementing Agencies through institution but they should have established track record of at least three financial year, and such expenditure including expenditure on administrative overhead shall not exceed 5% of the total CSR expenditure of the company in one financial year.

Company can also join other companies for CSR expenditure however all the companies involved in it should be in a condition to report separately.

ONGOING PROJECTS AND TRANSFER OF UNSPENT CSR AMOUNT –

Any amount remaining unspent to an ongoing project (ongoing project means an multi-year project undertaken by a company in fulfillment of its CSR obligation, the maximum allowed duration of which is four years (three years excluding the year of commencement as mentioned in the New CSR Rules – Rules 2021). The definition of ongoing projects also includes projects that were initially not approved as multi-year but are later extended beyond one year by the Board on reasonable justification) fulfilling such conditions as prescribed undertaken by the company in pursuance of its CSR policy shall be transferred by company within the period of 30 days from the end of the financial year to a special account to be opened by the company in that Behalf for that financial year in any schedule Bank to be called as UNSPENT CSR ACCOUNT and such amount shall be spent by the company within a period of three years from the date of the 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 the completion of third financial year.

If the unspent amount is not related to an ongoing activity it should be transferred by the company to the fund specified in Schedule VII within a period of six months from the expiry of the financial year. Also the reason for not spending the said sum is to be mentioned in the Board’s Report.

Consequence of non-transfer in aforesaid manner –

  • Offence decriminalized vide CAA, 2020
  • Company liable to pay penalty twice the amount of default or Rs. 1 crore , whichever is less
  • Every officer liable to pay penalty @ 10% of default or Rs. 2 lacs, whichever is less.

IMPACT ASSESSMENT –

As per Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021 companies having average CSR obligation of ten crore rupees or more in three immediately preceding financial years are required to undertake impact assessment through an independent agency for its CSR projects. The impact assessment reports are required to be placed before the Board and annexed to the annual report on CSR.

A Company undertaking impact assessment is allowed to book the expenditure towards Corporate Social Responsibility for that financial year not exceeding five percent of the total CSR expenditure or fifty lakh rupees, whichever is less.

Holding company and subsidiary company for CSR expenditure should individually cross the threshold limit for CSR under section 135.

CSR expenditure should not be for employees of the company and their family. Any contribution directly or indirectly to any political party will not be considered or covered under CSR expenditure.

Any activity undertaken by the company outside India shall not be considered as CSR except for training of Indian sports personnel representing any State or Union territory at national level or India at international level.

Any Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services also activities carried out for fulfillment of any other statutory obligations under any law in force in India does not qualify as a CSR activity.

SET OFF OF EXCESS CSR AMOUNT –

As per Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, companies are also allowed to set off any excess amount spent by it in relation to its CSR requirements up to immediate succeeding three financial years subject to the following conditions:-

  • The excess amount for set off shall not include the surplus arising out of CSR activities ; and
  • The Board shall pass a resolution to that effect.

TREATMENT OF SURPLUS OUT OF CSR PROJECTS –

Any surplus amount arising out of CSR project or activity should not be the part of business project of the company and

(i) need to be either ploughed back into the same project or,

(ii) transferred to the Unspent CSR Account or,

(iii) transferred to a Fund specified in Schedule VII within a period of six months from the expiry of the financial year.

The Central Government may give general or special directions to a company or class of companies as it consider necessary to ensure compliances of the provisions of this section and such company or class of companies shall comply with such directions.

CESSATION –

Under the CSR rules If a company does not satisfy the prescribed threshold for a period of three consecutive years then company is not required to comply with CSR obligations implying that a company not satisfying any of the specified criteria in a subsequent financial year would still need to undertake the CSR activity unless it ceases to satisfy the specified criteria for a continuous period of three years.

PENALTIES –

If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.

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