A complete guide to Corporate Social Responsibility (CSR) in India

CSR stands for Corporate Social Responsibility which can be defined as a company’s sense of responsibility towards the community and environment in which it operates.

In India, CSR is primarily governed by two legislations, the Companies Act of 2013 and the Companies (Corporate Social Responsibility) Rules, 2014. Key provisions of both legislations are discussed in this article.

But first, let us understand what CSR really entails.

As per Rule 2(1) (d) of CSR Rules 2014 (post January 2021 Amendment)-

“CSR” means the activities undertaken by a company in pursuance of its statutory obligation under Section 135 of the Companies Act 2013- in accordance with the procedure given in the CSR Rules 2014.

But, it does not include the following:

1. Activities undertaken in pursuance of the normal course of business of the company.

2. Any activity undertaken by the company outside India except- training a sports personnel representing any state or UT at national or India at the international level.

3. Contribution of any amount directly or indirectly to any political party under Section 182 of the Companies Act 2013.

4. Activities benefiting employees of a company defined under Section 2(k) of the Code on Wages 2019.

5. Activities supported on sponsorship basis for deriving marketing benefits.

6. Activities carried out fir fulfilment of any other statutory obligation.

#prior to the Companies Amendment Act in January, 2021- “CSR” was defined under Section 2(c) which stated- CSR means and includes but is not limited to

• Projects, programs relating to activities mentioned under Schedule VII of the Act

• Activities undertaken by the Board of Directors of company in pursuance of the recommendation of the CSR Committee.

Understanding Section 135 of Companies Act 2013: Corporate Social Responsibility (CSR)

Section 135(1) states that CSR provisions will be applicable to companies which fulfil any of the following criteria during the immediately preceding Financial Year (FY):

i. Net worth of Rs 500 Crore or more;

ii. Turnover of Rs 1000 Crore or more;

iii. “Net profit” of Rs 5 Crore or more.

If the company matches the criteria mentioned above, it is mandated to constitute a “CSR Committee” of the Board. It shall typically consist of 3 or more Directors of the Company out of which 1 shall be an Independent Director.

However, if a company does not appoint an Independent Director (I.D.) under Section 149(4) then the CSR Committee must have 2 or more Directors i.e. the minimum is reduced from 3 to 2 directors.

Section 135(2) - states that the “Board’s Report” under Section 134(3) shall disclose the composition of the CSR Committee of the concerned company.

###Rule 3(1) of CSR Rules 2014: requires compliance with CSR provisions by holding or subsidiary companies as well as foreign companies having branches or project offices in India.

###Rule 3(2) further adds that a company which ceases to be covered under Section 135(1) shall not be required to:

• Constitute a CSR Committee

• Comply with any CSR provision

Till such time it meets the criteria under Section 135(1)

Section 135(3): Talks about the – Role of CSR Committee

• Formulate CSR Policy which shall indicate the activities to be undertaken by the companies (as per the subjects allowed under Schedule VII of the Act).

• Recommend the amount if expenditure to be incurred on activities referred under Section 135(3) (a).

• Monitor the CSR Policy of the company from time to time.
  

Section 135(4) and (5) state the Role of the Board

U/S 135(4) - The Board shall:

• Accept the CSR Policy

• Implement activities under the CSR Policy
  

U/S 135(5) - The Board shall ensure that the company spends at least 2% of net profits made during the immediately preceding 3 Financial Years (FY) in pursuance of its CSR Policy.

• As per the 1st proviso to Section 135(5) - the company shall give preference to the local area and areas around which it operates.

• As per the 2nd proviso to Section 135(5) - When the company fails to spend the requisite amount then the Board shall in its report [u/s 134(3)] state reasons as to why such amount was unspent [unless such unspent amount relates to an ongoing or impending project under Section135 (6)] and, transfer such unspent amount to a fund-under Schedule VII within 6 months of the end/expiry of the FY. On non-compliance of the 2nd proviso, the company shall attract a penalty of Rs. 3, 00,000 and for every defaulting officer- Rs. 50,000.

• As per the 3rd proviso to Section 135(5) - companies spending excess amounts on CSR may set it off against its liability in the subsequent FYs.

Section 135(6) : Transfer of unspent CSR Fund

It states that any amount unspent under Section 135(5) shall be transferred by the company within 30 days of the end of FY to a special account opened by the company called the “Unspent Corporate Social Responsibility Account”.

