We lead dynamic lives in an increasingly complex world. Ecological, social, cultural and economic problems on a global scale have now become part of our daily lives.
Earnings growth is no longer the only indicator of business performance for companies and they must play the role of responsible corporate citizen as they have an obligation to society.
The concept of Corporate Social Responsibility (CSR), introduced by the Companies Act 2013, places a greater responsibility on companies in India to provide a clear CSR framework.
Many companies such as TATA and Reliance have voluntarily committed to CSR. The law introduces the culture of Corporate Social Responsibility (CSR) in Indian companies and obliges companies to formulate CSR policies and spend on social improvement activities.
CSR: The Origin
Corporate Social Responsibility or CSR has many interpretations but can be understood to be a concept imposing a liability on the Company to contribute to the society (whether environmental causes, educational promotion, social causes etc.) along with the reinforced duty to conduct the business in an ethical manner.
Other Popular Names of CSR: corporate conscience, corporate citizenship, social performance, sustainable business & Responsible business.
Section 135 of Companies Act 2013 and CSR rules 2014 along with CSR Amendment Rules 2021 contains provisions related to CSR.
Benefits of CSR
Implementing CSR in business activities not only benefits society but to business entity also. Here are some points below-
1. Strengthening brand positioning
2. Enhanced corporate image and reputation
3. Satisfaction of economic and social contribution to society
4. Contribution to the surrounding society
5. Increased ability to attract, motivate and retain employees
6. Enhanced sales and market share
7. Increased appeals to investors and financial analysts
Steps companies should take after fulfilling specified conditions
As stated in Section 135(1), any company fulfilling any one of following specified conditions-
1. Net worth of Rs.500 Cr. or more;
2. Turnover of Rs.100 Cr. or more;
3. Net Profit of Rs. 5 cr. or more, (Net profit to be calculated in accordance with provisions of Section 198 and shall not include sums as prescribed in this Section)
1. Shall form CSR Committee who shall make the policies and the procedures for making CSR expenses. The same policies shall be accepted by BOD and shall be disclosed on the BOD’s report and on the website of the Company.
2. Contribution to be made- Co. shall make an expenditure of 2% of average net profit of last 3 financial years as CSR expenses and these expenses are to be made as per CSR policy. It is to be noted that these CSR expenditures shall be made in the local areas in which company is working.
Constitution of CSR Committee
a. Every company to which Section 135 is applicable, shall constitute a Corporate Social Responsibility Committee of the Board.
b. The Committee shall consist of 3 or more directors.
c. Out of the 3 directors, at least 1 director shall be an independent director.
d. Where a company is not required to appoint an independent director under Section 149 (4) of the Companies Act 2013, it shall have in its CSR Committee two or more directors
e. A private company having only 2 directors on its Board, shall constitute its CSR Committee with 2 directors.
What disclosures are to be made in Board’s Report?
The company should mention following information related to CSR-
a. The composition of the CSR Committee;
b. The contents of CSR policy; and
c. The reasons for not spending the amount of 2% in pursuance of its CSR policy(in case the company fails to spend such amount).
Activities not amounting to CSR
As per Rule 4 and Rule 6 of the Companies(Corporate Social Responsibility Policy) Rules, 2014 following amount shall not amount to CSR activities for the purpose of Section 135-
a. The CSR projects or programs or activities undertaken outside India.
b. The CSR projects or programs or activities that benefit only the employees of the company and their families.
c. Contribution of any amount directly or indirectly, to any political party under Section 182 of Companies Act 2013.
d. Any activity undertaken in pursuance of normal course of business of a company.
Display of CSR policy on the website
As per Rule 9 of the Companies (CSR Policy) Rules, 2014 and Rule 6 of the Companies (Accounts) Rules, 2014, the CSR Policy and its contents shall be displayed on the Company’s website, if any, as per the particulars specified in the Annexure to the Companies (CSR Policy) Rules, 2014.
Penal provisions for not complying with Section 135
1. The concept of CSR is based on the principle “comply or explain”. Section 135 of the Act does not lay down any penal provisions in case a company fails to spend the desired amount.
2. Second provisions to Section 135(5) provides that if the company fails to spend such amount, the Board shall in its report specify the reasons for not spending the amount.
3. In case it does not disclose the reasons for not spending in the Board’s report, the company shall be punishable with fine minimum Rs. 50000 & maximum Rs. 25 lakhs and every officer in default shall be punishable with the imprisonment for a term which may extend to 3 years or with fine minimum Rs. 50000 & maximum Rs. 5 lakhs, or with both.