What is Corporate Social Responsibility?
Corporate Social Responsibility or more commonly CSR is a Company’s social responsibility toward its community and environment. There are numerous ways in which a Company can take up this social responsibility. Corporates can take up the tasks of environmental protection or conservation, Educational projects, can work on reducing pollution, reduce carbon footprints, adopt labor-friendly policies or spend on labor welfare, waste management, etc. Then can try to integrate these tasks effectively into their business module.
CSR is more than an act of donating money or spending funds on charity. The idea of Corporate Social Responsibility is to give back to the community under which a company is running. After all, it is the community that helps the company to survive and to make profits. The company should try to give it back to the society which has actually helped the company bloom. CSR is a good medium for integrating the profit-making objectives of the companies with a social cause. Companies can use this integrated effort to meet the required social obligation. CSR can further enhance the goodwill and reputation of the company in society.
The Companies Act, 2013 in Section 135, has defined the Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII which prescribes mandatory provisions for Companies to fulfill their CSR.
In this article below, we would like to highlight the key points of the Corporate Social Responsibility provisions. Our aim to present it in as simple a manner as possible so that, everyone understands it. We do not attempt to duplicate the applicable provisions or we would not like people to rely solely on this article, we would highly recommend expert help on the matter for further clarity.
Applicability of the provisions of CSR
CSR provisions defined in the Companies Act, 2013 are applicable to the companies having:–
- The net worth of Rs. 500 Crore or more, or
- Turnover of Rs. 1000 crore or more, or
- Net Profit of Rs. 5 crores or more during any financial year.
The clarification here is that the financials would be interpreted as any of the three preceding financial years. Alternatively, if a company does not meet the above criteria in 3 consecutive financial years, then the provisions of CSR will not be applicable until such time that the above criteria are met.
The above criteria are considered separately for the holding and subsidiary company. It means that the subsidiary company will not be covered under CSR provisions even if the holding company is covered under the sections of CSR. This condition is true till the time, the subsidiary company itself meets the criteria of applicability of CSR or vice versa.
The CSR provisions are applicable to any type of company, be it a Section 8 company or a foreign company.
Every Company on which the provisions of CSR as per Companies Act, 2013 are applicable, is required to constitute a CSR Committee. The committee must:
- Consist of 3 or more directors, out of which at least one director must be an independent director.
- If a company is not required to appoint an independent director, then it must have 2 or more directors in the CSR Committee.
- Consist of only 2 directors in case of a private company having only two directors on its Board.
- Consist of at least 2 persons in case of a foreign Company of which one person must be an authorized Indian resident and another nominated by the foreign company.
Functions, roles, and responsibility of the CSR Committee
The CSR committee must make sure that all the CSR provisions are fulfilled by the company. Such committee must:
- Plan and recommend to the Board, a CSR Policy which must state the activities to be undertaken by the Company as per the provisions of Schedule VII;
- Recommend the amount of expenditure to be incurred on the activities referred to above;
- Track the CSR Policy of the company from time to time
Responsibility of the Board of Directors (BOD) on CSR
The BOD of every company on which CSR is applicable must-
- after considering and taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the Company and disclose contents of such Policy in Board report and also place such CSR policy on the company’s website in such manner as is prescribed.
- ensure that the activities are included in the CSR Policy of the company are undertaken by the Company.
- 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 CSR Policy.
The companies are encouraged to give preference to the local areas and areas around their operations for spending the amount earmarked for CSR spending. Further the Average profit shall be calculated as per section 198 of the Companies Act, 2013.
The BOD shall further report if the company fails to spend the required money as per the CSR policy.
The BOD is also entitled to carry forward the unspent money on CSR to the following year. This has to be done with the proper disclosure of such amount left unspent in the BOD report as above and such amount unspent would be accumulated and added into the CSR amount, (done separately as per CSR calculation of that year) in the next year.
The unspent amounts can also be transferred to specified funds within 30 days of the ending of the financial year in which such shortfall in spending occurs. Alternatively, the unspent amount can also be kept in a separate bank account marked specifically, to meet the expenses in the following 3 financial years to discharge the provisions of CSR.
The CSR Policy of the company shall, inter-alia, include the activities to be undertaken by the company and the amount of money to be spent on them for meeting the provisions of CSR. This shall include:-
- A list of CSR projects or programs which a company plans to undertake.
- The policy shall specify the modalities and the execution stage with timelines of such projects.
- There should also be specification as regards to the monitoring of such projects and a disclaimer that the surplus if any generated form such projects shall not form the profits of the company and shall be redeployed in the CSR projects.