The amount so transferred to the said account shall be utilized by the company in pursuance of its CSR obligations within a period of 3 FYs (from the date of transfer) ---- failing which the fund shall be transferred to the fund specified under Schedule VII [as observed under 135(5)]

Section 135(7) - provides for the Penalty for non-compliance of 135(6)

Any company in default of 135(6) shall be liable to a penalty of 2X the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 1 Crore (whichever is less).

Additionally, every officer of the company who is in default shall be liable to a penalty of 1/10th of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or Rs. 2 lakh (whichever is less).

Other key provisions

Section 135(8) - provides that the Central Govt. may give special directions to a company or a class of companies to ensure compliance with the entirety of Section 135.

Section 135(9) - The requirement of a CSR Committee [u/s 135(1)] shall not be required if the amount unspent u/s 135(5) does not exceed Rs. 50 Lakhs- in which case the functions of the Committee shall be discharged by the Board of Directors.

We do see some companies providing “CSR Days” to their employees (which is usually 2 days paid leave from work to volunteer somewhere). Now, can a company use its CSR Fund to pay its own employees to do CSR work?

Well, interestingly, as per Rule 4(6) of CSR Rules, the remuneration provided by companies to both standard CSR personnel and employees contributing to CSR activities will constitute administrative overheads (a part of administrative costs of a business), and it must adhere to the limit of 5% of the overall CSR expenditure.

As per Rule 9 of CSR Rules: The Board of Directors of the Company shall mandatorily disclose the:

• Composition of the CSR Committee.

• CSR Policy and Projects approved by the Board on their website, if any, for public access.

Understanding the ambit of Schedule VII of the Companies Act 2013

Although the Act does not specify any projects wherein companies can just employ their CSR funds and be done with it but, it does specify following the kinds of activities than can be included in a CSR Policy:

1. Eradicating hunger, poverty, and malnutrition, promoting healthcare, including preventive measures and sanitation by the way of contributions to “Swatch Bharat Kosh” set up by the Central Govt and, making safe drinking water available.

2. Supporting education, especially among vulnerable groups like children, women, elderly, and the differently abled.

3. Advancing gender equality and empowering women, including setting up facilities (homes and hostels) for women, orphans, and senior citizens. It may also involve measures to reduce inequalities between socially and economically weaker groups.

4. Ensuring environmental sustainability and conservation of land and water resources (including contributions to the Clean Ganga Fund). Undertaking disaster management or reconstruction projects are also promoted (post-2019 amendment).

5. Protecting national heritage, art, and culture, including restoration projects and promotion of traditional arts.

6. Providing support to armed forces veterans, war widows, and their dependents, as well as promoting rural and Olympic sports.

7. Contributing to government relief funds for socio-economic development, and welfare of marginalized groups. This may also involve undertaking the development of “slum areas” (designated as such by the Central Govt.)

8. Supporting research and development projects in various fields of science, technology, engineering, and medicine aimed at promoting Sustainable Development Goals (SDGs). This may involve providing funding to public funded universities such as IITs, ICMR, DAE, DRDO, ICAR, DST etc.

Advantages of Corporate Social Responsibility

1. Enhancing Public Image: Similar to P&G's impactful campaign "Padhega India Tabhi to Badhega India" integrated across its widely recognized FMCG products, fostering a positive public perception.

2. Amplifying Brand Awareness and Recognition: Emulating ITC's commendable initiative of contributing Re.1 per copy towards establishing schools for underprivileged and rural children, elevating brand visibility and societal impact.

3. Establishing Competitive Advantage: Crafting an effective CSR Policy serves as a strategic asset, augmenting goodwill and consequently enhancing overall business value.

4. Driving Cost-Efficiency: Embracing sustainable manufacturing practices, such as adopting eco-friendly processes and implementing material reuse and recycling, not only leads to cost savings in production but also facilitates fair wage distribution to employees.

5. Balancing Economic and Social Objectives: By prioritizing local employment and investing in infrastructure, companies can offer quality goods at affordable prices while simultaneously accessing remote markets.

6. Mitigating Government Intervention and Environmental Risks: Proactive CSR measures can help preempt government intervention and mitigate potential environmental hazards, ensuring smoother business operations.

7. Enhancing ESG Compliance for Investor Appeal: Demonstrating commitment to Environmental, Social, and Governance (ESG) principles through robust CSR initiatives can attract socially responsible investors and bolster financial performance.

8. Fostering Long-Term Business Growth and Sustainability: Through sustained investment in CSR, businesses can lay the groundwork for enduring growth and resilience, aligning with broader societal needs and expectations.