Corporate Social Responsibility (CSR) carries 2 marks in the bar exam. Students are advised to refer to the Companies Act, 2013 bare act while answering questions on the subject. 

Introduction

CSR initiatives have only been taken on a voluntary basis. In 2009, the Ministry of Corporate Affairs had released ‘voluntary guidelines’ on CSR, which were optional for companies to follow. However, CSR activities have been made mandatory under the Companies Act for certain classes of companies. Under the Companies Act, 2013, every company (including a foreign company which has its branch or project office in India) which has:

i) net worth of at least Rs. 500 crores,

ii) turnover of at least Rs. 1000 crores, 

iii) a net profit of at least Rs. 5 crores during any financial year, is required to mandatorily allocate at least 2 percent of its profits (calculated as per the average net profits for the past three financial years) to CSR initiatives. (Section 135, Companies Act) 

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Which initiatives qualify as CSR initiatives? 

The activities enumerated in Schedule VII of the Companies Act 2013 qualify as CSR initiatives and are listed below: 

1. eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water.
2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects; 
3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; 
4. Setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups; 
5. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water; 
6. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
7. Measures for the benefit of armed forces veterans, war widows and their dependents. 
8. Training to promote rural sports, nationally recognised sports, para-olympics sports and Olympic sports; 
9. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Caste, the Scheduled Tribes, other backward classes, minorities and women; contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government; 
10. Rural development projects salaries paid to the company’s regular CSR staff and volunteers will be considered as part of CSR expenditure. 

The scope of the above-listed initiatives must be interpreted liberally, taking into account the broad essence of the above-enlisted initiatives. 

What initiatives do not count as CSR contributions? 

The Act excludes certain kinds of activities from the ambit of CSR, as follows: 

• Any contribution made to a political party, either directly or indirectly will not be considered as CSR contribution. 
• CSR contributions cannot be made in respect of activities which are undertaken by the company in the normal course of its business. 
• Any contribution made only for the benefit of the employees of the company or their family will not be considered as CSR contribution. 
• Any one-off event like marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes, which is not part of the CSR project/programme will not be considered as CSR contribution. 
• Expenses incurred by the company for the fulfilment of any Act/Statute or regulations (such as labour laws, land acquisition laws) will not be considered as CSR contribution. 

How should a company which is required to make CSR contributions comply with its obligations under the law?

Step 1: The Company should establish a CSR Committee of the Board of directors comprising of at least 3 directors, of which at least 1 must be an independent director. A private or an unlisted public company which is not required to appoint an independent director is exempted from appointing an independent director, or if it is a private company having only two directors, they are allowed to appoint only two such directors to the Committee. 

Step 2: The Company should create a CSR Policy specifying the following: 

•  List of activities (from amongst those specified in Schedule VII of the Companies Act which can be undertaken) 
• A monitoring process for such activities.
• The policy must also specify 

Step 3: Preparation of Annual Report on CSR activities and inclusion of the must disclose the composition of the Corporate Social Responsibility Committee, CSR Policy, activities undertaken and expenditure as part of the Board’s report. The CSR policy of the company should also be disclosed in the report. Foreign companies operating in India should include the CSR report as an annex to their balance sheet. 

Step 4: In case the company has a website, the CSR policy (and activities) of the company should be disclosed on the website. 

Is it necessary for the company to execute the CSR activities by itself?

Note that as per the Companies Act, it is not necessary for a company to actively participate in CSR initiatives by itself – it is only required to make a financial contribution of 2 percent profits to CSR initiatives. It has the option to implement CSR activities through associated entities, but CSR initiatives it can also merely make a financial contribution towards CSR initiatives of other unrelated entities. It can even collaborate with other companies while running its initiatives. 

Note: That any project will be considered to be a CSR project only when it is undertaken through a registered society, a registered trust or a section 8 company (non-profit company). 

Such entities can be created by the company itself or its parent / sister companies (in case the CSR activities are proposed to be carried out through related entities). The entity must exclusively be created for the purpose of undertaking CSR activities or a special corpus has been created for executing a CSR initiative (as mentioned earlier). 

If the company is only interested in making a financial contribution to CSR initiatives of other entities, the company should ensure that the third party has an established track record of undertaking similar projects for at least three years. 

Can a company channelize profits from the CSR activity into its own business activities?

