Corporate Social Responsibility (CSR) in India

  • The concept of Corporate Social Responsibility (CSR) traditionally involved voluntary contributions from companies for social good and environmental well-being. Companies would integrate social concerns into their operations to benefit stakeholders.
  • However, Section 135 of the Companies Act, 2013, introduces a mandatory aspect to CSR in India.

Mandating CSR Activities

  • The Act mandates CSR spending for some companies in India. These companies must undertake projects or programs aligned with the activities mentioned in Schedule VII of the Act. The company's Board of Directors makes the final decision, but they consider recommendations from the CSR Committee. The CSR policy drafted and formulated by the company must also address the themes specified in Schedule VII.
  • The companies having the following criteria during the immediately preceding financial year shall make CSR expenditure under Section 135 of the Companies Act, 2013
  • Net worth of Rs. 500 Crore or more
  • Turnover of Rs. 1000 crore or more
  • Net Profit of Rs. 5 crores or more

The Importance of Corporate Social Responsibility (CSR)

Companies today are increasingly expected to go beyond simply making a profit. Corporate Social Responsibility (CSR) plays a crucial role in achieving this by encouraging companies to contribute to a better society and environment. Here's why CSR is important:

  1. Enhancing Public Image and Reputation
  • Positive Publicity: By actively engaging in CSR initiatives, companies can generate positive media coverage and public relations. Highlighting their efforts towards social good increases their chance of becoming favourable in the eyes of consumers.
  • Building Trust: Consumers are increasingly looking to support companies that align with their values. CSR initiatives demonstrate a company's commitment to social responsibility, fostering trust and loyalty from customers.
  1. Strengthening Brand Value
  • Socially Strong Relationships: Engaging in meaningful CSR activities allows companies to build strong relationships with customers and communities. This fosters a sense of shared purpose and strengthens brand value.
  • Competitive Advantage: In today's competitive landscape, CSR can help companies stand out from the crowd. Consumers often choose brands that actively participate in positive social change.
  • Employee Engagement: CSR initiatives can boost employee morale and engagement. Participating in programs that benefit society can create a sense of purpose and pride among employees.
  • Attracting and Retaining Talent: Companies with a strong CSR reputation are more likely to attract and retain top talent. Job seekers often prioritize working for organizations that are socially responsible.

UNDERSTANDING A COMPANY'S CSR POLICY

What is a CSR Policy?

A Corporate Social Responsibility (CSR) Policy is a document outlining a company's commitment to social and environmental well-being. It details the specific activities the company plans to undertake as part of its CSR initiatives.

Key Features of a CSR Policy:

  • Alignment with Schedule VII: The activities outlined in the policy must be aligned with those mentioned in Schedule VII of the Companies Act, 2013. This schedule specifies permissible CSR initiatives, ensuring companies focus on areas with social and environmental impact.
  • Distinct from Core Business: CSR activities should be separate from the company's regular business operations. The goal is to contribute positively to society beyond simply generating profits.
  • Public Availability: The Board of Directors is responsible for making the CSR policy publicly available on the company's website. This transparency allows stakeholders to understand the company's CSR priorities.
  • Implementation and Monitoring: The policy should not be a mere document. Companies are required to undertake the activities mentioned in the policy. Additionally, the policy should establish a system for monitoring and evaluating the implemented CSR projects or programs. This helps ensure effectiveness and track progress towards achieving social and environmental goals.
  • Collaboration with Others: Companies can collaborate with other organizations for undertaking CSR projects or programs. However, they are required to report on such collaborative efforts separately. This allows for a clear understanding of the company's specific contribution to the joint initiative.

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.
  • Excess Expenditure: Any situation where expenses exceed income is deducted.
  • Legal Damages and Compensation: Damages or compensation paid for legal liabilities, and related insurance costs, are deducted.
  • Bad Debts: Debts considered bad and written off during the accounting year are 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.

CSR Committee Composition Requirements

Every company having 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 shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one director shall be an independent director.

  • Minimum Number of Directors: The CSR Committee must consist of at least three directors.
  • Independent Director Requirement: At least one member of the committee must be an independent director. However, there are exceptions:
    • Unlisted Public and Private Companies: These companies can have a CSR Committee without an independent director if they are not required to appoint one in general.
    • Small Private Companies: Private companies with only two directors on their board can form a two-person CSR Committee.
  • Foreign Companies: Foreign companies with a presence in India need a CSR Committee with at least two members. One member must be a resident authorized to accept legal documents on behalf of the company. The other member is appointed by the foreign company itself.

Additional Note:

  • Companies with unspent funds in their "Unspent Corporate Social Responsibility Account" are still required to maintain a CSR Committee and comply with CSR regulations.

By adhering to these composition guidelines, companies ensure their CSR Committee is properly structured to oversee and manage their social responsibility initiatives effectively.

Mandatory CSR Reporting Requirements

Companies in India subject to CSR regulations are required to submit annual reports on their CSR activities. Here's a breakdown of the reporting provisions:

  • Domestic Companies: For domestic companies, the annual CSR report becomes an integral part of the Board's Report. This applies to financial years commencing on or after April 1, 2014.
  • Foreign Companies: Foreign companies operating in India need to include a CSR report as an annexure to their balance sheet filing.

By mandating CSR reporting, the regulations ensure transparency and accountability in how companies fulfil their CSR obligations. This allows stakeholders to assess a company's commitment to social responsibility and its impact on society.

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 lakhs (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.

Are activities undertaken by companies outside India for the benefit of resident Indians, permitted as eligible CSR activity?

As per Rule 2(1)(d)(ii) of the Companies (CSR Policy) Rules, 2014 clearly states that any activity undertaken by the company outside India shall not be an eligible CSR activity. The only exception is training of Indian sports personnel representing any State or Union Territory at national or international level.

Article Written by

Shashwat Tripathy a Legal Intern at Corpzo