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Corporate Social Responsibility (CSR) under the Companies Act, 2013 (the Act)

“Successful people have a social responsibility to make the world a better place and not just take from it.”

Introduction:

Corporate Social Responsibility (CSR) also called corporate Conscience, Corporate Citizenship or Responsible business is a form of corporate self-regulation integrated into a business model. Every person has a responsibility towards the society in which he/she/it lives. So, a Corporate has to undertake such activities and carry out such practices that benefit society.CSR is a commitment to developing policies that integrate responsible practices into daily business operations, and to reporting on progress made towards implementing these practices. In view of above, Companies Act, 2013 contains provisions regarding Corporate Social Responsibility.

Section 135 of Companies Act, 2013:

According to Section 135 of Companies Act, 2013 -

1. Every Company whether, private company or public company shall constitute a Corporate Social Responsibility Committee if -

  • Net worth of company is Rs. 500 crore or more; or
  • Turnover of company is Rs. 1000 crore or more; or
  • Net profit of company is Rs. 5 crore or more during any financial year.

2. The CSR Committee shall consist of three or more directors, out of which at least 1 shall be an independent director. Composition of CSR Committee shall be disclosed in the Board’s Report under section 134(3). An unlisted public company or a private company who is not required to appoint an independent director shall have CSR Committee without independent director.

For private company, having only two directors shall constitute CSR Committee with such two  directors. For foreign company, the CSR Committee shall comprise of at least two persons of which at least one person shall be resident in India and another person shall be nominated by the foreign company. The CSR Committee shall institute a transparent monitoring mechanism for implementation of CSR projects or programs or activities undertaken by company. 

3. The CSR Committee  shall -

  • Formulate and recommend to the Board, a CSR Policy which provide the activities to be undertaken by the company as specified in Schedule VII of the Act;
  • Recommend the amount of expenditure to be incurred on CSR activities;
  • Monitor the implementation of CSR policy of the company.                                

4. The Board of every Company which is required to constitute CSR Committee shall -

  • after taking into account the recommendations made by CSR Committee, approve the CSR Policy for the Company and disclose contents of such policy in its report and also place it on Company’s website;
  • Ensure that activities included in CSR Policy are undertaken by the company.

5. The Board of every company which is required to constitute CSR Committee shall ensure that the Company spends, in every financial year, at least 2% of the average net profits of the company made during the immediately preceding three financial years.

PROVISO

  • The Company shall give preference to the local area and areas where it operates for spending the amount mentioned above.
  • If Company fails to spend such amount, the Board shall specify the reasons for not spending such amount in its Report.

Companies Corporate Social Responsibility Policy (CSR) Rules, 2014:         

MCA has also notified the Companies (Corporate Social Responsibility) Rules, 2014 effective from 1st April 2014 which, inter alia, provides as follows:

Rule 3 - Applicability of CSR:

1. Every Company including its holding or subsidiary, and a foreign company having its branch office or project office in India which fulfils the criteria as specified in section 135(1) shall comply with the provisions of section 135 of Companies Act, 2013.

2. Every Company which ceases to be a company under section 135(1) for three consecutive financial Years shall not be required to constitute a CSR Committee and complying with other provisions of said section till such time it fulfils the criteria specified in section 135(1).

Rule 4 - CSR activities:

  1. Company shall undertake such activities as stated in CSR policy excluding activities undertaken in pursuance of its normal course of business.
  2. The Board of a company may undertake CSR activities approved by CSR Committee through a registered society or trust or company.
  3. A Company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committee of respective companies shall separately report on such activities or projects or programs.
  4. Subject to the provisions of section 135(5), CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure.
  5. The CSR projects or programs or activities that benefit only the employees of the company and their families that shall not be considered as CSR activities.
  6. Companies may build CSR capacities of their personnel and implementing agencies but such expenditure shall not exceed 5% of total CSR expenditure of the company in one financial year.
  7. Contribution of any amount directly or indirectly to any political party shall not be considered as CSR activity.

