Most often than not, the activities of business enterprises are fuelled by profit motives, and to carry out these activities, they fail to realize the impact that they have on society. To remind business houses of their responsibility towards the society around them, the idea of Corporate Social Responsibility (CSR) has been put forth.
Corporate Social Responsibility is viewed as a continued commitment by business enterprises to contribute towards sustained economic development and growth of the quality of life, local community, and society at large. CSR motivates business houses to behave ethically and includes responsibility for current and past actions as well as future impacts. Simply put, CSR aims to achieve commercial success in a way that honors ethical values and respects people, communities, and the natural environment.
Definition of Corporate Social Responsibility.
Though there is no universally accepted definition for the term CSR, however various commissions and committees have time and again given their definition. Some of them are.
In the World Business Council for sustainable development, Lorde Holmes and Richard Watts gave the following definition:
“Corporate Social Responsibility is the continued commitment by big business enterprises to function ethically and contribute to economic development while simultaneously improving the quality of life of the workforce and the society. ”[1]
Meanwhile, the European Commission envisions – “CSR is the responsibility of the enterprises for their impact on the society. Enterprises should have a place to integrate ethical, social, and consumer concerns in business and core strategy, in collaboration with their stakeholders”[2]
A more traditional approach has been taken to define CSR in the United States.
According to the United National Industrial Development Corporation (UNIDO), “Corporate social responsibility is a management concept whereby companies integrate social, environmental and consumer concerns in their business operations and interactions with their stakeholders”[3]
Countries like Ghana and the Philippines, take a philanthropic approach where CSR is simply described as a way to give back to society.
In a broader sense, all these definitions focus on how the integration of CSR is important for ethical business practices. Some of these definitions go even further in prescribing how companies can manage their impact into the terrain of acting and also beyond that sphere to make a contribution to the achievement of broader societal goals.
Corporate Social Responsibility in India
The concept of CSR has been introduced all over the world and different countries have applied it differently. In the last decade, CSR activities in India have undergone a pendular momentum, it is interesting to note that, India is the first country in the world to have a statutory compliance requirement on CSR for specified entities whereas, in countries like the UK, France, Germany, etc., there have been only voluntary guidelines. The concept of philanthropy has existed in India for decades, and in keeping with this tradition, the government has formulated the policy of CSR. This ensures that every company discharges its social obligation in a prescribed and effective manner.
The Companies Act of 2013 replaced The Companies Act of 1956 and brought about far-reaching changes in the manner of incorporation, administration, and governance of companies in India. The Act also included the incorporation of new sections, including CSR. The idea of CSR has been instituted under The Companies Act, 2013 under section 135. The act stipulates that companies that meet a certain threshold will have to direct a specified portion of their spending toward CSR activities mentioned in Schedule VII of the Act.
If a company does not comply with these provisions, it would be required to explain not spending the specified amount on CSR activities. This approach is called “comply or disclose”, it promotes disclosure and transparency and builds confidence among the stakeholders of the company. Further, we will discuss the definition of CSR as mentioned in Section 135. This clause essentially covers the prerequisites of the execution, fund allotment, and reporting for successful project implementation.
CSR under The Companies Act 2013:
According to section 135, Companies Act, 2013, CSR provisions apply to every private and public company, as well as their holding and subsidiary company, and includes foreign companies that have offices in India, which meet any of the following criteria:
Every company has[4] –
- Net worth of Rs. 500 Crores;
- Turnover of Rs.1000 Crores or more in any financial year;
- Profit of Rs.5 Crore or more during any financial year[5]
Companies that meet any of the aforesaid criteria would have to allocate at least two percent (2%) of their average net profits made during the previous three financial years towards CSR activities and also establish a Corporate Social Responsibility Committee. This committee will formulate the CSR committee and present the policy to the Board of Directors for approval.
Computation of Net Profit:
The computation of net profit for CSR is done as per Section 198 of The Companies Act of 2013, which is net profit before tax[6].
Every company which has been incorporated under the Companies Act will have to report its net profit accrued in a financial year to ascertain whether it falls within the purview of CSR or not.
The methodology for the computation of net profit has been provided in CSR Rules. According to the CSR rules of 2014, to determine a company’s ‘net profit’, profit made by overseeing branches or dividends received from another Indian company should be disregarded. Further, the 2% CSR is to be computed as 2% of the average net profits made by the company during the last three financial years[7]. If a company has not completed three financial years since its incorporation, the average net profits shall be calculated for the financial years since its incorporation.
Corporate Social Responsibility Committee
Every company qualifying for CSR will have to constitute a CSR Committee consisting of three or more directors, including at least one independent director.
However, unlisted companies and private companies which are not required to appoint an independent director will be exempt from the provision of appointing an independent director for the CSR committee[8].
In the case of a private company, with two directors, the CSR committee shall be constituted with those two directors[9]. Meanwhile, in the case of a foreign company, the CSR Committee shall consist of at least two persons wherein one person shall be an Indian resident and another person will be nominated by the foreign company[10].
Role of CSR Committee:
The role of the CSR Committee is threefold, it has to:
- Formulate a Corporate Social Responsibility Policy,
- Recommend to the board the policy and the amount of expenditure to be incurred on the activities and
- monitor the Corporate Social Responsibility Policy of the company[11].
