Understanding Corporate Social Responsibility under Companies Act 2013?

What is CSR?

Corporate Social Responsibility (CSR) implies a Company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates. CSR is basically a moral and ethical conduct towards the society in large by a company.

Corporate Social Responsibility means and includes but is not limited to:

• Projects or programs relating to activities specified in Schedule VII to The Act.
• Projects or programs 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.

CSR Applicability in India

According to section 135 of the Companies Act,2013, CSR is compulsory for all companies whether government or private and applies to:

• every company
• its holding company
• its subsidiary company
• foreign company

Having in the preceding financial year:

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

Importance of CSR

• CSR shows to the public that a company is considerate towards the environment and society. This in turns increase their public image.
• Companies which undertake CSR Activities and are more active in the developmental projects are more favoured by customers and potential customers. This in turns makes companies stand out from their competitors in the market.
• CSR activities also provide free publicity in the society.
• CSR boosts a company’s brand value and builds a strong relationship with its customers who generally feel more inclined towards that company.

CSR Laws in India

• It is a legal requirement for businesses in India to adhere to CSR actions.
• The Companies Act, 2013  has formulated Section 135, Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII which prescribes mandatory provisions for Companies to fulfil their CSR.
• The CSR provision is that businesses need to satisfy the criteria by spending a minimum of 2% of their annual profits over the past three years on CSR initiatives.
• Some companies fail to adhere to the rules for CSR. In such conditions, they must explain their non-compliance in their board report.
• The government does not have any responsibility for monitoring CSR initiatives in India. It puts the company’s management burden on monitoring the effectiveness and quality of a CSR project.
• If a company fulfils the requirements of Section 135 of the Companies Act, 2013 then they are required to form a CSR committee to fulfil their CSR obligations under law.

Highlights CSR Committee

• Minimum 3 directors are necessary to form a CSR Committee.
• One among these directors must be an independent director.
• However in unlisted public companies or private companies where an independent director is not required, their CSR committees can be without any independent director
• In Private companies which have only 2 directors, CSR Committees shall have only 2 directors.
• In a foreign company, the CSR committee shall have atleast 2 persons. Among these, one person shall be a resident of India who must be authorized to accept on behalf of such foreign company. The other person shall be nominated by the foreign company accordingly.
• 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 a transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.

CSR Activities

• Eradicating hunger, poverty & malnutrition
• Promoting preventive health care & sanitation & making available safe drinking water
• Promoting livelihood enhancement projects as well as education & employment among children, women & the differently abled.
• Promoting gender equality and empowerment of women, setting up orphanages, old age homes, day care centers and other facilities for senior citizens.
• Promoting measures for reducing inequalities faced by SEBCs, OBCs, SCs and STs.
• Providing proper hospital facilities and medicines at a subsidized rate and to improve maternal health to reduce child mortality
• Providing hospital and dispensary facilities with a focus on proper sanitation in order to fight various health related diseases and issues like human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases.
• Ensuring sustainability and an ecological balance in the environment, safeguarding flora & fauna, animal welfare, agro forestry, conservation of natural resources & maintaining quality of soil, air & water.
• Enhancement of vocational skills by employment
• Protection of national heritage, art & culture by working towards restoration of historically important buildings & sites & works of art.
• Promotion & development of traditional Indian arts & handicrafts.
• Introducing measures for welfare of veterans of armed forces, war widows & their dependents.
• Training to promote rural/nationally recognized/Olympic sports.
• Contribution to PM’s National Relief Fund or any other Central Government for development of socio-economic issue and SCs, STs, OBCs and minorities.
• Contributing towards Central Government approved technology incubators within academic institutions like universities and colleges.
• Development of slum and rural areas.

Fines and Penalties for Non-Compliance

Failure of a company to comply with CSR spending provisions or transferring and utilizing the unspent amount amount out of the CSR funds, a company will be punishable with a fine which may increase to Rs.25 lakh but not less than Rs. 50000.

The Act also provides for punishment of company officers who default in compliance. It states that every such officer of the company will be liable to for a punishment with a fine which may increase to Rs. 5 lakh but not less than Rs. 50,000 or imprisonment for a maximum term of three years of with both.

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Note: This Post was last updated on December 3, 2022

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