Corporate Social Responsibility (CSR) Obligation Under Companies Act, 2013
-CA Sandip Kaushal
Introduction of CSR
Corporate social responsibility is a form of corporate self-regulation integrated into a business model. CSR policy functions as a self-regulatory mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards and national or international norms. With some models, a firm’s implementation of CSR goes beyond compliance and engages in “actions that appear to further some social good, beyond the interests of the firm and that which is required by law”. The aim is to increase long-term profits through positive public relations, high ethical standards to reduce business and legal risk, and shareholder trust by taking responsibility for corporate actions. CSR strategies encourage the company to make a positive impact on the environment and stakeholders including consumers, employees, investors, communities, and others.
Applicability of CSR
Section 135 of the Companies Act, 2013 and Rules made thereunder prescribe that every company having a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more during any financial year shall ensure that the company spends, in every financial year at least 2 % of the average net profits made during the three immediately preceding financial years in pursuance of its Corporate Social Responsibility Policy.
General Procedure of CSR compliance
1. Constitute CSR Committee (No requirement of Independent Director in CSR committee where appointment of independent is not required by the Act.)
2. Disclose Composition of CSR committee in Board’s Report
3. Formulate CSR Policy by CSR Committee
4. Board of Director approve the CSR Policy and Disclose in policy in Director Report and publish in Website of Company if any.
5. Utilize the amount as per requirement of Schedule VII Act and Rule made there under.
Applicable Rule and Regulation
1. Section 135 of Company act 2013,
Brief overview and analysis
1. Board of Director should ensure that the company spends in every year at least 2 % of Average Net profit of previous 3 years. If the company fails to spend such amount, the Board shall specify the reasons for not spending the amount.
2. Way of discharge its CSR obligation :
a. Making a contribution to the funds as specified in Schedule VII to the Act
b. Through a registered trust or a registered society or a company established under section 8 of the Act by company, Holding , Subsidiary, Associate company and combination thereof.
c. By the company its own way spending as per schedule VII
d. A company may also collaborate with other companies for undertaking projects or programs or CSR activities.
The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.
Provided That –
i. If the trust, society or company under section 8 of the Act not established by the company, Holding , Subsidiary, Associate company and combination thereof , it shall have anestablished track record of 3 years in undertaking similar programs or projects
ii. the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism
iii. Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure including expenditure on administrative overheads, shall not exceed 5 % of total CSR expenditure of the company in one financial year.
3. CSR Policy shall include the following :
i. A list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and
ii. Monitoring process of such projects or programs.
iii. The CSR Policy of the company shall specify that the surplus arising out of the CSRprojects or programs or activities shall not form part of the business profit of a company.
4. CSR Expenditure :
CSR expenditure shall include all expenditure including contribution to corpus, for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee
5. CSR Reporting:
The Board’s Report of a company covered under these rules pertaining to a financial year commencing on or after the 1st day of April, 2014 shall include an annual report (In case of a foreign company, the balance sheet filed in ROC) on CSR containing particulars specified in Annexure – 1
6. Activities not qualified for CSR :
- CSR Expenses that benefits only the employee and/or their family.
- One time event such as : marathon, award, charitable contribution, advertisement, sponsorship of TV program etc.
- Expenditure incurred by the company for the fulfillment of any other act/statue of regulation.
- Contribution directly or indirectly to political party.
- Project, program or activity undertaken outside India.
- Can donation of money to a trust by a company be treated as CSR expenditure of the company-
The Ministry of Corporation Affairs has vide General Circular No.21/2014 dated June 18,2014 has clarified that Contribution to Corpus of a Trust/ Society/ Section 8 Companies etc. will qualify as CSR activities as long as
a. The Trust/Society/ Section 8 etc. is created exclusively for undertaking CSR activities or
b. Where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.