Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) was introduced under Section 135 of the Companies Act, 2013. Amongst the various provisions stated by the Act, the Government of India makes it mandatory for a particular class of companies to contribute their share of profits for the cause of social activities through a dedicated procedure prescribed by the CSR rules and regulations.

Applicability for Companies: 

Every company having

- a net worth of rupees five hundred crore or more, or 

- turnover of rupees one thousand crore or more or 

- a net profit of rupees five crore or more during 

the immediately preceding financial year.

Constitution of CSR Committee:

The Company shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its CSR Committee two or more directors.

Role of CSR Committee:

- Formulate and recommend to the Board, a CSR Policy

- Indicate the activities to be undertaken by the company as specified in Schedule VII. Such activities may include eradication of extreme hunger & poverty, promotion of education, promoting gender equality and empowering women, ensuring environmental sustainability and etc;

- Recommend the amount of expenditure to be incurred on the activities specified above.

- Monitor the CSR Policy of the Company from time to time.

Activities:

The following activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to:—

(i) Eradicating hunger, poverty, malnutrition, sanitation and making available safe drinking water. 

(ii) promoting education, including special education and employment enhancing vocation skills and the differently-abled and livelihood enhancement projects.

(iii) promoting gender equality, empowering women, setting up homes and hostels for women and measures for reducing inequalities faced by socially and economically backward groups.

(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, conservation of natural resources and maintaining quality of soil, air and water 

(v) protection of national heritage, art and culture; setting up public libraries; promotion and development of traditional art and handicrafts; 

(vi) measures for the benefit of armed forces veterans, war widows and their dependents;

(vii) training to promote rural sports, nationally recognized sports, paralympic sports and olympic sports

(viii) contribution to the prime minister's national relief fund or any other fund set up by the central govt. for socio-economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women;

(ix) Contribution to incubators funded by Central Govt. or State Govt. or any agency or PSU of Central Govt or State Govt, and contributions to Public-Funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organisation (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).]

(x) rural development projects

(xi) slum area development.

(xii) disaster management, including relief, rehabilitation and reconstruction activities

Amount to be Spent on CSR Activities:

The Board of every company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its CSR Policy.

Disclosure: 

- The Board of every company shall disclose the composition of the Corporate Social Responsibility Committee.

- The Board of every company shall after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website and to ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company. 

- If the Company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount.

Proposed Amendments under Companies (Amendment) Act, 2019 (yet to be notified): 

In section 135 of the principal Act,—(a) in sub-section (5), —

(i) after the words “three immediately preceding financial years,”, the words “or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years,” shall be inserted;

Explanation: As per the issued amendments, companies that have not completed 3 whole years but fall under the following category will have to contribute 2% of their average net profit of the previous 3 years or years after the incorporation, if less than 3 years, on CSR.

Transfer to Section VII Funds

(ii) in the second proviso, after the words “reasons for not spending the amount” occurring at the end, the words, brackets, figure and letters “and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year” shall be inserted;

Explanation: If the amount allocated for CSR activities by a company is unable to spend the targeted amount, then the company is required to transfer the amount to a Fund prescribed in Schedule VII. An example of a fund specified in the Schedule would be the Prime Minister’s National Relief Fund. The unspent amount has to be transferred to such a Fund within 30 days post the date of closure of the third financial year.

Transfer to Unspent CSR Account

(b) after sub-section (5), the following sub-sections shall be inserted, namely:—

“(6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

Explanation: Companies are only required to retain amounts only to the extent of what is necessary for any ongoing projects. However, there will be specific rules and regulations under which a project will be selected as eligible for current projects. Even in such cases of ongoing projects, the amount set aside by the company for the project is required to be put into a special CSR account post 30 days from the end of a financial year. It is from this account that the expenditure for the ongoing project must be utilised in the next 3 years. Additionally, if the amount in the CSR account is not utilised for any CSR activity within the next 3 years, then the amount will once again be transferable to the Funds mentioned in Schedule VII.

Penalty for Non-Compliance

(7) If a company contravenes the provisions of sub-section (5) or sub-section (6), the company 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.

Explanation: If a company fails to comply with the provisions prescribed in the new amended Section 135 of the Companies Act, 2013, the company will be liable to a penalty of an amount that will be more than INR 50,000 but less than INR 25 Lakhs. Moreover, it also prescribes that every officer of such non-compliant company will be levied with a fine that is more than INR 50,000 but less than INR 5 Lakhs, or up to 3 years of imprisonment as punishment, or even both.