Schedule VII of the Act describes activities to be undertaken as CSR:-

  • Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation.
  • Promoting education and vocation skills among women, children, elders etc
  • Promoting gender equality, empowering women, setting up hostels for women and orphans, day care centers and such other facilities for senior citizens.
  • Ensuring environmental sustainability, ecological balance, protection of flora and fauna, conservation of natural resources.
  • Protection of natural heritage, art and culture, setting up public libraries and other beautification.
  • Measures for the benefit of armed forces veterans, war widows and their dependents,
  • Training to promote rural sports, Paralympics sports ,Olympic sports;
  • Contribution to the Prime Minister Relief Fund and other funds set by central government for socio-economic development, for backward classes.
  • Rural development projects, contribution to technology incubators and other contributions which are approved by central government.

NOTE- According to the clarification issued by MCA on 18th June, 2014, the expenditure towards following do not qualify for the purpose of CSR Expenditure:-

  • One- off events such as marathons/awards/charitable contribution/advertisements;
  • Expenses incurred for fulfillment of any Act/Statue of Regulations;
  • Salaries paid by the companies to regular CSR staff as well as volunteers of the companies.
  • Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR expenditure of Indian subsidiary if CSR expenditure routed through Indian subsidiary and if Indian subsidiary is required to do so as per section 135 of the act.

Rule 5 - CSR Committees:

1. Companies mentioned in Rule 3 shall constitute CSR Committee as under:-

i. An unlisted public company or a private company which is not required to appoint an independent director pursuant to sec 149(4) shall constitute such Committee without independent director.

ii. A private company having only two directors shall constitute CSR Committee with two such directors.

iii. A foreign company shall constitute CSR Committee with at least two directors in which one shall be resident of India and other person shall be nominated by foreign company.

2. CSR Committee shall institute a transparent monitoring mechanism for implementation of CSR projects or programs or activities undertaken by company.

Rule 6 - CSR Policy:

1. CSR Policy of a company shall include the following:

  • List of CSR projects or programs or activities which a company plans to undertake to fulfill its social responsibility.
  • Monitoring process of such projects or programs.                                             

PROVISO: It does not include the activities undertaken in pursuance of normal course of business of a company.

2. It shall specify that the surplus arising out of the CSR projects or programs shall not form part of the business profit of a company.

Rule 7 - CSR Expenditure:

CSR Expenditure shall include all expenditure incurred on CSR activities or programs but it does not include any expenditure incurred on activities other than activities/programs specified in schedule VII of the Act.

Rule 8 - CSR Reporting:

  1. The Board’s Report of company shall include a report on CSR.
  2. In case of foreign company, the balance sheet shall contain an annexure regarding report on CSR.

Rule 9 - Disclosure:

The Board of Directors of the company shall, after taking into account the  recommendations of CSR Committee, approve the CSR policy of the company and disclose contents of such policy in its report and same shall also be displayed on company’s website.

Penalties:

  • If the Company fails to spend the amount earmarked for CSR activities, the Board shall in its report made under clause (o) of sub section (3) of section 134 of companies act, 2013, specify the reasons for not spending the amount.
  • If the company fails in specifying reasons for not spending the required amount in its Board’s Report then the Registrar of Companies (ROC) may issue a notice to Show Cause as to why the prescribed amount is not spent and if ROC is satisfied with the cause specified by company then no penalties attracted.
  • If the RoC is not satisfied with the cause provided by the Company, then penalty under Section 134(8) may be attracted and it states that company shall be punishable with fine which shall not be less than Rupees Fifty Thousand but which may extend to Rupees Twenty Five Lakhs and every officer of Company who is in default shall be punishable with imprisonment  for a term which may extend to three years or with fine which shall not be less than Rupees Fifty Thousand but which may extend to Rupees Five Lakh or with both.

Conclusion:

There is a need for corporate entities to understand their responsibility towards society. Apart from the primary objective of earning profits, every business shall remain conscious of its obligations as a responsible Corporate entity to the cause of society at large by taking up activities that contribute to - promotion of social harmony, increasing opportunities to socially and economically disadvantaged sections of society, and to mitigate environmental degradation.

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