INTRODUCTION

Corporate Social Responsibility (CSR) involves voluntary contributions by companies to enhance society and the environment. It is a concept where businesses incorporate social and beneficial concerns into their operations for the betterment of stakeholders and society as a whole.

Under Section 135 of the Companies Act, 2013, certain companies are required to contribute a specified amount to CSR activities. According to the Act, 'Corporate Social Responsibility' encompasses:

Projects or programs related to activities outlined in Schedule VII of the Act.

Schedule VII:

  • Eradicating hunger, poverty, and malnutrition, promoting healthcare and sanitation, and providing safe drinking water.
  • Promoting education, vocational skills, and livelihood projects for children, women, the elderly, and differently-abled individuals.
  • Promoting gender equality, empowering women, and supporting facilities for orphans, senior citizens, and socially and economically disadvantaged groups.
  • Reducing child mortality and improving maternal health
  • Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

Projects or programs initiated by the company's Board of Directors following recommendations from the CSR Committee, ensuring alignment with the CSR Policy, which must include subjects specified in Schedule VII of the Act, etc.

CSR APPLICABILITY IN INDIA

CSR provisions apply to any company that meets any of the following conditions in the previous financial year:

  • Net worth of more than Rs.500 crore
  • Turnover of more than Rs.1000 crore
  • Net profit of more than Rs.5 crore

The Board of Directors of each company subject to CSR provisions must ensure the company spends at least 2% of its average net profits from the last three financial years on CSR activities. If the company hasn't completed three financial years since incorporation, it should spend 2% of its average net profits from the available financial years according to its CSR policy.

IMPORTANCE OF CSR

  • CSR improves the public image by publicising the efforts towards a better society and increasing their chance of becoming favourable in the eyes of consumers.
  • CSR increases media coverage as media visibility throws a positive light on the organisation.
  • CSR enhances the company’s brand value by building a socially strong relationship with customers.
  • CSR helps companies to stand out from the competition when companies are involved in any kind of community.

CSR FRAMEWORK

Under Section 135 of the Companies Act, 2013, a listed company must have a Corporate Social Responsibility (CSR) Committee comprising at least three directors, including at least one independent director. The committee is responsible for:

  1. Formulating the CSR Policy: Outlining activities to be undertaken per Schedule VII.
  2. Recommending CSR activities: Suggesting specific projects and expenditure.
  3. Monitoring CSR activities: Ensuring implementation and compliance with the CSR policy.

This structure ensures transparency and accountability in a company's CSR efforts and if a company’s required CSR expenditure does not exceed fifty lakh rupees, forming a CSR Committee is not mandatory. In such cases, the Board of Directors will handle the CSR Committee's responsibilities.

CSR COMMITTEE

For a Corporate Social Responsibility (CSR) Committee, the following requirements apply:

  1. Minimum Membership: The CSR Committee must have at least three directors.
  2. Independent Director: At least one of these directors must be an independent director, ensuring objectivity and impartiality.
  3. Chairman: Any member of the CSR Committee can be appointed as the chairman of the committee. This means that while there is flexibility in choosing the chairman, the role can be filled by any of the committee members, including the independent director.

The Corporate Social Responsibility (CSR) Committee is responsible for:

  1. Formulating and Recommending CSR Policy: Creating and suggesting the CSR policy to the Board.
  2. Recommending Expenditure: Advising on the amount to be spent on CSR activities.
  3. Monitoring CSR Policy: Overseeing and reviewing the CSR policy periodically.
  4. Annual Action Plan: Developing and recommending an annual action plan for CSR activities, including specific items as per rule 5(2) of the Companies (CSR Policy) Rules, 2014.

According to section 135(9) of the Companies Act, 2013, If a company needs to spend less than fifty lakh rupees on CSR activities, it doesn't have to set up a separate CSR Committee. Instead, the Board of Directors will handle the CSR responsibilities themselves.

FUNCTIONS OF BOARD OF DIRECTORS

The responsibilities of the Board of a CSR-eligible company include:

  1. Approve CSR Policy: Ensure the CSR policy is formally approved.
  2. Disclose Policy: Include the CSR policy in the company’s report and publish it on the company’s website, if available.
  3. Implement Activities: Make sure the activities outlined in the CSR policy are carried out.
  4. Ensure Spending: Ensure the company spends at least 2% of its average net profits from the last three Preceding financial years on CSR activities each year.
  5. Monitor Fund Utilization: Verify that the CSR funds are used appropriately.
  6. Report Shortfall: If the company does not spend the required 2%, the Board must explain the reasons in its annual report and transfer any unspent amount as per sections 135(5) and 135(6) of the Act.

If a company does not spend the required CSR amount and it's not for an ongoing project, it must transfer the unspent money to a fund listed in Schedule VII within six months after the end of the financial year.

