Corporate Social Responsibility

“There is no pleasure in this or in the other world equal to the joy of being helpful to those around you”

Help, The word help is not just enough unless it is combined with a sense of duty and this is the point, which is in the name of Corporate Social Responsibility and which focuses on the social responsibility of the whole corporate world.

Corporate social responsibility (CSR), also called Corporate Conscience, Corporate Citizenship, Social Performance, or Sustainable Responsible Business/ Responsible Business is a form of corporate self-regulation which is further integrated into a business model.

The totality of CSR can be best understood by three words: ‘corporate’, ‘social’ and ‘responsibility’ in broad terms, CSR relates to responsibilities corporations have towards society within which they are based and within which they operate, not denying the fact that the purview of CSR goes much beyond this.

Some perceive it to be a commitment of a company to manage its various roles in society, as producer, employer, customer and citizen in a responsible manner while for others it is synonymous to Corporate Responsibility (CR) or Corporate Citizenship or Social Action Program (SAP). Of late, the term has also been started to link up with Triple Bottom Line Reporting (TBL) which essentially measures an enterprise‘s performance against economic, social and environmental indicators.

CSR and Companies Act, 2013

Companies (Corporate Social Responsibility Policy) Rules, 2014 were notified on 27.02.2014.

Rule 2(c) therein, defines Corporate Social Responsibility as under-

“It means and includes but is not limited to –

(i) Projects or programs relating to activities specified in Schedule VII to the Act; or

(ii) Projects or programs relating to activities undertaken by the Board of directors of a company (Board) in pursuance of recommendations of the CSR committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.”

Applicability

As per Section 135(1) of the Companies Act, 2013, every company qualifying the following conditions during any financial year, shall have to comply with CSR obligations:

  • Net Worth of Rs. 500 crore or more;
  • Turnover of Rs. 1000 crore or more;
  • A Net Profit of Rs. 5 crore or more.

Every Company including its holding or subsidiary company, and a Foreign Company under Section 2(42) having its branch office or project office in India, which fulfills the criteria specified in Section 135(1), shall comply with Section 135 and rules.

The above mentioned criteria shall be checked irrespective of the type of company; whether it be a public limited company or a private limited company, a listed company or an unlisted company.

Such specified criteria to be met “during any financial year” and not “at any time during any financial year”.

Section 2(41) of the Act defines the term financial year as “in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up.”

Thus, a harmonious interpretation says that the applicability of CSR obligations shall have to be checked independently for every financial year.

Mandatory Obligations

There are certain mandatory CSR obligations which every company, on whom the CSR provisions are applicable, shall have to comply with. They are –

  • Constitution of a CSR Committee and disclosure of the composition in Board Report.
  • Formulation of a CSR Policy based on CSR committees recommendations
  • Undertaking activities included in CSR Policy
  • Mandatory spend of at least 2% of average Net Profit of the company on CSR activities.

In case of non-spending of at least 2% amount, the same shall have to be disclosed with reasons in the Board’s Report.

Constitution of CSR Committee

In compliance with Section 135(1), every company which meets the criteria specified 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.

Rule 2(d) defines “CSR Committee”. It means the Corporate Social Responsibility Committee of the Board referred to in Section 135 of the Act.

Responsibility of CSR Committee

As set out in sub-section (3) of Section 135 of the Companies Act, 2013, the CSR 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.

 Responsibilities of Board of Directors

As per Section 135(4) of the Companies Act, 2013, The Board of every company on whom the CSR provisions are applicable 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.”

The Board of every such company 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.

CSR Activities as prescribed

Schedule VII sets out the activities for CSR purposes and have been briefly listed down by the Ministry.

Exemption from CSR provisions

Rule 3(2) exempts a company and thus, no obligation on the Company for CSR, if the Company ceases to be covered for 3 consecutive financial years under Section 135.

This exemption will be available till the time the Company again meets the criteria under Section 135.

Place of CSR Spend Activities

In accordance with Rule 4(4), activities to be undertaken in India only will qualify for CSR.

Following shall not be consider CSR spends

  • CSR activities for the benefits of employees and their families only not to be considered as CSR. [Rule 4(5)]
  • Contribution to Political party not to be considered as CSR. [Rule 4(7)]

(The above article has been authored by CS Reema Jain)