Corporate Social Responsibility in Company Law: Companies Act, 2013

Corporate Social Responsibility (CSR)

 

Table of Content:

1. Introduction

2. Applicability

3. Companies Act, 2013

4. Corporate Social Responsibility Committee

4.1 Composition of Corporate Social Responsibility Committee

4.2. Functions of Corporate Social Responsibility Committee

5. Corporate Social Responsibility Activities

6. Treatment of Unspent Corporate Social Responsibility Amount

7. Fine and penalties for Non-compliance

8. Conclusion

 

1. Introduction

Increasing profits is no longer the sole purpose of the business for the corporates and they have to be the responsible corporate citizens by undertaking activities for betterment of the society and the environment under the umbrella of Corporate Social Responsibility. In the past 20 years, significant economic growth and integration have taken place in the global economy which is resulting in several changes in the way businesses operate.

Corporate Social Responsibility is not a new concept in India. However, the Ministry of Corporate Affairs, Government of India has recently notified the Section 135 of the Companies Act, 2013 along Companies (Corporate Social Responsibility)  Rules, 2014 and other notifications related thereto which makes it mandatory for those companies who fulfil the criteria as mentioned undersection 135 (1) of the Companies Act.

Meaning: Corporate Social responsibility means and includes but is not limited to:

  1. Projects or programs relating to activities specified in Schedule VII to the Act; or
  2. Projects or programs relating to activities undertaken by the board of directors of a company in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.

2. Applicability

A company that met any of the following criteria in the previous financial year must comply with CSR provisions

  • Net worth – 500 crores or more
  • Turnover – 1000 crores or more
  • Net Profit – 5 crores or more

While computing the net profits for CSR provisions, adjustments must be made to profit before tax as per section 198, which has been calculated according to Schedule III by the company. In addition to this, “Net Profit” shall also not include the following namely:-

  1. Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise;
  • Any dividend received from other companies in India, which are covered under and complying with the provisions of Section 135 of the Act.

3. Companies Act, 2013

The Companies Act, 2013 officially initiated the world’s largest experiments of introducing the concept of CSR as a Mandatory provision. CSR is an important and progressive concept for socio economic development. It is an attempt by the Government to engage businesses with the national development agenda. The introduction of CSR provisions in the Act has created a statutory responsibility on the corporate to take initiative towards social, environment and economic obligations. Section 135 of the Act and the CSR rules, form the legal framework of CSR in India.

4. CSR Committee

4.1 Composition of CSR Committee:

Every company covered under section 135(1) of the Act is required to constitute a CSR committee of the Board consisting of at least three or more directors with at least one independent director.

In case Company is not required to appoint an independent director, as per Section 135(1) of the Act, it shall have in its CSR Committee two or more directors.

In case of Foreign company, two persons of which one shall be a person resident in India authorised by the foreign company to receive notices in its behalf and other person nominated by foreign company.

Section 135(2) of the Act requires that the composition of the CSR committee shall be disclosed in the Board’s Report.

4.2. Functions of CSR Committee

The CSR Committee shall undertake the following functions:

  1. Formulate and recommend to the Board, the amount of expenditure to be incurred on the CSR activities to be under taken by the company.
  2. CSR policy of the Company should be monitored by the CSR Committee from time to time.
  3. A transparent control mechanism will be established by the committee to implement CSR projects, programs, or activities undertaken by the company.

5. CSR Activities

All activities listed under Schedule VII to the Act shall be eligible as CSR Activities.

Following activities will not qualify for CSR-

  1. Activities benefitting employees of the company as defined in Section 2 (k) of the Code on Wages, 2019;
  2. Activities undertaken in pursuance of normal course of business of the company;
  3. Activities which are undertaken outside India;
  4. Contribution of money, directly or indirectly to any political party;
  5. Activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;
  6. Activities carried out for fulfilment of any other statutory obligations under any law in force in India.

6. Treatment of Unspent CSR Amount

In any financial year, if a company is unable to spend the earmarked amount for CSR activities during that particular financial year itself, second proviso to section 135(5) of the Act prescribes that the reasons for non-spending of CSR amount needs to be mentioned in the Board’s Report prepared under section 134 of the Act.

If the Board has not approved any multi-year on-going project for CSR spending with reasonable justification as to why the CSR amount needs to be carried forward beyond that financial year up to a maximum of next 3 financial years, such unspent amount needs to be transferred within 6 months of the expiry of that financial year, to any fund mentioned in Schedule VII to the Act.

7. Fine and penalties for Non-compliance

According to the Companies Act, 2013, a company that fails to comply with CSR spending provisions may be fined up to Rs. 25 lakh, not less than Rs. 50,000.

The Act also provides for punishment of company officers who default in compliance which may increase to Rs. 5 lakh but not less than Rs. 50,000 or imprisonment for a maximum term of 3 years of with both.

8. Conclusion

With the enactment of the Companies Act, 2013, CSR became a norm in India. India is perhaps one of the few countries in the world where CSR is mandated under the Statute. The provision has driven positive change, by making CSR a legal obligation for eligible companies. It has also fostered sustainable development. While challenges remain, the integration of CSR into company law has set the stage for responsible and ethical business practices, positioning India as a global leader in corporate social responsibility.

References:

  1. https://www.icsi.edu/media/webmodules/Guidance_Note_on_CSR_Final.pdf
  2. https://scr.indianrailways.gov.in/cris/uploads/files/1478757989193-CSR-Policy.pdf
  3. https://taxguru.in/company-law/complete-understanding-corporate-social-responsibility.html
  4. https://www.legalserviceindia.com/legal/article-5998-corporate-social-responsibility-under-companies-act-2013.html

Written by Nireesha Rao

Also read – Mergers and Acquisitions in the 21st Century

 

Best law firm in Bangalore – Corporate Lawyers

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