Table of Contents
INTRODUCTION
Corporate Social Responsibility defines under section 135 of the Companies Act, 2013. It is a concept whereby companies voluntarily contribute to a better society and a cleaner environment – a concept, whereby the companies integrate social and other valuable concerns in their business operations for the betterment of their stakeholders and society in general in a voluntary way.
CSR Applicability in India
The provisions apply to:
- Every company
- Its holding company
- It’s a subsidiary company
- Foreign company
Having in the preceding financial year:
- Net worth > 500 crore
- Turnover > 1000 crore
- Net profit > 5 crore
How does Corporate Social responsibility work in India?
The eligible companies are required to formulate a CSR Committee, in order to carry out the programs or activities as approved by the Committee. The programs or activities under CSR in India are carried out through a registered trust, society, or company. As per the law, CSR activities that only benefit employees of the companies and their families do not qualify as CSR expenditures.
In case a company fails to spend the said amount within a year, it will have to transfer the unutilized CSR funds to an escrow account and ensure its utilization within three years. If a company fails to do even that, it will have to transfer the balance amount to the National CSR Fund.
Since its rollout in 2014, CSR expenditure in India has continued to increase year-on-year. In fact, in the year 2017-2018, for the first time, the amount spent by companies exceeded the prescribed expenditure. The cumulative expenditure by the top-100 companies listed on the National Stock Exchange from 2014-2015 to 2017-2018 is about Rs. 26,385 crore per the KPMG Report. Sectors such as health and sanitation, rural development, education, and environment, have recorded the highest number of funds.
The implementation of Corporate Social Responsibility in India has brought various socioeconomic and political challenges to good governance under one umbrella and sought interventions by India Inc. to address the same. While the Act itself has facilitated this process, India Inc. continues to explore the difference in their own style of business and what they are expected as part of CSR in India. At the same time, CSR has also become a space for active policy practitioners and social impact organizations that are trying to find their space in different ways
What is NOT Corporate Social Responsibility?
According to the law, the contribution of any amount directly or indirectly to any political party, shall not be considered as CSR activity in India. Similarly, CSR projects or programs, or activities that benefit only the employees of the company and their families shall not be considered CSR activities. In addition to this, any activity which is not in the form of a project cannot be qualified as CSR of a company. Similarly, any CSR project which has not officially been approved by the board cannot qualify as a CSR initiative of that organization.
Importance of Corporate Social Responsibility
CSR is an immense term that is used to explain the efforts of a company in order to improve society in any other way. The below reasons reflect why CSR is important:
- CSR improves the public image by publicizing the efforts towards a better society and increasing their chance of becoming favorable in the eyes of consumers.
- CSR increases media coverage as media visibility throws a positive light on the organization.
- CSR enhances the company’s brand value by building a socially strong relationship with customers.
- CSR helps companies to stand out from the competition when companies are involved in any kind of community.
Role of Board of Directors
The role of the Board of Directors is as follows:
- After considering the recommendations made by the CSR Committee, approve the CSR policy for the Company.
- The Board must ensure only those activities must be undertaken which are mentioned in the policy.
- The Board of Directors shall make sure that the company spends in every financial year, a minimum of 2% of the average net profits made during the 3 immediately preceding financial years as per CSR policy.
- In case a company has not completed 3 financial years since its incorporation, the average net profits shall be calculated for the financial years since its incorporation.
- The Board’s Report shall disclose: CSR Committee’s composition
- The contents of CSR Policy
- In case CSR spending does not meet 2% as per CSR Policy, the reasons for the unspent amount, and details of the transfer of the unspent amount relating to an ongoing project to a specified fund (transfer within a period of six months from the expiry of the financial year).
Net Profit for Corporate Social Responsibility
Every company which needs to comply with the CSR provisions has to spend 2% of the average net profits made during the preceding 3 years as per the CSR policy. The computation of net profit for CSR is as per Section 198 of the Companies Act, 2013.
Section 198 provides that while computing the net profits of a company a credit should be given for the subsidies and bounties received from any Government, or public authority authorized or constituted on this behalf.
For computing net profits, credit cannot be given for the following sums:
- Profits, by way of premium on shares, unless the company is an investment company.
- Profits on sales of forfeited shares.
- Profits of a capital nature, including profits from the sale of the undertaking or any part thereof.
- Profits from the sale of any fixed assets or immovable property of a capital nature comprised in the undertaking, unless the company business consists of buying and selling any assets or property.
- Any change in the carrying amount of an asset or of a liability recognized in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.
- Any amount representing notional gains, unrealized gains, or revaluation of assets
In making the computation of net profits, the following sums should be deducted:
- Every usual working charge.
- Directors’ remuneration.
- Bonus or commission payable or paid to any member of the company’s staff, technician, engineer or person engaged or employed by the company, whether on a part-time or whole-time basis.
- Any tax notified by the Central Government as a tax on abnormal or excess profits.
- Any tax on business profits imposed for special reasons or special circumstances and notified by the Central Government.
- Interest on debenture issued by the company.
- Interest on mortgages executed by the company and on advances and loans secured by a charge on its floating or fixed assets.
- Interest on unsecured advances and loans.
- Expenses on repairs, whether to movable or immovable property, provided the repairs are not of a capital nature.
- Outgoings are inclusive of contributions made under section 181.
- Depreciation to the extent specified in section 123.
- Excess of expenditure over income.
- Damages or compensation are to be paid for any legal liability and any sum paid by way of insurance against the risk of meeting such liability.
- Debts are considered bad and adjusted or written off during the year of account.
In making the computation of net profits, the following sums cannot be deducted:
- Income tax and super-tax are payable by the company under the Income-tax Act, 1961.
- Any damages, compensation, or payments made voluntarily.
- Loss of capital nature including loss on sale of the undertaking or of any part thereof not including any excess of the written-down value of any asset which is discarded, sold, discarded, destroyed, or demolished over its sale proceeds or its scrap value.
- Any change in the carrying amount of an asset or of a liability recognized in equity reserves, including surplus in profit and loss accounts for the measurement of the asset or the liability at fair value.
Corporate Social Responsibility Committee Applicability
Every company to which CSR criteria are applicable shall constitute a Corporate Social Responsibility (CSR) Committee.
The CSR Committee should consist of 3 or more directors, out of which at least 1 director must be an independent director.
An unlisted public company or a private company shall have its CSR Committee without any independent director if an independent director is not required.
A private company having only two directors on its Board shall constitute its CSR Committee with two directors.
In the case of a foreign company, the CSR Committee shall comprise of at least 2 persons of which one person shall be a person resident in India authorized to accept on behalf of the foreign company – the services of notices and other documents. Also, the other person shall be nominated by the foreign company.
A company having any amount in its Unspent Corporate Social Responsibility Account shall constitute a CSR Committee and comply with the CSR provisions.
Duties of the Corporate Social Responsibility Committee
The CSR Committee shall formulate and recommend a CSR policy to the Board. CSR policy shall point out the activities to be undertaken by the company as enumerated in Schedule VII.
CSR Committee shall recommend the amount of expenditure to be incurred on the CSR activities to be undertaken by the company.
CSR Committee shall monitor the CSR policy of the Company from time to time.
The committee shall establish a transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.
Fines and Penalties for Non-Compliance
In case a company fails to comply with the provisions relating to CSR spending, transferring and utilizing the unspent amount, the company will be punishable with a minimum fine of Rs 50,000 which may increase to Rs 25 lakh. Further, every officer of such a company who defaults in compliance will be liable for a punishment which is imprisonment for a term that may extend to three years or with a minimum fine of Rs 50,000 which may increase to Rs 5 lakh, or with both.