The board of the Company is tasked with the responsibility to approve the CSR policy of the company and disclose the contents of the policy and also place it on the company’s website.
Role of Board of Directors:
After the CSR policy recommendation is made to the Board of Directors by the CSR Committee, the board approves the policy and ensures that the activities undertaken by the company are within the scope of this policy.
Further, the liability rests on the Board to ensure that the company spends in every financial year, a minimum of 2% of the average net profits made during the 3 immediately preceding financial years as per CSR policy.
The Board’s report shall disclose:
- The composition of the CSR Committee;
- The CSR policy
- And, in case the CSR spending of the company does not meet the specified 2% as per CSR Policy, the reasons for the unspent amount, and details of the transfer of the unspent amount relating to an ongoing project to a specified fund (the transfer should be made within a period of six months from the expiry of the financial year).
Scope of Activities under CSR
The scope of activities permissible is mentioned under Schedule VII of the Companies Act, 2013. Apart from these specified activities, the Government may include any other activity which it decides needs to be covered within the ambit of CSR. The following activities can be undertaken by companies in pursuance of their CSR obligations:
- eradicating hunger, and poverty and promoting sanitation;
- promoting education and enhancing employment enhancing vocation skills;
- promoting gender equality and empowering women, setting up hostels for women and orphans;
- maintaining environmental sustainability, ensuring ecological balance, and conservation of natural resources;
- undertaking protection of national heritage, art, and culture including restoration of buildings and sites of historical importance and works of art;
- taking measures for the benefit of armed forces veterans, war widows, and their dependents;
- providing training to promote rural sports;
- undertake contribution to the prime minister’s national relief fund or any other fund set up by the central govt;
- combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria, and other diseases;
- such other matters as may be prescribed by the government of India[12];
Mode of undertaking CSR policy
The Board of Company shall undertake its CSR activities, as approved by the CSR committee in the following manner:
- a company may perform CSR activities through a company established under section 8 of the Act or a registered trust or a registered society;
- the activities may be conducted in association with other companies provided that each eligible company can report its CSR activities individually;
- the activities may be carried out with the aid of a registered charity company functioning within India which is established by the funding company, its parent, subsidiary, or associate company; or which is not established by the funding company, its parent, subsidiary, or associate company if it has a proven track record of undertaking similar activities for at least three years[13]
- the activities must be carried out within India, preferably in the local area in which the company operates;
- the company is also permitted to use up to 5% of its CSR spending in a financial year for training its employees for the implementation of CSR activities or for developing the required facilities;
Activities not considered CSR activities.
There are certain activities as mentioned under The Companies Act of 2013 which outside the sphere of CSR activities. These are:
- Any contribution of any amount directly or indirectly to any political party shall not be considered under the ambit of CSR activity;
- CSR projects or activities that benefit only the employees of the company and their families would also not be considered CSR activities;
Penalty for contravention of CSR provisions
According to the Companies Act of 2013, section 134(3)(O), the board of directors shall mandatorily disclose all relevant information about the Company’s CSR policy and its implementation on an annual basis.
Section 134(8) of The Companies Act proves to be a sufficient deterrent for defaulting companies, in case a company fails to comply with CSR provisions of spending, transferring, and utilizing the unspent amount, they will be penalized with a minimum fine of Rs. 50,000 which may increase to Rs. 25 lakhs.
The government has also introduced penal liability for qualified professionals of the company, every officer of the company who defaults in compliance will be liable for a punishment which is imprisonment for a term that may extend to three years or with a minimum fine of Rs 50,000 which may increase to Rs 5 lakh, or with both.
Conclusion
In a constantly evolving world, that grows more complex each day, the need for business entities to be held accountable for their action has become more evident. Companies can no longer base their actions solely on profit, they do have to take into account the duty they have towards society too.
Even though philanthropy is not a new concept for business conglomerates like Tata and Birla, CSR provisions brought forward by The Company Act of 2013, provide a clear framework for social obligation within which a company has to function. The CSR provision puts a greater responsibility on companies in discharging this obligation.
[1]CSR India, available at https://indiacsr.in/definitions-corporate-social-responsibility , (Last visited 20th December,2022).
[2] The European Commission Report on CSR, available at https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-social-responsibility-csr_en , (Last visited on 22nd December 2022)
[3]United Nations Industrial Development Organization report on CSR, available at https://www.unido.org/our-focus/advancing-economic-competitiveness/competitive-trade-capacities-and-corporate-responsibility/corporate-social-responsibility-market-integration/what (Last visited on 22nd December 2022)
[4] Section 135, The Companies Act of 2013 (Act 18 of 2013)
[5] “Any financial year” referred to under Sub-Section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three previous financial years
[6] General Circular No. 01/2016 bearing No. 05/19/2015-CSR. (Issued on 12th January 2016)
[7] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 2(1)(f)
[8] Pursuant to Section 149 of the Companies Act, 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1(i))
[9] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1(ii))
[10] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 5(1(iii))
[11] Section 135 (3) of The Companies Act, (Act 18 of 2013)
[12] The Companies Act, 2013, Schedule VII, (Act 18 of 2013)
[13] Companies (Corporate Social Responsibility Policy) Rules, 2014, Rule 4(2); See Ministry of Corporate Affairs, Notification Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016. [GSR 540 (E)] dated 23rd May, 2016
Author: Astha Mittal
Juris Centre 