Introduction
While there isn’t one universally agreed-upon definition of corporate social responsibility (CSR), every existing definition acknowledges the influence businesses have on society and the societal expectations placed upon them. Initially rooted in philanthropic endeavors like corporate donations, charity, and relief work, CSR has expanded worldwide to encompass various related concepts. These include the triple bottom line, corporate citizenship, philanthropy, strategic philanthropy, shared value, corporate sustainability, and business responsibility.
The United Nations Industrial Development Organization defines CSR as “Corporate social responsibility refers to a management principle in which companies incorporate social and environmental considerations into their business practices and engagements with stakeholders. CSR is commonly seen as the means by which a company achieves a harmonious blend of economic, environmental, and social priorities, known as the triple-bottom-line approach. Simultaneously, it aims to meet the expectations of both shareholders and stakeholders.”
Furthermore, according to the Ministry of Corporate Affairs’ Second High-Level Committee Report, 2018, “The (CSR) law intends to mainstream the practice of business involvement in CSR and make (businesses) socially, economically and environmentally responsible…to address social and environmental concerns of the local area and other needy areas in the country”.[i]
Regulatory Framework
Section 135 of the Companies Act, 2013, along with Schedule VII and the Companies (Corporate Social Responsibility Rules), 2014, provide the basic regulatory framework for CSR in India.
Applicability
As per section 135(1) of the Companies Act 2013, the CSR provision applies to companies which fulfils any of the following criteria during the immediately preceding financial year: –
- “Companies having net worth of rupees five hundred crore or more, or
- Companies having turnover of rupees one thousand crore or more, or
- Companies having a net profit of rupees five crore or more.”[ii]
The Companies (Corporate Social Responsibility Policy) Rules, 2014 have expanded the scope of compliance requirements to encompass not only the parent and subsidiary companies but also foreign companies that have branches or project offices in India and meet the specified criteria mentioned above.
As per Rule 3, Every company, including its holding company, subsidiary, and foreign company with a branch office or project office in India that has a net worth of rupees 500 crore or more, a turnover of rupees 1000 crore or more, or a net profit of rupees 5 crore or more during the immediately preceding financial year will also be subject to the CSR provision.[iii]
According to Section 135, sub-clause 5 of the Act, all the companies which satisfy the criteria mentioned under Section 135(1) need to spend at least 2% of the average net profit earned during the immediately preceding three financial years in accordance with the company’s corporate social responsibility policy.[iv]
CSR Committee
Companies that meet any of the aforementioned conditions are obligated to establish a Corporate Social Responsibility Committee, which will be responsible for creating and overseeing the company’s CSR policy. According to Section 135(1) of the Act, the CSR Committee must comprise a minimum of three directors, including at least one independent director.[v]
When a corporation is exempt from the requirement for appointing an independent director under subsection (4) of section 149, it is still required to have two or more directors on its CSR Committee.
Additionally, the CSR Committee might be formed with these two directors if a private company’s Board of Directors consists of just two people. [vi]
A foreign firm’s CSR Committee must consist of at least two members, one of whom must reside in India and the other of whom must be chosen by the foreign corporation.[vii]
The Board’s report shall disclose the composition of the Corporate Social Responsibility Committee.[viii]
Further, If the required amount to be spent by the company under section 135(5) of the Companies Act, 2013 doesn’t exceed 50 lakhs rupees then such companies are not required to form CSR committee.[ix]
Functions of the CSR Committee
1. The committee is tasked with developing a CSR policy that outlines the specific activities to be undertaken by the company, aligning with the guidelines provided in Schedule VII of the Act. Furthermore, the committee is responsible for recommending the formulated policy to the board.
2. The committee is in charge of recommending the amount of money that must be spent on activities that are intended to be carried out in accordance with CSR policy.
3. The CSR committee is tasked with formulating an annual action plan in accordance with CSR policy and recommending it to the board in accordance with Rule 5 sub-rule (2) of the CSR Rules, 2014.[x] The plan must include the following:a list of authorised projects that are expected to be carried out in connection with the topics or areas covered by Schedule VII of the Act.
- Clarify the procedure for implementing the approved programs or projects as outlined in Rule 4, sub-rule (1) of the CSR rules of 2014.
- Outline the method for allocating and utilizing funds allocated to such projects, along with the designated schedule for their implementation.
- Describe the system for reporting and monitoring these projects.
- Mention the details of impact and need assessment if required, for such projects.
Implementation of CSR projects
As per the rule 4 of CSR Rules[xi] the company has the option to either take on the responsibility of implementing the CSR project itself or execute the approved CSR projects by other means.
- By Section 8 companies of the Act[xii], public trust, societies registered under section 12A and 80G of the Income Tax Act, 1961, may be established by the company, itself or with any other company.
- By Section 8 companies of the Act, public trusts, and societies registered under section 12A and 80G of the Income Tax Act, 1961, either established by the state or central government
- By Section 8 companies of the Act, public trust, societies registered under section 12A and 80G of the Income Tax Act, 1961, and holds the experience of undertaking such activities of at least three years.
- By body or entity constituted under the parliament Act, or by the state legislature.
Registration of Entity
Any organization that meets the specified criteria for carrying out CSR activities and intends to undertake such activities, must register itself by filing the CSR-1 Form with the central government.[xiii]
The form can be filed electronically with help of the registrar. This provision came into effect on April 1, 2021. Thus, this provision shall not be applicable to projects that are approved before April 1, 2021.