DUE DATE OF CSR FILING

  • CSR Form 1 (Registration for Implementing Agencies):
    • This form is no longer required for new registrations as of April 1, 2021.
    • Existing registrations likely remain valid, but there's no need to file them again.
  • CSR Form 2 (Annual Report on CSR Activities):
    • The deadline to file CSR-2 depends on the company's financial year:
      • For the financial year 2022-23: The due date to file CSR-2 is March 31, 2024. This is a recent change, as previously it was filed as an addendum to another form.
      • For financial years before 2022-23: The deadline for filing CSR-2 would have been along with the company's annual filings.

MECHANISMS FOR MONITORING THE CSR PROCESS

CSR is a Board-driven process where the Board of Directors is responsible for planning, deciding, executing, and overseeing CSR activities based on the CSR Committee's recommendations. The CSR framework relies on transparency, with companies required to report their CSR activities annually in the MCA 21 registry. Additionally, companies must include CSR-related disclosures and any non-compliance issues in their financial statements. Existing legal provisions, including mandatory disclosures, accountability of the CSR Committee and the Board, and audit requirements, ensure effective monitoring of CSR activities.

ROLE OF THE GOVERNMENT IN MONITORING COMPLIANCE OF CSR

The Government oversees CSR compliance by reviewing the disclosures companies make on the MCA21 portal. If a company fails to adhere to CSR provisions, the Government can take action under the Companies Act, 2013, following a review of the records and due legal process. Non-compliance with CSR requirements is considered a civil wrong.

PENALTIES FOR NON-COMPLIANCE WITH CSR REGULATIONS

Companies in India subject to CSR provisions face penalties for failing to comply with spending requirements, transferring unspent amounts, or utilizing unspent funds appropriately. Here's a breakdown of the potential consequences:

For Companies:

  • Financial Penalty: The company can be penalized with a fine of Rs. 1 crore (approximately $127,000 USD as of today).
  • Alternative Penalty: The company may also be required to pay a penalty equal to twice the amount they were obligated to transfer to the CSR fund or the Unspent Corporate Social Responsibility Account, whichever is less.

For Company Officers:

  • Financial Penalty: Any company officer who is responsible for non-compliance can be penalized with a fine of Rs. 2 lakh (approximately $2,540 USD as of today).
  • Alternative Penalty: Alternatively, the officers may be required to pay a penalty equal to one-tenth of the amount the company was obligated to transfer to the CSR fund or the Unspent Corporate Social Responsibility Account, whichever is less.

CALCULATING NET PROFIT FOR CSR SPENDING

Companies subject to CSR provisions in India are mandated to spend 2% of their average net profit from the preceding three financial years on CSR initiatives. This section outlines the specific rules for calculating net profit for CSR purposes, as defined by Section 198 of the Companies Act, 2013.

What is Included in Net Profit?

  • Government Subsidies: The company can include subsidies received from government or authorized public bodies when calculating net profit.

What is Excluded from Net Profit?

  • Profits from Shares (Except Investment Companies): Profits from issuing shares are excluded unless the company is classified as an investment company.
  • Forfeited Share Sales: Profits from selling forfeited shares are not considered part of net profit.
  • Capital Gains: Profits arising from capital-related activities, such as selling the entire company or parts of it, are excluded.
  • Fixed Asset Sales: Profits from selling fixed assets or immovable property of a capital nature are excluded, unless the company's primary business involves buying and selling such assets.
  • Fair Value Adjustments and Notional Gains: Any changes in asset or liability carrying values due to fair value measurements, or unrealized gains and asset revaluations, are not included.

What is Deducted from Net Profit?

  • Normal Business Expenses: All usual operating expenses are deducted.
  • Directors' Remuneration: Compensation paid to directors is deducted.
  • Employee Bonuses and Commissions: Bonuses and commissions paid to staff, technicians, engineers, or any company employee (part-time or full-time) are deducted.
  • Special Taxes: Taxes notified by the Central Government as taxes on abnormal or excess profits, or for special reasons/circumstances, are deducted.
  • Interest Payments: Interest on company-issued debentures, mortgages, secured loans, and unsecured loans are deducted.
  • Repairs and Maintenance: Expenses for repairs to movable or immovable property are deducted, as long as the repairs are not considered capital expenditures.
  • Contributions and Outgoings: Contributions made under Section 181 and other outgoings are deducted.
  • Depreciation: Depreciation allowed under Section 123 is deducted.

 

What Cannot Be Deducted from Net Profit?

  • Income Taxes: Income tax and super tax payable under the Income-tax Act, 1961, are not deducted.
  • Voluntary Payments: Any voluntary damages, compensation, or payments made are not deducted.
  • Capital Losses: Losses of a capital nature, including selling the company or parts of it (excluding excess written-down value of discarded or demolished assets), are not deducted.
  • Fair Value Adjustments and Notional Gains: Similar to exclusions mentioned earlier, adjustments related to fair value measurements and unrealized gains are not deducted.

By adhering to these calculations, companies can accurately determine their net profit for CSR purposes and ensure compliance with CSR spending requirements.