Corporate Social Responsibility Under Section 135 of Companies Act 2013

Corporate Social Responsibility (CSR) implies a concept, whereby companies decide voluntarily to contribute to a better society and a cleaner environment – a concept, whereby the companies integrate social and other useful concerns in their business operations for the betterment of their stakeholders and society in general in a voluntary way.

Basically, “Corporate Social Responsibility” means and includes but is not limited to:

• Projects or program relating to activities specified in Schedule VII to The Act.
• Projects or program relating to those activities which are undertaken by the Board of directors of a company in ensuring the recommendation of the CSR Committee of the Board as per declared CSR Policy of the Company along with the conditions that such policy will cover subjects specified in Schedule VII of the Act.

Applicability

The provisions of CSR applies to:

• Every company
• Its holding company
• It’s subsidiary company
• Foreign company

Having in the preceding financial year:

• Net worth > 500 crore
• Turnover > 1000 crore
• Net profit > 5 crore

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.

• CSR improves the public image by publicizing the efforts towards a better society and increase their chance of becoming favourable in the eyes of consumers.
• CSR increases media coverage as media visibility throws a positive light on the organisation.
• 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, 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 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).
    

Transfer and Use of Unspent Amount

The specified funds for transfer of unspent amount are:

• A contribution made to the prime minister’s national relief fund.
• Any other fund is initiated by the central government concerning socio-economic development, relief and welfare of the scheduled caste, minorities, tribes, women and other backward classes.
• A contribution made to an incubator is funded either by the central government, the state government, public sector undertaking of state or central government, or any other agency.
• Contributions made to:
  • Public-funded universities
  • National Laboratories and Autonomous Bodies (established under the auspices of the Indian Council of Agricultural Research (ICAR)
  • Council of Scientific and Industrial Research (CSIR)
  • Department of Atomic Energy (DAE)
  • Indian Institute of Technology (IITs)
  • Indian Council of Medical Research (ICMR)
  • Defence Research and Development Organisation (DRDO) Ministry of Electronics and Information Technology)
  • Department of Science and Technology (DST) engaged in conducting research in technology, science, medicine, and engineering aimed at encouraging Sustainable Development Goals (SDGs).
• In case of the unspent amount relating to an ongoing project under the company’s CSR policy, the amount shall be transferred by the firm in less than 30 days from the end of the financial year to an exclusive account to be opened by a firm in any scheduled bank.
• The account shall be designated as ‘Unspent Corporate Social Responsibility Account’, and the funds shall be used towards its obligations under the CSR policy within a period of three financial years from the date of the transfer.
• In a case where the company fails to utilise the funds at the end of the three financial years, the funds should be transferred to the specified fund mentioned above within a period of thirty days upon completion of the third financial year.
  

Constitution of the CSR Committee

• Every company to which CSR criteria is applicable shall constitute a Corporate Social Responsibility of the Board (i.e. CSR Committee).
• Minimum 3 or more directors must form CSR Committee.
• Among those 3 directors, 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.
• In 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.

Duties of the CSR 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 the transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.

CSR Reporting

With respect to CSR Reporting, the provisions are as follows :

• The Board’s Report referring to any financial year initiating on or after the 1st day of April 2014 shall include an annual report on CSR.
• In the case of a foreign company, the balance sheet filed shall contain an Annexure regarding a report on CSR.

CSR Policy

CSR Policy elaborates the activities to be undertaken by the Company as named in Schedule VII to the Act and spend. The activities should not the same which are done by the company in its normal course of business

• Contents of CSR Policy should be placed on the company’s website by the Board.
• The activities mentioned in the policy must be undertaken by the company.
• The Company can join hands with other companies for undertaking projects or programs or CSR activities and report separately on such programs or projects.
• The CSR policy shall monitor the projects or programs.

List of Permitted Activities To Be Included in Accordance With Schedule VII of the Companies Act, 2013

The Board shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included is schedule VII. Some activities are specified in Schedule VII as the activities which may be included by companies in their Corporate Social Responsibility Policies. These activities are related to:

Sr.No	CSR Activities
1	Eradicating poverty, hunger and malnutrition, promoting health care which includes sanitation and preventinve health care, contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.
2	Improvement in education which includes special education and employment strengthening vocation skills among children, women, elderly and the differently-abled and livelihood enhancement projects.
3	Improving gender equality, setting up homes and hostels for women and orphans, setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
4	Safeguarding environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining a quality of soil, air and water which also includes a contribution for rejuvenation of river Ganga.
5	Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
6	Measures for the benefit of armed forces veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows.
7	Training to stimulate rural sports, nationally recognized sports, Paralympic sports and Olympic sports.
8	Contribution to the Prime Minister’s National Relief Fund, Contribution to the Prime Minister’s National Relief Fund (PM-CARES) or any other fund set up by the Central Government for socio-economic development providing relief and welfare of the Scheduled Castes, the Scheduled and backward classes, minorities and women.
9	Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government, State Government, Public Sector Undertaking or any agency of the Central Government or State Government.
10	Contributions to public funded Universities, IITs, National Laboratories and autonomous bodies established under DAE, DBT, DST, Department of Pharmaceuticals, Ministry of AYUSH, Ministry of Electronics and Information Technology and other bodies, namely DRDO, ICAR, ICMR and CSIR, engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
11	Rural development projects.
12	Slum area development.
13	Disaster management, including relief, rehabilitation and reconstruction activities.

