CSR: Concept, Provisions and Practical Issues

Devershi Gupta , Last updated: 28 July 2021
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CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives ('Triple- Bottom-Line- Approach'), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that.

A properly implemented CSR concept can bring along a variety of competitive advantages, such as enhanced access to capital and markets, increased sales and profits, operational cost savings, improved productivity and quality, efficient human resource base, improved brand image and reputation, enhanced customer loyalty, better decision making and risk management processes.

Even though globally, CSR is a voluntary exercise. In India, concept of CSR has been incorporated under section 135 of the Companies Act, 2013, as mandatory requirement for certain Companies.

CSR: Concept, Provisions and Practical Issues

APPLICABILITY OF THE CSR

Every Company having-

Net worth of Rs. 500 crore or more, or
Turnover of Rs. 1000 crore or more, or
Net profit of Rs. 5 crore or more

during the immediately preceding financial year shall constitute CSR Committee of the Board and undertake CSR activities.

Provided-

If amount required to be spent as CSR is 50 Lacs or less, requirement to constitute a CSR committee shall not be applicable and its functions shall be discharged by the Board of Directors.
If any company ceases to meet the criteria for 3 consecutive financial years then it is not required to comply with CSR provisions till such time it meets the applicability criteria, again.

CONSTITUTION OF COMMITTEE

Every company to which CSR criteria is applicable and the amount to be spent by a company is more than Rs. 50 lakh shall be required to constitute a CSR committee of the Board. Corporate Social Responsibility Committee of the Board shall consist of three or more directors, out of which at least one director shall be an independent director.

Exceptions

A company, which is not required to appoint an independent director pursuant to sub-section (4) of section 149 of the Act, shall have its CSR Committee without such director.
A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.
In case of a foreign company, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under section 380 (1) (d) of the Companies Act, 2013 and another nominated person by the foreign company.

FUNCTIONS OF CSR COMMITTEE

To formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the company in prescribed areas or subjects;
To recommend the amount of CSR expenditure to be incurred on the activities referred to in above clause; and
To monitor Corporate Social Responsibility Policy of the Company from time to time.
CSR committee shall formulate and recommend to the Board an Annual Action Plan in pursuance of its CSR Policy, which shall include the following namely;

the list of CSR projects or programmes that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act;
the manner of execution of such projects or programmes as specified in sub-rule (1) of rule 4;
the modalities of utilisation of funds and implementation schedules for the projects or programmes;
monitoring and reporting mechanism for the projects or programmes; and
details of need and impact assessment, if any, for the projects undertaken by the company:

Board may alter such plan at any time during the financial year, as per the recommendation of its CSR Committee, based on the reasonable justification to that effect.

FUNCTIONS OF BOARD

To approve the CSR Policy for the company, after taking into account the recommendations made by the CSR Committee;
To ensure that the activities as are included in CSR Policy of the company are undertaken by the company;
To ensure that the company spends required amount as CSR expenditure;
To ensure proper disclosure of CSR Policy & activities undertaken by the Company;
The Board of a company shall satisfy itself that the funds so disbursed have been utilised 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;
In case of ongoing project, the Board of a Company shall monitor the implementation of the project with reference to the approved timelines and year-wise allocation and shall be competent to make modifications, if any, for smooth implementation of the project within the overall permissible time period.
In absence of CSR Committee, discharge the functions of CSR committee also

CSR EXPENDITURE

Amount to be spent for CSR, in every financial year, shall be at least 2 % of the average net profits of the company made during the three immediately preceding financial years. While taking up any activity for CSR expenditure following provisions should be taken care of:

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
Administrative overheads incurred by the Company shall not exceed five percent of total CSR expenditure of the company for the financial year.
Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

IMPLEMENTATION OF CSR

The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by -

a section 8 company or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number; or
beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or
a public authority.