CSR activities may also generate profits. However, as per the rules, the surplus from any CSR activities cannot be part of business profits of the company – therefore, they must be kept separately. They cannot be ploughed back into the business of the company and must only be utilized in furtherance of the CSR responsibilities of the company. 

What are the consequences of non-compliance? 

In case of failure to provide details of CSR policies developed and implemented by the company (or in case of misstatements) in the report of the Board of Directors, the company and its officers who are responsible for the omission will also be liable to pay fine ranging from INR 50,000 to INR 25,00,000. In addition, they may face imprisonment of upto 3 years. 

Though there is no specific penalty provided for non-compliance with the spending requirement on CSR under Companies Act, 2013. However, Section 450 of the Companies Act, 2013 which is an overarching provision for punishing a company or its officers in case no specific punishment is provided for a particular offence in the Act states, any company or every officer of the company who are responsible for the omission will be liable to pay a fine of INR 10,000 along with INR 1,000 per day after the first day of non- compliance.

This provision can be applicable for not spending the mandatory contribution to be made for CSR under Companies Act, 2013. Though the applicable penalty is quite low in comparison with the liability under the Act; non-spending of mandatory contribution might lead to reputational risks for an organisation. 

Quiz

1.) In what year did the provisions for Corporate Social Responsibility came into force in India? 

A.) 2012 

B.) 2013 

C.) 2014 

D.) None of the above 

2.) Section 135 of the Companies Act requires every company whose turnover is above _______ to undertake Corporate Social Responsibility. 

A.) Rs. 100 crore or more 

B.) Rs. 1000 crore or more 

C.) Rs. 5000 crore or more 

D.) Rs. 2000 crore or more 

3.) What part of the net profit does a company need to spend on CSR activities? 

A.) at least 2% of its average net profit for the immediately preceding 4 financial years 

B.) at least 5% of its average net profit for the immediately preceding 2 financial years 

C.) at least 5% of its average net profit for the immediately preceding 3 financial years 

D.) at least 2% of its average net profit for the immediately preceding 3 financial years 

4.) How many Board of Directors are requred to constitute the CSR Committee? 

A.) At least 5 

B.) Only 4 

C.) At least 3 

D.) Maximum 2 

5.) Which of the following is not a function of the CSR Committee 

A.) recommend to the Board a policy which shall indicate the activities to be undertaken 

B.) recommend ways to increase net profit so as to increase the amount spent on CSR activities 

C.) recommend the amount of expenditure to be incurred on the activities referred 

D.) monitor the CSR Policy of the company 

6.) Would CSR activities undertaken outside India be taken into consideration as per the Companies Act? 

A.) Yes 

B.) No 

C.) Only for Public Companies 

D.) Only for One Person Companies 

7.) What is the maximum amount of penalty leviable on a company failing to fulfil its CSR responsibility? 

A.) 20 lakhs 

B.) 15 lakhs 

C.) 25 lakhs 

D.) None of the above 

8.) What is the maximum amount of penalty leviable on an officer of the company, who fails to fulfil its CSR responsibility? 

A.) 7 lakhs 

B.) 5 lakhs 

C.) 8 lakhs 

D.) 6 lakhs 

9.) Does a foreign company need to follow CSR laws of India? 

A.) Only if it falls under Section 380 of the Companies Act 

B.) Only if it falls under Section 2 (42) of the Companies Act 

C.) Both (1) and (2) are true 

D.) Neither (1) or (2) is true 

10.) Whether contribution to a political party be considered a valid activity under CSR Rules? 

A.) Yes, if the contribution is direct 

B.) Yes, only if the contribution is indirect 

C.) No 

D.) Both (1) and (2) are true 

11.) What is the maximum amount of net profits that a company can spend on CSR activities in a year? 

A.) 5% of profits of one year 

B.) 2% of profits of two years 

C.) 5% of profits of two years 

D.) None of the above 

12.) What is the minimum amount of penalty leviable on a company failing to fulfil its CSR responsibility? 

A.) 40000 

B.) 50, 000 

C.) 60000 

D.) 70000 

13.) What is the minimum amount of penalty leviable on an officer of the company, who fails to fulfil its CSR responsibility? 

A.) 10000 

B.) 20000 

C.) 30000 

D.) 50000 

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