Explanation:
For the purposes of this item “slum area” shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

Fines and Penalties for Non-Compliance

In case a company fails to comply with the provisions relating to CSR spending, transferring and utilising 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 company who defaults in the compliance will be liable for a punishment which is imprisonment for a term which may extend to three years or with a minimum fine of Rs 50,000 which may increase to Rs 5 lakh, or with both.

Reason For Introduction of CSR for Companies

We live a dynamic life in a world that is growing more and more complex. Global-scale environment, social, cultural and economic issues have now become part of our everyday life.

Boosting profits is no longer the sole business performance indicator for the corporate and they have to play the role of responsible corporate citizens as they owe a duty towards society.

The concept of Corporate Social Responsibility (CSR), introduced through Companies Act, 2013 puts a greater responsibility on companies in India to set out a clear CSR framework.

Many corporate houses like TATA and Birla have been engaged in doing CSR voluntarily. The Act introduces the culture of corporate social responsibility (CSR) in Indian corporate requiring companies to formulate a CSR policy and spend on social upliftment activities.

CSR is all about corporate giving back to society. The Company Secretaries are expected to be known about the legal and technical requirements with respect to CSR in order to guide the management and Board.

Frequently Asked Questions

Whether provisions of CSR apply to a section 8 Company?

Yes, the CSR provisions apply to a company registered for a charitable purpose under Section 8 of the Companies Act, 2013. Section 135(1) of the Act states that every company having the specified net worth, turnover, or net profits must establish a CSR committee. Thus, section 8 companies must also establish a CSR committee and comply with CSR provisions when it meets the specified net worth, turnover, or net profits. 

Which activities do not qualify as eligible CSR activity?

Rule 2(1)(d) of the Companies (CSR Policy) Rules, 2014 defines CSR and excludes the following activities from being considered as eligible CSR activity: 

• Activities undertaken in pursuance of the normal course of business of the company. 
• Activities undertaken outside India, except for training of Indian sports personnel representing any state/UT at the national level or India at the international level 
• Contribution of any amount, indirectly or directly, to any political party under Section 182 of the Act
• Activities benefiting employees of the company 
• Sponsorship activities for deriving marketing benefits for products/services 
• Activities for fulfilling statutory obligations under any law in force in India

What is the role of the Government in monitoring CSR provision compliance?

The government monitors the CSR provisions compliance through the disclosures made by the companies on the MCA portal. The government can initiate action for any violation of CSR provisions against the non-compliant companies after due examination of records. 

How is the average net profit calculated for the purpose of Section 135 of the Act?

The average net profit to determine the spending on CSR activities is to be computed as per the provisions of Section 198 of the Act and be exclusive of the items given under Rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. Section 198 of the Act specifies certain additions/deletions (adjustments) to be made while calculating a company’s net profit. It mainly excludes capital payments/receipts, income tax and set-off of past losses. 

Can the excess CSR spending be set off against the CSR expenditure of the succeeding financial years?

Yes, the excess CSR spending can be set off against the required 2% CSR expenditure up to the immediately succeeding three financial years subject to compliance with the conditions mentioned under Rule 7(3) of the Companies (CSR Policy) Rules, 2014. However, the excess amount spent on CSR activities can be set off from 22 January 2021. Thus, no carry forward shall be allowed for the excess amount spent, if any, in financial years before FY 2020-21.

What is the meaning of surplus arising from CSR activities? 

Surplus refers to income generated from the spend on CSR activities, e.g., revenue received from the CSR projects, interest income earned by the implementing agency on funds provided under CSR, disposal/sale of materials used in CSR projects, and other similar income sources. The surplus arising out of CSR activities shall be utilised only for CSR purposes.

Whether companies must carry out CSR only in their local areas?

Section 135(5) of the Act provides that the company should give preference to local areas around where it operates. However, with the advent of IT and the emergence of new-age businesses like process-outsourcing companies, e-commerce companies, and aggregator companies, it becomes difficult to determine the local area for various activities. Thus, the preference to the local area mentioned in the Act is only directory and not mandatory, and companies need to balance local area preference with national priorities.

Whether spending of CSR funds for COVID-19 related activities shall qualify as CSR expenditure?

The Ministry of Corporate Affairs (MCA) clarified that spending CSR funds for COVID-19 related activities qualify as CSR expenditure. It further clarified that the funds could be spent for various activities related to COVID-19 under items (i) and (xii) of Schedule VII. However, the company’s spending on COVID-19 vaccines for its employees and families is not considered a CSR activity. They can conduct vaccination drives for larger groups and include that under their CSR expenditure for the financial year.

The companies engaged in R&D activities for new vaccines, drugs and medical devices in their normal course of business can undertake R&D activity of vaccine, drugs and medical devices related to COVID-19 as CSR activity for financial years 2020 to 2023. But these companies engaged in R&D concerning COVID-19 should do so in collaboration with the institutions mentioned in Schedule VII. 

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