Corporate Social Responsibility

Overview of CSR under the Companies Act, 2013

The Companies Act, 2013, introduced provisions on CSR under Section 135. These provisions make it mandatory for certain companies to establish CSR policies and spend a certain percentage of their profits on social, environmental, and community development.

Applicability of CSR Provisions

CSR provisions under Section 135 apply to companies that meet any of the following criteria:

• Net worth: The company’s net worth should be ₹500 crores or more.

• Turnover: The company’s annual turnover should be ₹1000 crores or more.

• Net profit: The company’s net profit should be ₹5 crores or more during the immediately preceding financial year.

If a company meets any of these conditions, it must comply with CSR requirements as per the Companies Act.

CSR Committee

A company covered under CSR provisions is required to form a CSR Committee of the Board of Directors. The committee must consist of at least three directors, with at least one being an independent director. The committee’s responsibilities include:

• Formulating a CSR policy.

• The organization needs to determine its CSR spending budget.

• Ensuring that the activities are in line with the company’s CSR policy.

CSR Policy

A company must have a CSR policy in place, which outlines its CSR initiatives, goals, and activities. The policy must include:

• The areas or sectors in which the company intends to undertake CSR activities (e.g., education, healthcare, rural development, environment protection).

• The process for monitoring and reporting the progress of CSR initiatives.

• A clear framework on how the company will measure the impact of CSR activities.

The CSR policy should be approved by the Board of Directors and updated regularly.

CSR Expenditure and Compliance

As per the Companies Act, the company is required to spend at least 2% of its average net profit over the previous three financial years on CSR activities. The key points include:

• Net Profit Calculation: The net profit should be calculated as per Section 198 of the Companies Act, excluding certain items like profits from extraordinary items, etc.

• Unspent Funds: If the company is unable to spend the mandated amount in a particular financial year, it should disclose the reasons in its Annual Report and carry forward the unspent amount to the next year. In certain cases, if the amount is unspent due to reasons beyond the company’s control, it can be allocated to a specific fund set up by the government (e.g., Prime Minister’s National Relief Fund).

CSR Activities

The establishment of CSR initiatives by the company must align with categories from Schedule VII of the Companies Act that cover:

• Eradicating hunger, poverty, and malnutrition.

• Promoting education, including special education.

• The company works to enhance gender equality while empowering all women.

• The company focuses on environmental sustainability through programs to diminish its carbon emissions.

• The company should actively protect cultural national heritage and works of art.

• Advancement of healthcare, especially preventive healthcare.

The company holds the flexibility to perform such activities directly or select non-governmental organizations (NGOs) or government initiatives to receive their CSR donations.

Reporting and Disclosure

Every company required to undertake CSR activities must include a CSR Report in its Annual Report, which should contain:

• Details of the CSR policy.

• The composition of the CSR Committee.

• The amount of CSR spent and its utilization.

• The company report contains descriptions of its CSR activities from the recent financial period.

If a company does not comply with CSR requirements, it must provide an explanation in its report, including reasons for not meeting the CSR spending threshold.

Penalties for Non-compliance

Failure to meet CSR requirements will result in the following consequences for the company.

• Penalty of twice the amount required to be transferred or ₹1 Crore, whichever is less

• The officers in default may face a penalty of 1/10th of the amount required to be transferred or ₹2 lakhs, whichever is less.

Amendments to CSR Provisions

The Ministry of Corporate Affairs (MCA) has made several amendments to CSR regulations. Notable changes include:

• CSR expenditure to include administrative costs: As per amendments, administrative costs related to CSR activities (like salaries of employees engaged in CSR activities) are allowed to be counted within the 2% CSR spend.

• Impact assessment: For CSR projects worth ₹1 crore or more, companies must conduct an impact assessment to evaluate the effectiveness of the project.

Importance of CSR for Businesses

CSR under the Companies Act, 2013 serves several purposes:

• The practice works as a business tool to create positive social outcomes which resolve health concerns and provide education services and protect the environment.

• CSR-active firms build stronger brand image which results in better customer trust and improved brand recognition.

• CSR promotes responsible business cultures through which organizations can integrate sustainable development processes with their growth objectives.

Conclusion

Corporate Social Responsibility (CSR) under Companies Act, 2013 has emerged as an integral part of business operations among specific companies within India. Monetary investments drive businesses to develop programs which benefit both society and environmental needs. Companies must meet a minimum expenditure threshold on their CSR commitments while reporting their actions to maintain transparency according to the Act's provisions which support national sustainable development.

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