CORPORATE SOCIAL RESPONSIBILITY (CSR)

Background:

Corporate Social Responsibility (herein after referred as CSR) is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all the stakeholders. It is defined as responsibility of the business towards the community and environment in which it operates. CSR is important to business because it demonstrates that company takes an interest in social issues that have no direct impact on profit margins of the Company.

Legal Reference:

The Companies Act,2013 has notified Section 135, and Companies (Corporate Social Responsibility) Rules, 2014 which deals exclusively with CSR, also Schedule VII* which indicate the activities to be undertaken by the company.

Applicability as per above Legal Reference:

As per Section 135(1), Every Company having-

·         Net worth of rupees five hundred crore or more, or

·         Turnover of rupees one thousand crore or more, or

·         Net profit of rupees five crore or more

during immediately preceding financial year. 

(Amended by Companies Amendment Act 2017, earlier there was three-year criteria and there been lot of ambiguity say 2 year old Company can contribute or not? as intent of the section was in question.)

Obligation to Constitute CSR Committee

Every Company on which CSR is applicable as discussed above shall constitute a committee of the Board consisting of 3 or more directors, out of which one shall be an independent director.

However, where company is not required to appoint an independent director as per the provisions of Section 149 of the Companies Act 2013, the CSR Committee shall constitute 2 or more directors.

In case of foreign company, it shall comprise at least 2 persons, from which one shall be nominated by foreign company.

Functions of  Committee

• To formulate and recommend to the Board, a CSR Policy which shall indicate the activities that can be undertaken by the company.
• To recommend the amount of expenditure to be made on such activities.
• To monitor the CSR Policy of the company.

Responsibility of  Board Of Directors:

• To approve CSR Policy, after taking into consideration the recommendations made by CSR Committee and disclose such content in its report and on website of the Company.
• Ensure that the activities included in CSR Policy are actually undertaken by the Company.
• Ensure that the company spends, at least 2% of average net profits made during three immediately preceding financial years in pursuance of its CSR Policy. Where if the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years
• If the company fails to spend such amount, the Board shall in its report (Board Report) specify the reasons for not spending such amount.
• Disclose such content of policy on the company’s website.

Treatment of Unspent CSR Amount:

1. If the unspent amount relates to an ongoing project, it should be transferred by the Company within a period of 30days of close of financial year, in a special account called Unspent Corporate Social Responsibility Account and such amount shall be spent within a period of 3 financial years from date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

2. If the unspent amount does not relate to an ongoing project, it should be transferred to a fund specified in Schedule VII, within a period of 6 months of expiry of financial year.

CSR Activites: What qualifies as CSR, what not?

1. Company should strive out to made CSR as per its Policy, however Company should ensure that activities undertaken should relates to Company’s Ordinary Course of Business.

(The author assumed that the readers are well versed with term ordinary course)

2. The Board of the Company may decide to undertake its CSR activities approved by CSR Committee, through:

•  A Section 8 company or a registered trust or society, established by company, either singly or with any other company, or;
• A Section 8 company or registered trust or society, established by Central or State Government or any entity established under Act of Parliament or State Legislature.

The company or trust or society shall have an established track record of 3 years in similar programs or projects. 

3. To collaborate with other companies which are in position to report separately.

4. Activities held in India only amounts to CSR Expenditure.

5. Activities that benefit only to employees of the company does not amount to CSR Expenditure.

6. The CSR Expenditure including expenditure on administrative overheads shall not exceed 5% of total CSR expenditure in one financial year.

7. Contribution to political party shall not be considered for CSR Activity.

8. Company should also ensure the activities undertaken should not only benefit the employee of the Company.

CSR Policy: The CSR Policy includes –

1. A list of list of CSR projects or programs in Schedule VII which a company plans to undertake

2. Monitoring process of such projects or programs, but does not include activities undertaken in normal course of business of company.

3. The surplus arising of the CSR projects or programs shall not form a part of profit of the company.

IMPACT OF COVID-19:  Read Detailed clarification  MCA Circular- What qualifies? What not? - COVID-19 related Frequently Asked Questions (FAQs) on Corporate Social Responsibility (CSR)

In continuation to initiatives of the government with respect to the existing pandemic of COVID-19 in the country, a series of active steps have been taken by the government to combat the persisting threat of COVID-19 over the country. The Ministry has already issued clarifications in this regard-

Contribution made to: *PM CARES Fund *State Disaster Management Authority *Spending CSR Funds for Covid-19 shall qualify as CSR Expenditure and shall be included in Schedule VII.

Contribution made to: * Chief Minister’s Relief Fund * State Relief Fund shall not qualify as CSR Expenditure.

CONSEQUENCES FOR NON- COMPLIANCE:

If a company contravenes the provisions of Section 135 (5) or 135(6) of Companies Act,2013 it shall be punishable with a fine which shall not be less than Rs. 50,000 but which can extend to Rs. 25,00,000, and;

Every officer in default shall be punishable with imprisonment of term up to 3 years, with a fine not less than Rs. 50,000 but which can extend to Rs. 5,00,000, or both.

Further if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

 *(Link to Schedule VII-  https://www.mca.gov.in/SearchableActs/Schedule7.html)

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ABOUT THE AUTHOR

Kanika Maheshwari

Commerce Graduate and Budding Company Secretary.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of the use of such information.

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