List of Permitted Activities for CSR in Schedule VII of the Companies Act, 2013
The CSR Committee and the BOD shall ensure that the activities included by a company in its CSR Policy fall within the list of the activities defined in schedule VII. These activities, not limited only to the following, are listed as :
1. Projects directed towards abolishing poverty, eradicating malnourishment and hunger, improvising health care including preventive health care and sanitation and making available safe drinking water
2. Promotion and improvement in education which includes special education, employment-generating vocational skills among children, women, elderly and the differently-abled people and any livelihood enhancement projects
3. Projects aimed at improving gender equality, women empowerment, setting up homes and hostels for women and orphans. Setting up old age homes, daycare centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
4. Activities pertaining to Safeguarding environment, the sustainability of ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining the quality of soil, air and water. This will also include contributions for rejuvenation of river Ganga, including contributions to the Clean Ganga Fund set up by the Central Government.
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. Projects for the benefit of armed forces, war widows and their dependents
7. Stimulate and promote rural sports, nationally recognized sports, Paralympic 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 providing relief and welfare of the Scheduled Castes, the Scheduled and backward classes, minorities and women
9. Contributions or funds provided to technology incubators which are approved by the Central Government
10. Rural development projects and slum area development projects
11. Disaster management, including relief, rehabilitation and reconstruction activities
Fines and Penalties for Non-Compliance of provisions of CSR
With CSR provisions of Companies Act,2013 clearly defined, there are provisions In place for non-compliance of such provisions. In case a company fails to comply with the provisions relating to CSR policy, CSR spending or transferring and utilization of the unspent amount, the company will be punishable with a minimum fine of Rs 50,000 which can be enhanced to a maximum of Rs 25 lakh.
Further, every officer of such a company who defaults in the compliance will be liable for a punishment, which is imprisonment for a term which may extend to three years or a minimum fine of Rs 50,000 which can be increased to Rs 5 lakh, or both.
Other important points as regards to Corporate Social Responsibility
Some other points which need to be kept in mind while framing a CSR policy of the company so that the CSR provisions are adequately met are highlighted as below:-
- The CSR activities are undertaken by the company, as per its CSR Policy, shall not include activities undertaken in pursuance of its normal course of business.
- The BOD may decide to undertake its CSR activities approved by the CSR Committee, through a section 8 company or a registered trust or a registered society, established by the company, either singly or along with any other company, or established by Central or State Government or an entity established under the Act of Parliament of State Legislature.
Collaboration with other companies, in such a manner, that the CSR Committees of respective companies are in a position to report separately on such projects or programs.
- Following CSR projects or programs or activities not to be considered as CSR Activities:
- Projects specifically for the benefit of only the employees of the company and their families.
- Contribution of any amount directly or indirectly to any political party
- Proper reporting on CSR has to be done by a foreign company as well. The balance sheet of a foreign company to be filed under section 381(1)(b) of the Act must contain an Annexure regarding a report on CSR.
The Ministry of Corporate Affairs (MCA) has drafted Companies SCR amendment rules 2020, which are put forward for the public comments. However such rules are kept in abeyance till further notice. These rules are stricter and defined from the earlier rules and regulations and move in the direction of “ Implementation and disclosure “ to “ Implementation and punishment”.
Central Government take on COVID-19
Further, in wake of COVID-19 the Central Government came out with a circular on spending to combat coronavirus
The central government has decided to allow companies to use their mandatory Corporate Social Responsibility funds spending on measures to fight COVID-19. The Finance Minister Ms. Nirmala Sitharaman confirmed that spending of funds to combat COVID-19 is an eligible CSR activity.
“In view of the spread of novel coronavirus in India, its declaration as a pandemic by the WHO, and the decision of Government of India to treat this as a notified disaster, it is hereby clarified that spending of CSR funds for COVID-19 is eligible CSR activity,” Sitharaman said on Twitter.
The Ministry of Corporate Affairs has further said that donations made by companies to the Prime Minister’s Citizens Assistance and Relief in Emergency Situations Fund (PM CARES Fund) will be considered as expenditure on corporate social responsibility.
In a tweet, Finance Minister Ms. Nirmala Sitharman said that CSR Funds can now donate to the PM CARES Fund.
“The PM CARES Fund has been set up to provide relief to those affected by any kind of emergency or distress situation. Accordingly, it is clarified that any contribution made to the PM CARES Fund shall qualify as CSR expenditure under the Companies Act 2013,” said a circular by the Ministry of Corporate Affairs.