(This article was written by Partha Prateem Ray Choudhury, a graduate of Dibrugarh University, during his internship with  iPleaders)

Introduction:

The much-awaited Companies Act, 2013 brings in some emerging add-ons to the corporate regime. One of them is the introduction of Corporate Social Responsibility   (hereinafter referred to as ‘CSR’). Generally, CSR refers to certain social initiatives undertaken by companies as an obligation towards the society. In other words, it is an instrument through which the Government aims to make business establishments socially responsible who yields huge profits from the society. The CSR rules will come into effect from 1^st April, 2014.

CSR provisions under the Companies Act, 2013:

Section 135 of the Companies Act, 2013 (hereinafter stated as ‘the Act’) makes provision for CSR. Those are:-

A)  Section 135(1) specifies that the following companies have to constitute Corporate Social Responsibility Committees (CSRC), namely:-

i) Companies having net worth of INR 500 crores or more; or

ii) Companies having a turnover of INR 1000 crores or more; or

iii) Companies having a net profit of INR 5 crores or more during any financial year.

B)  Every foreign company [Section 2(42)] having its branch or project office in India shall comply with the provisions of Section 135 of the Act.

Provided the net worth, turnover or net profit of a foreign company shall be computed in accordance with the balance sheet and profit and loss account of such company [Sections 381(1)(a) and 198(1)(a)[1]].

 

C) Every company which ceases to be a company under Section 135(1) for 3 consecutive financial years shall not be required to constitute a CSRC and comply with the provisions of sub-section (2) to (5) of Section 135

Functions of CSRC:

The CSRC shall comprise of minimum 3 or more Directors among whom one of them would be an Independent Director. Some of its important functions are:-

A) To specify and formulate a list of CSR projects which a company plans to undertake  in  the  implementation year.

B) To specify modalities of execution in the chosen areas and determine implementation schedules for the same.

C) CSR projects of a company should focus on integrating business models with social and environmental priorities and processes in order to create a shared value.

D)  The CSRC has to formulate and recommend a CSR policy containing activities as specified in Schedule VII which may be undertaken by the company as a part of their CSR initiatives.

E)  The CSRC is entrusted to recommend expenses that would be incurred in CSR activities.

F) CSRC is also authorized to monitor the implementation of CSR policy for a company at regular intervals in a transparent way.

 

Obligations of the Board of Directors:

The Board of Directors (BoD) of a company has to comply with the following responsibilities:-

1)  The BoD has to approve the Corporate Social Responsibility Policy (CSRP) recommended by the CSRC and disclose contents of such policy in its Report and company’s website.

2)  To ensure that the activities as stated in CSRP are undertaken by the company.

3)  The Board should ensure that the company spends at least 2% of the average net profits accumulated in the preceding three financial years for CSR activities.

N.B:  The net profit includes accumulated profits before tax as per books of accounts in accordance with Section 198. But it does not include any profits arising from branches outside India.

4)  The BoD has to implement CSRP’s through trusts or societies which are not set up by the company.

5)  If a company fails to comply with the CSR initiatives in a financial year, the BoD has to provide an explanation for that.

6) The format of annual report on CSR activities has to be included in the  Board’s report by qualifying companies.

Activities specified as CSR:

Schedule VII of the Act lays down certain activities that may be undertaken by a company as a part of their CSR initiatives. Those are:-

i)   Elimination of extreme hunger and poverty.

ii)  Advancement of education.

iii)  Furtherance of gender equality and empowerment of women.

iv) Minimizing child mortality and improving maternal health.

v)  Eradicating AIDS, malaria and other diseases.

vi) Ensuring environment sustainability.

vii) Enhancing vocational skills.

viii) Promoting social business projects.

Additional guidelines:

a)  The taxation on CSR spending by a company is levied in accordance with the IT Act as notified by the Central Board on Direct Taxes (CBDT)

b) The projects undertaken as a part of CSR is excluded from normal business projects.

c)  Any surplus arising from implementation of CSR programmes will not be a part of business projects.

d) A company may conduct its CSR programmes through Trusts, Societies or Section 8 companies operating in India which is not set up by the company itself.

e) CSR programmes undertaken in India will only be taken into consideration.

f) Company shall give preference to the local area of its operation for spending the amount earmarked for undertaking CSR activities.

g) Activities which are not exclusively for the benefit of the employees of the company and their family members shall only be considered as CSR activities.

Conclusion:

The introduction of CSR is certainly an important step towards ensuring social obligation for companies. It may be used as a useful tool by companies by undertaking certain programmes for the benefit of the society. Companies tend to be socially responsible towards the society through CSR initiatives. In other words, implementation of CSR policies is more of a moral pursuit of companies for social cause.