Corporate Social Responsibility
Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” Sir Adrian Cadbury.
Governing regulations in India:
Section 135 The Companies Act, 2013 read with Corporate Social Responsibility Policy Rules, 2014.
As the name suggests CSR stands for Corporate Social Responsibility, briefly it may be defined as:
Corporate:
- a corporation, or
- a business entity, or
- an organisation, or
- a body corporate, or
Social: a society, social work, people, environment, planet ; Responsibility: means the responsibility for the welfare and goodness of the society.
"In short, Corporate Social Responsibility may be defined as the commitment by a Company to act in the most transparent and ethical way that helps to contribute to the health and welfare of the society in such a way that meets the expectations of the society that it has from the business entity"
The Companies Act, 2013 has covered Corporate Social Responsibility in its ambit and it is defined under section 135 of Act as under, applicable to all Companies:
(1) Applicability:
Every company having net worth of rupees five hundred crore (500 crore) or more, OR
turnover of rupees one thousand crore (1000 crore) or more, OR
a net profit of rupees five crore (5 crore) or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
* this sub section describes the parameters for applicability of CSR in form of constitution of CSR committee which is manadatory under the Act, if the Company falls in the abovementioned criteria, the Company shall form a Corporate Social Responsibility committee which shall consist of 3 members out of which 1 member shall be an independent director.
(2) Disclosure:
The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee, if the Company falls in the criteria given in under (1).
(3) Responsibility of CSR committee:
The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, 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 activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility 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 Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) Expenditure on CSR:
The Board of every company referred in (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
* every company that is covered under the definition of CSR shall spend atleast 2% of the average of the Net Profits made during 3 immediately preceding Financial Years as calculated in accordance with section 198 of the Act on CSR activities.
Provided that 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:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
* the onus is to only specify the reasons for not spending the amount on CSR, no penal provisions are given in the Act for not complying with section 135.
Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
Comment:
Section 135 of the Companies Act, 2013, makes it compulsory for certain class of Companies to constitute CSR committee and to formulate a policy and plan for expenditure for CSR but it is still a voluntary requirement and not the mandatory requirement to spend all the required amount as specified by the Act (2% of Avg.net profit of preceding 3 FY) on CSR activities, it provides a scape route as the Board can explain the reasons for not spending such amount on CSR during a financial year.
“Disclaimer: statements and opinions expressed in this article are those of the author’s personal views and interpretation of law. However, every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information.”
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