Institutionalizing Corporate Social Responsibility
By Dr. Yashpal Singh
The business sector has been extremely successful in generating wealth and value for its shareholders over the post-independence years. It is commendable, but at the same time, triggered by an increasingly unmanageable population, we have been faced with an India, besieged with problems of poverty, malnutrition, illiteracy and unemployment. The Government is undertaking ambitious development schemes but the magnitude of services required, necessitates that all stakeholders join hands in achieving the development objectives of dream India. The business sector therefore has been asked to assist by taking up socially responsible business practices. The new Company’s Act of 2013 has made provisions for Corporate Social Corporate Responsibility with a budgeted spend of 2% of the Average profits over the past 3 years and made CSR and the reporting of C.S.R. activities mandatory. (Section 135, Company Act 2013) The Environmental Impact assessment notification of 2006 enables the government to prescribe compulsory incorporation and implementation of C.S.R. initiatives. Noncompliance has been regarded as a punishable offence.
Social responsibility initiatives are of advantage to the corporate also as they provide intangible benefits through enhancing brand loyalties, community satisfaction, stronger employee morale and greater investment confidence and have a great potential to enhance the competitiveness of business because of a better social acceptance for the enterprise. It should therefore be planned accordingly rather than a purely philanthropic exercise.
A good C.S.R. initiative will help in building a positive and long-term relationship with communities by providing support where government support is inadequate. It will assist in overall prosperity of the region of operation and the creation of a healthy resource base for the corporate. Shareholder values will increase when customers exercise a preference in favour of businesses with a sound C.S.R. involvement.
The International Centre for not-for-profit Law in India has in its answers to some Frequently asked questions most beautifully explained the provisions.(ICNL accessed 2-02-22). The Rules have been amended in 2021(Ministry of Corporate Affairs, 2021).
Companies registered under the Indian Companies Act 2013 have been mandated under Section 135 of the act tospend funds on Corporate Social Responsibility related activities.Contravention shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.
Section 135 applies to every company registered under the Indian Companies Act that (1) is a private or public company or a subsidiary of a foreign company and (2) has a net worth of 5 billion Indian rupees or more, a turnover of 10 billion rupees or more, or a net profit of 50 million rupees or more during the preceding financial year.
“Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely: – (i) any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.In case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381, read with section 198 of the Act.
The Act also requires that the Company must form a CSR Committee of its Board members consisting of three or more Directors, at least one of whom is independent. The CSR committee of a private company may be made up of two directors, neither of whom need be independent.
This CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the (a) the list of CSR projects or programmes that are approved to be undertaken (b) the manner of execution of such projects or programmes (c) the modalities of utilisation of funds and implementation schedules for the projects or programmes; (d) monitoring and reporting mechanism for the projects or programmes; and (e) details of need and impact assessment, if any. Provided that Board may alter such plan at any time during the financial year, as per the recommendation of its CSR Committee, based on the reasonable justification to that effect.
After taking into account the recommendations of the CSR committee, the Company must approve a CSR policy, include the contents of the policy in its annual performance and financial reports, publish the policy on its website, and ensure that activities specified in the policy are actually undertaken.
The company must also ensure that in every fiscal year it spends at least 2 percent of its average net profits from the three preceding fiscal years in pursuit of its CSR policy.
It shall be ensured that CSR activities are undertaken by the company itself or through (a) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company, or (b) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government; or (c) any entity established under an Act of Parliament or a State legislature; or (d) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and having an established track record of at least three years in undertaking similar activities. Every entity, who intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1electronically with the Registrar, with effect from the 01st day of April 2021. Provided that the provisions of this sub-rule shall not affect the CSR, projects or programmes approved prior to the 01st day of April 2021
The Board shall ensure that the administrative overheads shall not exceed five percent of total CSR expenditure of the company for the financial year.
Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
Where a company spends an amount in excess of requirement provided under sub-section (5) of section 135, such excess amount may be set off against the requirement to spend under sub-section (5) of section 135 up to immediate succeeding three financial years subject to the conditions that the excess amount available for set off shall not include the surplus arising out of the CSR activities, if any as above and the Board of the company shall pass a resolution to that effect.
The CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by – (a) a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having charitable objects and CSR Registration Number or (b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or (c) a public authority.
If a company fails to spend the required amount on CSR, the reasons for not doing so should be specified in the company’s annual performance and financial reports.
Schedule VII of the Indian Companies Act 2013 provides an illustrative list of CSR activities, which opens a wide range of possible activities. The list includes:
- Eradicating hunger, poverty, and malnutrition; promoting healthcare, including preventive health care and sanitation (e.g., contributing to the Swach Bharat Kosh or Clean India Initiative set up by the central government to promote sanitation); and making safe drinking water available.
- Promoting education, including special education and employment-enhancing vocational skills, especially among children, women, the elderly, and differently abled, as well as livelihood enhancement projects.
- Promoting gender equality; empowering women; setting up homes and hostels for women and orphans; setting up old-age homes, day care centers, and other facilities for senior citizens; and establishing measures for reducing inequalities faced by socially and economically marginalized groups.
- Ensuring environmental sustainability, ecological balance, the protection of flora and fauna, animal welfare, agro-forestry, the conservation of natural resources; and maintaining the quality of soil, air, and water, including contribution to the Clean Ganga Fund set up by the central government to rejuvenate the Ganga River.
- Protecting India’s national heritage, art, and culture, including the restoration of buildings and sites of historical importance and works of art; setting up public libraries; and contributing to the promotion and development of traditional arts and handicrafts.
- Setting forth measures for the benefit of veterans, war widows, and their dependents.
- Training to promote rural sports, nationally recognized sports, Paralympic sports, and Olympic sports.
- Contributing to the prime minister’s National Relief Fund or any other fund set up by the central government for the socio-economic development, relief, and welfare of marginalized classes, minorities, and women.
- Contribution to publicly-funded business incubators and public bodies (such as publicly-funded universities and national laboratories) conducting research in science, technology, engineering, and medicine to promote the Sustainable Development Goals (SDGs).
- Working on rural development projects.
- Developing slum areas.
- Disaster management, including relief, rehabilitation, and reconstruction activities.
As per the amendment of 2021 in the CSR Rules, Corporate Social Responsibility (CSR) shall, however, not include the following, namely: – (i) activities undertaken in pursuance of normal course of business of the company. Provided that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to conditions as prescribed. (ii) any activity undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level; (iii) contribution of any amount directly or indirectly to any political party under section 182 of the Act; (iv) activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019); (v) activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services; (vi) activities carried out for fulfilment of any other statutory obligations under any law in force in India.
Companies may use their budgets to build up the CSR capacity of company personnel and staff at implementing agencies. However, such expenditures, including on administrative overhead, should not exceed five percent of the total amount spent on CSR in a given fiscal year.
CSR expenditure is not considered a “business expenditure” that can be deducted under Section 37 of the Income Tax Act. However, a CSR expenditure is tax deductible if it is considered a deduction under other sections of the Income Tax Act.The CSR Rules does not recognize employee volunteer time as CSR.
Every company having average CSR obligation of ten crore rupees or more in pursuance of subsection (5) of section 135 of the Act, in the three immediately preceding financial years, shall undertake impact assessmentof its CSR projects having outlays of one crore rupees or more and which have been completed not less than one year before the impact study, through an independent agency (b) The impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR. (c) A Company undertaking impact assessment may book the expenditure towards Corporate Social Responsibility for that financial year, which shall not exceed five percent of the total CSR expenditure for that financial year or fifty lakh rupees, whichever is less”.
The Board of Directors of the Company shall mandatorily disclose the composition of the CSR Committee, and CSR Policy and Projects approved by the Board on their website, for public access.
Suggested Reading
- https://www.icnl.org/wp-content/uploads/India-FAQ-3—Corporate-Social-Responsibility-FINAL.pdf accessed 2-10-22.
- https://www.mca.gov.in/Ministry/pdf/CSRAmendmentRules_23012021.pdf
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