The From CSR-1 is duly signed and submitted electronically by such interest entity and must be digitally verified by Practicing Company Secretary (CS), Practicing Charted Accountant (CA) or Practicing Cost Accountant.[xiv]
After the successful submission of Form CSR-1, a unique CSR Registration number shall be generated automatically.[xv]
List of CSR Activities
The wide and illustrative list is provided under the Schedule VII of the Act. The companies can engage in any of the activities provided under the Schedule as the CSR activities and include such activities in companies CSR policy. The list of activities includes but is not limited to:
- dealing with hunger, health care promotion, malnutrition, contribution towards the Swach Bharat Kosh established by the Central Government etc.
- towards the promotion of education, skills enhancing programmes, livelihood promotion projects or programmes.
- Programmes for gender neutrality, undertaking projects for women like homes, hospitals, orphans, care centres, old age homes etc.
- Projects for the sustainable environment, implementing a project for promoting environmental awareness, projects and programmes for maintaining the soil, air water, etc.
- Programmes for the promotion of culture, art, heritage and projects for the protection of historical sites, buildings etc.,
- Plans and initiatives for the growth of ruler areas, etc.
In addition to the list mentioned above, Schedule VII of the Act outlines various activities that companies can undertake as part of their CSR projects and programs. Companies have the flexibility to include any of these activities or similar ones mentioned in Schedule VII within their CSR policy.
ONGOING PROJECT
The term ongoing project has been defined under the CSR Rules, it is defined as a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification. [xvi]Under Rule 4(6) the Board should monitor the monitor the implementation of the ongoing project and shall ensure smooth implementation of the project within the overall permissible time period.
Penalty for Non-Compliance
Section 135(5) requires the company to spend 2% of the average net profits of the company made during the three immediately preceding financial years, and other than ongoing project if the company has unspent CSR amount the company transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
Section 135(6) requires the company to transfer the unspent amount on ongoing project within 30 days from the end of financial year to the unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer.
The companies shall be liable for the penalties are given under section 135(7) if they fail to comply with the above mentioned two sub-sections:
- In default, the company is required to transfer twice the amount liable to transfer in schedule VII or the unspent CSR account, or rupees 1 crore, whichever is less, and,
- Every officer involved in default shall be liable to pay one-tenth of the amount liable to transfer in schedule VII fund or unspent CSR account, or rupees 2 lakhs, whichever is less.
CSR Report
Every company which falls under section 135 of the act shall include CSR Annual Report in form the format prescribed in the board report. The report must contain the relevant details related to CSR activities undertaken by the company and the company is required to make the contents of CSR policy available on the company’s official website. [xvii]The company should also publish the composition of the CSR committee and the CSR policy approved by the board on the company’s website.[xviii] Annexure II of the CSR Rules provides for the format in which a CSR report is to be made.
Impact assessment: Every company having average CSR obligation of ten crore rupees or more in pursuance of sub-section (5) of Section 135 of the Act, in the three immediately preceding financial years, shall undertake impact assessment, through an independent agency, of their CSR projects having outlays of one crore rupees or more, and which have been completed not less than one year before undertaking the impact study. [xix]The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR. [xx]Impact assessment related expenditure may be booked as a CSR expense as long as it does not exceed 5% of the total CSR spending or INR 50,00,000, whichever is less.[xxi]
Furthermore, as per the new amended rules, every company covered under section 135 shall furnish a report on CSR in E-Form CSR-2 to the Registrar. The CSR-2 is to be filed as an addendum to Form AOC-4/AOC-4 XBRL/AOC-4 (Ind AS) as the case may be.[xxii]
Conclusion
Corporate social responsibility (CSR) is a legal obligation toward the society at large for corporations, that requires an adequate percentage of profits being used for betterment of the stakeholders. The companies which are required to do CSR must do it, as it not only benefits the society and environment but also give the corporation a chance to earn reputation and goodwill in the market.
[i] Ministry of Corporate Affairs Report of the High-Level Committee on Corporate Social Responsibility 2018 (Ministry of Corporate Affairs 2019) ch. 2, Pg. 21.
[ii] The Companies Act, 2013, § 135(1), No. 18, Acts of parliament, 2013 (India).
[iii] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 3.
[iv] The Companies Act, 2013, § 135(5), No. 18, Acts of parliament, 2013 (India).
[v] The Companies Act, 2013, § 135(1), No. 18, Acts of parliament, 2013 (India).
[vi] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(ii).
[vii] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1)(iii).
[viii] The Companies Act, 2013, § 135(2), No. 18, Acts of parliament, 2013 (India).
[ix] The Companies Act, 2013, § 135(9), No. 18, Acts of parliament, 2013 (India).
[x] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(2).
[xi] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 4(1).
[xii] The Companies Act, 2013, § 8, No. 18, Acts of parliament, 2013 (India).
[xiii] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 4(2)(a).
[xiv] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 4(2)(b).
[xv] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 4(2)(c).
[xvi] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 2(i).
[xvii] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 8.
[xviii] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 9.
[xix] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 8(3)(a).
[xx] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 8(3)(b).
[xxi] The Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 8(3)(c).
[xxii] The Companies (Accounts) Amendment Rules, 2022, Rule 12 (1A).
Author: Abhishek Gupta, Senior Associate (assisted by Mayank Chitlangi)
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at info@samistilegal.in
