The term ‘Corporate Social Responsibility (CSR)’, in its most rudimentary sense, implies the responsibilities that business houses owe to the society for ensuring public welfare. The term was coined with the primary goal of controlling corporate aggrandizement by ensuring that the fruits of progress are distributed amongst all sections of society- especially historically marginalized and deprived sections.
The Companies Act, 2013
The new Companies Act, 2013, marks a paradigm shift in the legislature’s conception of Corporate Social Responsibility (CSR).
More specifically, it does not view Corporate Social Responsibility merely as a moral obligation that the corporate world owes to the society; instead, it imposes a mandatory obligation on all companies that meet the required criteria to play their part for alleviating the problems that continue to cripple our country.
In a nation like India, where there exists a wide chasm between large business houses and millions of people who continue to live in grinding poverty, it is hoped that the new CSR provisions will pave the way for a more just and equitable social order and will ensure wider acceptance of the principle that the business of business is not merely business.
The new CSR provisions apply to both private limited and public limited companies, including their holding and subsidiary companies and foreign companies that have offices in India, that fulfill the following requirements:
A. The company must have a net worth of Rs. 500 crore; or
B. It must have a turnover of Rs. 1,000 crore; or
C. It must have a net profit of Rs. 5 crore.
The net profit for this purpose would not include the profit that a company earns from its overseas branches or companies or the dividend that it earns from other companies in India.Interestingly, companies that fail to meet the eligibility criteria for 3 consecutive years would not be required to comply with CSR provisions.The upshot of this provision is that more companies will be required to comply with CSR provisions because the inability to meet the eligibility criteria for one year, or even for two years, will not be enough to grant a company immunity from complying with CSR provisions.
All companies that meet the aforementioned requirements must spend 2% of their average net profit for the immediately preceding three financial years for activities that would come under the ambit of Corporate Social Responsibility.
Schedule VII of the new Act exhaustively enumerates a list of activities that would come under the auspices of the Corporate Social Responsibility.
They are as follows:
A. Supporting initiatives for the amelioration of poverty, hunger and malnutrition.
B. Promoting access to healthcare to those who need it most and taking initiatives for spreading greater awareness about preventive diseases.
C. Contributing for improving access to education and the quality of education, including special education.
D. Pioneering or supporting initiatives for reducing gender inequality by developing, inter alia, hostels for women and taking measures for improving maternal health.
E. Reducing the widespread inequities that exist in our society by promoting the welfare of backward sections of society and developing homes for senior citizens, orphans, etc.
F. Taking initiatives for ensuring environmental sustainability and ecological balance. Taking measures for preventing the undue exploitation of air, soil, water or other natural resources.
G. Taking measures for promoting animal welfare.
H. Promoting the progress of art and culture. Ensuring the preservation of places of historical importance.
I. Taking measures for improving the quality of life of veterans of the armed forces, widows of military personnel or their dependents.
J. Improving training facilities for locally or nationally recognized sports, especially Paralympic and Olympic sports.
K. Contributing to the Prime Minister’s National Relief Fund and other funds for the empowerment of women and members of SC, ST and OBC.
L. Contributing to technology incubators located within educational institutions.
It is pertinent to note that any contributions made to any political party would not fall under the ambit of CSR. Similarly, any activity which is conducted for the welfare of employees of that company or their families cannot be considered a CSR activity.
Companies should seek to perform their CSR activities in the local area in which their office is located.
Agencies for executing CSR activities
A company can perform its CSR activities with the help of a registered trust or society.Similarly, it can also perform such activities through a company established by its holding, subsidiary or associate company.If it does not opt for the latter, then it must show that the entity through which it is performing its activities has a proven track record and has been undertaking such activities for at least three years.The company can also use up to 5% of its CSR expenditure in a year for training its own personnel for performing CSR activities or for collaborating with reputed institutions to develop the required facilities for undertaking CSR activities directly through its own agencies.
Companies can also work together for conducting CSR activities.
Section 135 of the Companies Act, 2013, states that a CSR Committee must be constituted to design the company’s CSR policy and to monitor its progress.The CSR Committee must consist of 3 directors, one of whom must be an independent director.However, private companies and foreign companies only need to have 2 directors.In addition, unlisted public companies and private companies that are otherwise not required to appoint an independent director do not need to appoint an independent director in the CSR Committee.
The CSR Committee is tasked with the primary responsibility of formulating the CSR policy of the company and determining how the CSR expenditure is to be distributed.After the CSR policy is framed by the CSR Committee, it is analyzed and approved by the Board of Directors. A company is also required to post the policy on its official website.
The CSR Committee has to determine the modus operandi for implementing the policy to the fullest extent possible.Moreover, it has to regularly evaluate the implementation of the policy and has to take corrective steps, wherever necessary, to ensure successful implementation.
Annual CSR report
A CSR report must be prepared annually by the board of directors in order to explain the company’s CSR policy in detail to various stakeholders .The report must be in the prescribed format and must contain, inter alia, the following details:
A. A brief overview of various facets of the company’s CSR policy;
B. Details about the composition and work of the CSR Committee;
C. Details of the net profit in the preceding 3 financial years and, more importantly, the amount of the net profit that was spent on CSR activities.
D. If a company fails to spend the required portion of its net profit on CSR activities in a financial year, it must give cogent reason for not doing so.
Penalty for violation of CSR provisions
Section 134 (3) (o) imposes a duty on the board of directors to disclose all the relevant information about its CSR policy and its implementation on an annual basis. Moreover, Section 134 (8) of the Act states that if the company fails to comply with the aforementioned provision, it shall be liable to pay fine which shall not be less than Rs. 50,000 but may extend to Rs. 25,00,000.Similarly, every defaulting officer shall be imprisoned for a period not exceeding 3 years and may also be asked to pay fine which shall not be less than Rs. 50,000 but may extend to Rs. 5,00,000. This essentially implies that the Act punishes a company for not disclosing information about its CSR policy but does not hold them liable for not undertaking CSR activities.
However, Section 450 of the Act contains a capacious provision for punishing a company or its officers in case no specific punishment is provided for a particular offence. More specifically, it states that if a company fails to comply with any provisions of the Act or any rules thereunder, the company and any defaulting officer can be asked to pay a fine which may extend to Rs. 10,000 and Rs. 1,000 per day if the contravention continues after the first fine.