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Corporate Social Responsibility under Companies Act 2013

The concept of Corporate Social Responsibility is mainly concerned with the responsibility of the corporates towards the welfare of the society & environment. Companies should contribute towards the welfare of the society because it utilizes resources for its utilization from the society such as raw material, Human Resources etc.

Ministry of Corporate Affairs has implemented the concept of CSR under section 135 of the Companies Act 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014 with the object of promoting CSR activities. Its scope has endured major changes from considering it as a charitable activity in comparison with the obligation of companies towards society.

Corporate Social Responsibility under Companies Act in Global Context

In simple words, Corporate Social Responsibility (CSR) is mainly the responsibility of corporates for their impact on society. Corporates should make a proper plan and core strategy in collaboration with their stakeholders to integrate ethical, social, and environmental concerns.

CSR is defined as per United National Industrial Development Corporation (UNIDO^[1]) as a management concept whereby companies integrate social and environmental concerns in their operations and interactions with their stakeholders.

The concept of Corporate Social Responsibility has been introduced all over the world. Different Countries have different ways of application of CSR. The very common thing among all the countries is that they use the LBG model to measure the real value and effect of community investment in society. In comparison to European companies, in USA corporate community contributions by the companies are ten times in a comparison of their British counterparts. US companies disclose their CSR activities on their website such as provisions regarding combating climate change, or providing better health care to the society.

The context of CSR activities in countries such as Japan, South Korea, and Taiwan is similar to that of the European Continent.

Multinational companies in developing countries are the major driving force for CSR activities in these developing nations.

For Example in the case of campaigns against Nike’s labor practices in Asian supply chains and Shell’s role in Nigeria had made substantial changes towards the contribution in CSR practices.

Domestic Companies in developing countries contributed towards CSR activity in relation to education, health, and transport etc.

Corporate Social Responsibility in India

The concept of CSR is not new in India. There are companies who are actively involved in CSR activities but still, the number is relatively few.

In our country, CSR activity is more like a voluntary spend rather than a statutory obligation. In Indian Heritage, at that time, there was three type of charitable activities which were traditionally practiced namely Dana, Dakshina, and Diksha.

Dakshina was the one which was given in exchange for something, whereas, Diksha was given for your own enlightenment and Dana was the one which was considered as the purest form of charity which was given without expecting anything in return. This was an activity which was voluntarily performed without any consideration.

In India, it is a statutory compliance requirement for the companies to comply with the CSR activities whereas in other countries such as the UK, France Germany etc. there are voluntary guidelines.

The government of India has notified Section 135 of Companies Act 2013 for the CSR activities. It promotes greater disclosure & transparency. The provision related to CSR includes that companies which meet criteria will have to spend minimum 2% of their average profits of last three years towards CSR activities. In case companies are unable to comply with the provisions of CSR then they are required to provide explanation or reason for the noncompliance in the board report. This provision includes the approach of “Comply or explain’. In case they fail to provide a reason for non-compliance then they will attract the penalty provisions.

CSR Provisions & Applicability

Provisions related to CSR are applicable to private limited companies and public limited companies as well as holding and Subsidiaries Company and foreign companies having offices in India and meets any of the following criteria mentioned below:

• The company has Net Worth of INR 500 crore or more;
• The company has a turnover of INR 1000 crore or more;
• The company having a Net profit of INR 5 Crore or more.

Companies who fall under this criteria have to spend at least 2% of average net profits of the previous three financial years on CSR activities.

CSR Committee

Every company fall into the criteria specified under the CSR provisions have to constitute CSR committee consisting of 3 or more directors including at least one independent director. Unlisted company and a private company, where there is no requirement of appointing an independent director, shall constitute CSR committee without an independent director. A private company having only two directors are required to constitute CSR committee with only two directors.

In the case of a foreign company, CSR committee with only two directors out of which one shall be Indian resident. CSR policy of the company shall specify the CSR activities to be undertaken by the company. The policy also recommends the amount of expenditure to be incurred on the CSR activities. The board of directors of the company shall consider the suggestions made by the CSR committee and will approve the CSR policy of a company.

Computation of Net profit

It is required for every company to report its net profit accrued for the purpose of ascertaining the criteria specified under section 135 of the Companies Act, 2013. There are different rules in respect of Indian company and foreign company.

• Indian Company

The computation of net profit is done according to CSR rules. For the purpose of contributing to CSR activities, 2% of the average net profits of the company of three financial years is computed according to section 198 of the Companies Act 2013, which is mainly net profit before tax.

• Foreign Company

Net profits of a foreign company incorporated in India shall be determined in conformity with the financial statements of a foreign Company and shall be computed in accordance with the section 381(1)(a) read with Section 198 of the Companies Act.

Activities under CSR

A wide range of activities which may be undertaken by the corporates is provided under Schedule VII of the Companies Act 2013. The government may also prescribe any other activity which it feels proper to be included within the ambit of CSR.

Here are the following activities that can be done by the company:

• Eradicating hunger & Poverty;
• Promotion activities related to education;
• Promoting gender equality;
• Reducing child mortality and improving maternal health;
• Combating human immune-deficiency virus, immune deficiency syndrome, malaria, and other diseases;
• Ensuring Environmental sustainability;
• Social Business projects;
• Contribution towards Prime Minister’s National Relief Fund or any other fund set up by the Governments for a development of the society;
• Rural development projects;
• Disaster management which includes relief, rehabilitation and reconstruction activities;
• Development of slum areas;
• Other matters prescribed by the government of India.

Implementation of Corporate Social Responsibility

Here are the following ways through which activities defined under Schedule VII can be executed:

• It must be carried out in the local areas within India and the area where the company operates;
• It can only be performed as CSR activities or projects;
• It can also be carried out with the aid of registered trust or society or charitable company in India, which is established by parent company, subsidiary or associate company or which is not established by any of these companies if it has proven a track record of undertaking similar activities for at least three years.
• Each eligible company is required to report on its CSR activities individually but these activities can be conducted in association with other companies.
• 5% of CSR can also be used for the purpose of giving training to its own employees/personnel for implementation of CSR activities.

Reporting

It is required for the companies to publish a report on its CSR activities on their website annually. It is required by the board of directors of the company to prepare an annual report on CSR activities in a prescribed format. Its report must contain the brief overview of CSR policy and the composition of CSR committee with the average net profit of the preceding three financial years and the amount of expenditure spent on CSR activities. In case the company fails to spend its net profit on CSR activities the company has to give a reason for the non-compliance in Board report.

Penalty

Board of Directors of the company has to disclose all the information regarding its CSR policy and about its implementation on annual basis. In case the company fails to comply with the CSR provisions, the company shall be liable to fine which shall not be less than Rs. 50,000 and which may extend to Rs. 25,00,000.

Further, Officer in Default shall be punishable by the fine which shall not be of less than Rs. 50,000 which may extend to Rs. 5,00,000 or Imprisonment of up to 3 years or both. Act provides penalty in case of non- disclosure of information regarding CSR activities but does not hold them liable for not undertaking CSR activities.

Conclusion

Corporate Social Responsibility is a noble initiative and it helps to fill the gap of socio-economic inequality and helps in addressing the problems faced by the society. In many countries, CSR activities are voluntary obligation whereas in India it is a mandatory statutory compliance requirement for companies after an amendment to the Companies Act, 2013 in 2014.

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