INTRODUCTION
“Corporate Social Responsibility” – colloquially referred to as “CSR” – dates back to ancient times in India, when the concept of “seva” and “daan” was promulgated, as a part of our tradition and culture. Business tycoons like JRD Tata were known for their philanthropic ideals and the trusts and foundations established with the idea of giving back to the society.
The advent of the Companies Act, 2013 (‘Act’) paved the way for the introduction of CSR as a legal mandate for Companies, breaching the prescribed threshold. India became the first country to officially mandate the concept of CSR. Section 135 of the Act read with the Companies (CSR Policy) Rules, 2014, are the statutory provisions governing the CSR regime.
Eligibility Criteria: Every Company having,
- 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 the immediately preceding financial year,
shall mandatorily be required to constitute a CSR Committee consisting of three or more directors, out of which at least one should be an Independent Director and comply with the mandatory obligations under the Act read with CSR Rules.
Note: Companies having a CSR obligation not exceeding fifty lakh rupees, in a financial year, shall not be required to mandatorily constitute a CSR Committee and the Board of Directors shall be responsible for undertaking the functions of the Committee.
In line with Schedule VII of the Act, the Companies will be permitted to expend the CSR obligation only in the list of specified activities as mentioned in the said list.
Another section in the Act, closely delving into the philanthropic activities undertaken by Companies, is Section 181. The said section imposes a responsibility on the Board of Directors to consider and approve the contribution to bona-fide charitable and other funds. However, prior permission of the members of the Company at a general meeting shall be required, in case such contribution exceeds five percent of the average net profits for the three immediately preceding financial years.
It is pertinent to note that unlike Section 135 – applicable to only specific companies, fulfilling the threshold – the aforementioned section is applicable to all companies, irrespective of their net worth, turnover or net profit during a financial year.
Note: Companies undertaking CSR expenditure by contribution to a bona-fide charitable fund, dealing in any of the activities being a part of Schedule VII of the Act, will not be required to separately execute a resolution for contribution u/s 181 of the Act.
Now, it has often been observed that Companies intend to voluntarily undertake CSR, in compliance with the provisions of the Act. In order to consider the same as CSR Expenditure and to set off the same amount in future, the following compliances are to be ensured:
| Governing Provision | Compliance | Particulars of Compliance |
| Section 135(3) | Recommendation of CSR Activities by the Committee | (a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company, in areas or subject, specified in Schedule VII;
(b) recommend the amount of voluntary expenditure to be incurred on the activities referred to in clause (a); (c) Monitor the Corporate Social Responsibility Policy of the company from time to time. And (d) to set off the amount of voluntary expenditure toward mandatory CSR Obligation in future. |
| Section 135(4) | Formulation of CSR Policy | After taking into account the recommendations made by the CSR Committee (if applicable), the Board of Directors shall approve the CSR Policy for the Company.
“CSR Policy” means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan. The Policy may be amended, as and when required, subject to the approval of the Board of Directors. The Board of Directors are to monitor the CSR Policy, from time to time. All the activities as are included in CSR Policy of the company are undertaken by the company, in terms of Schedule VII of the Act. |
| Schedule VII | Undertaking of CSR Activities -Schedule VII | Companies undertaking CSR are necessarily required to ensure that such activities are falling amongst the list of specified activities, as specified under Schedule VII of the Act.
Any activity, not being a part of Schedule VII of the Act, shall not be treated as expenditure towards CSR. The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities. |
| Rule 5 (2) | Formulation of CSR Annual Action Plan | The CSR Annual Action Plan is to be framed in pursuance of the CSR Policy of the Company.
The CSR Annual Action Plan, shall include the following points: (a) the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act; (b) the manner of execution of such projects or programmes as specified in sub-rule (1) of rule 4; (c) the modalities of utilisation of funds and implementation schedules for the projects or programmes; (d) monitoring and reporting mechanism for the projects or programmes; and (e) details of need and impact assessment, if any, for the projects undertaken by the company: (f) to set off the amount of voluntary expenditure toward mandatory CSR Obligation in future. Provided that the Board may alter such plan at any time during the financial year, as per the recommendation of its CSR Committee (if any), based on reasonable justification to that effect. |
| Rule 8 | CSR Reporting | The Board’s Report of a Company pertaining to any financial year shall include an annual report on CSR, as per the format set out in the Rules. |
| Rule 4 | CSR Utilization Certificate | 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. |
| Rule 9 | Display of CSR Activities of Website | The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee (if any) and CSR Policy and Projects approved by the Board on their website, if any, for public access. \ |
In case of the above-mentioned compliances not being ensured, the same can be termed as “Donation to charitable fund” under section 181 of the Act. Accordingly, compliances of Section 181 of the Act will be ensured with respect to Board Resolution or the Shareholder, as the case may be.
Penal provisions for non-compliance of Section 181:–
In the absence of any specific penal provision stipulated under the aforementioned provision, Section 450 of the Act shall be referred.
Section 450: If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.
CONCLUSION
In the current Indian landscape, with MSMEs dominating a major chunk of the commercial enterprise, often Companies, not forming part of the mandatory CSR regime, may intend to undertake contribution towards charitable organization with a view to term the same as ‘CSR.’ However, the mandatory compliances to be undertaken for it to be considered as ‘CSR Expenditure’ are often missed out and ultimately any such contribution will be considered as donation u/s 181 of the Act.
Section 135 of the Act presents a more structured approach towards social spending while Section 181 allows for traditional and ad-hoc giving. As environmental responsibility and sustainability are the buzzword amongst corporates, a more harmonized legal framework introducing clear demarcation between the two contradictory sections is needed. The term ‘charitable donations’ still remain ambiguous. Further, companies should be required to mandatorily disclose the ‘charitable donations’ made during the financial year in their Annual Reports, for necessary information of its stakeholders. Reconciling the letter of the law along with the spirit, the market regulator can ensure that companies essentially meet the goal of slow and steady sustainable development.
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To know more on Corporate Laws and allied compliances, reach out to me at csantikamukherjee@gmail.com or +91 98302-58891.
Author Bio
Thankyou so much CS Antika Mukherjee for enlightening us with this topic.