In other cases, The Board shall ensure that the CSR activities are undertaken by the company itself or through -

a company established under section 8 of the Act, or a registered public trust or a registered society, established by the company, either singly or along with any other company; or
a company established under section 8 of the Act or a registered trust or a registered society, established by the Central or State Government; or
any entity established under an Act of Parliament or a State legislature; or
any other company established under section 8 of the Act, or a registered public trust or a registered society, and having an established track record of at least three years in undertaking similar activities; or
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 for capacity building of their own personnel for CSR.
A company may also collaborate with other companies for undertaking projects or programmes or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programmes in accordance with these rules.

TREATMENT OF UNSPENT AMOUNT

If the company fails to spend amount required to be spent as CSR:

Transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year or
Any amount remaining unspent, pursuant to any ongoing project undertaken by a company, shall be transferred by the company within a period of thirty 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 scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
Where a company spends an amount in excess of requirement, such excess amount may be set off against the requirement to spend up to immediate succeeding three financial years.

ON-GOING PROJECT

'On-going Project' means a multi-year project undertaken by a company in fulfillment of its CSR obligation. It shall not have timelines exceeding three years excluding the financial year in which it was commenced, and it includes such projects that were initially not approved as a multi-year project but whose duration has been extended beyond one year by the Board based on reasonable justification.

The requirement under section 135(6) of the Act is to transfer the unspent amount earmarked towards an on-going CSR project in a separate bank account.

EXCESS SPENDING

With effect from 22nd January, 2021, a new proviso has been inserted in section 135(5) of the Act. With this insertion a new concept of carry forward and set-off of excess CSR expenditure has been introduced.

According to new provisions, if the company spends an amount in excess of the prescribed CSR expenditure, such excess amount may be carried forward to be set off from expenditure requirement of succeeding financial years subject to following conditions:

the set-off can be claimed up to immediately succeeding three financial years only;
the excess amount available for set off shall not include the surplus arising out of the CSR activities.
the Board of the company shall pass a resolution to that effect.

SURPLUS ARISING OUT OF CSR PROJECTS

Any surplus arising out of the CSR activities shall not form part of the business profit of a company and:

It shall be ploughed back into the same project; or
It shall be transferred to the Unspent CSR Account, and shall be spent in pursuance of CSR Policy and annual action plan of the company; or
It shall be transferred to a fund specified in Schedule VII to the Act, within a period of six months of the expiry of the financial year.

Further such surplus amount, ploughed back into the same project, shall not be included:

in calculation of excess amount by the company, carried forward for claiming set off in succeeding three financial years.
as part of 2% CSR obligation of the company for the financial year in which it is spent.

CSR IMPLEMENTING AGENCY

The term 'CSR Implementing Agency' has not been defined or used in CSR rules. It is used to generally refer to such agencies, which take up social, educational and other welfare work. The CSR activities can be carried out by the company either directly or through any implementing agency or through a combination of both methods. After the recent amendments in rule 4(1) of CSR Rules, any entity willing to take up CSR Projects as CSR implementing Agency shall have a CSR Registration Number.

The requirement of CSR Registration Number of is not applicable on the CSR projects or programmes approved prior to 1st April 2021.

Criteria to register an entity as CSR implementing Agency

1. Entity should be, either:

a company established under section 8, or
a registered public trust, or
a registered society, or
any entity established under an Act of Parliament or a State legislature

2. In case of other than govt. established entities, it shall be registered under section 12A and 80G of the Income Tax Act, 1961.

3. It shall have an established track record of at least three years in undertaking similar activities. Requirement of track record is exempted if such entity is established by the Company whether singly or jointly.

Registration of CSR Implementing Agency

Any entity fulfilling the above criteria may register itself with the Central Government by filing the form CSR-1 electronically with the Registrar of Companies, with effect from 1^st April 2021.

CSR ACTIVITIES

Schedule VII to the Companies Act, 2013, lists areas in which CSR activities can be taken-up:

Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.
Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
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 art and handicrafts;
Measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widow;
Training to promote rural sports, nationally recognized sports, paralympic sports and olympic sports
Contribution to the prime minister's national relief fund 8[or Prime Minister's Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)] or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;
(a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and

(b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organization (DRDO); Indian Council of Agricultural Research (ICAR); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR), engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs)

Rural development projects
Slum area development.

Explanation.- For the purposes of this item, the term `slum area' shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.