This article has been written by Mudit Gupta. This article discusses all the necessary details about Schedule VII of the Companies Act, 2013 and other related legislations that talk about Corporate Social Responsibility for companies within the jurisdiction of India.

Introduction to Schedule VII of Companies Act, 2013

“In a free enterprise, the community is not just another stakeholder in business, but is in fact the very purpose of its existence.” 

– Jamsetji Tata

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Corporate Social Responsibility (CSR) has become a very important aspect of corporate governance, reflecting how businesses have evolved in their role within society. In India, the Companies Act, 2013 brought about a change in CSR by introducing Schedule VII, which mandates companies to allocate a portion of their profits towards environmental initiatives. This provision not only breaks away from corporate norms but also signifies a shift in businesses perceptions of their responsibilities towards society.

The inclusion of Schedule VII in the Companies Act, 2013 was a very important moment for India’s regulatory framework. This Schedule acts as a guiding principle for corporations to fulfil their obligations towards society and the environment. It clearly outlines the areas and activities that qualify as CSR expenditures, providing companies with both clarity and flexibility when designing and implementing their CSR endeavours.

The importance of Schedule VII goes beyond its requirements. It emphasises that businesses are more than profit driven entities; they are parts of the communities where they operate. Therefore, it is crucial for them to actively engage in activities that contribute to the well being and progress of these communities. Schedule VII of the Companies Act, 2013 aims to promote an environment that prioritises both success and social responsibility.

This article aims to offer a legal analysis of Schedule VII of the Companies Act, 2013. It will explore the context and reasons behind its inclusion, thoroughly examine its provisions, and evaluate the challenges and consequences that companies face when complying with CSR requirements. Furthermore, this article will delve into the evolving interpretations of CSR by examining court cases and judicial statements that have influenced its understanding.

As we delve into the complexities of Schedule VII, it becomes clear that CSR is no longer an act of philanthropy for companies; rather, it is now a legal obligation with substantial implications for their operations and reputation. The objective of this article is to shed light on the framework surrounding CSR in India, offering insights for legal professionals, corporate leaders and scholars seeking to understand how corporate social responsibility has evolved in the country.

Meaning of Corporate Social Responsibility (CSR)  

Let us first understand the term ‘Corporate Social Responsibility (CSR)’ in detail. When companies operate in a particular region, they utilise the resources of that area, and their business flourishes on the demand created by the population of that region. To pay back to society, companies invest a share of their profits in welfare activities from which direct profits are not intended. This responsibility of the companies to contribute back to the society is termed corporate social responsibility, and these activities done for contributing are termed CSR activities. 

History of CSR under Schedule VII of Companies Act, 2013

Corporate Social Responsibility plays a crucial role in business strategies by emphasising a corporation’s duty to society that goes beyond mere profit generation. In India, the implementation of the Companies Act, 2013 was a moment in establishing CSR as a requirement obligating specific companies to allocate funds for social welfare initiatives. To truly grasp the significance and relevance of Schedule VII within the Companies Act, 2013, which outlines CSR activities, it is essential to delve into the historical evolution of CSR within India.

The idea of CSR in India holds deep historical and cultural significance. Throughout history, Indian businesses have often adhered to the principle of “dharma,” or duty, which includes a sense of responsibility. This guiding philosophy has encouraged businesses to contribute to the betterment of society even before formal regulations were established.

In the period leading up to India’s independence, prominent business figures such as the Tatas, Birlas and Bajajs made contributions towards institutions, healthcare facilities and community development projects. These acts of philanthropy set an example for CSR practices in India.

After India gained independence in 1947, the government began to place emphasis on the role of businesses in nation-building and social development. The First Five Year Plan, which was enforced from 1951 to 1956, explicitly acknowledged the responsibilities of the companies towards society. This notion gained further traction during the Second Five Year Plan, which was enforced during the period of 1956-1961. This five year plan created some fruitful impact as corporations were encouraged to invest in areas such as education, healthcare and rural development. The rise of public sector enterprises during this era also played a role in promoting CSR. These enterprises were mandated to allocate a portion of their profits towards social development activities, making a contribution to the growth of CSR initiatives. 

These events initiated CSR activities in the post-independence era of our country.

Introduction of CSR in India

Schedule VII of the Companies Act, 2013, provides a comprehensive framework for companies to engage in CSR activities. It mandates that certain categories of companies must allocate a portion of their profits towards CSR initiatives. Specifically, the section requires companies meeting the prescribed financial thresholds to spend at least 2% of their average net profits over the preceding three financial years on CSR activities. These activities are expected to benefit society at large and should fall within the areas mentioned in Schedule VII itself.

Key provisions relating to the CSR

  • Eligibility criteria: According to Schedule VII of the Companies Act, 2013, only companies with a net worth of Rs. 500 crore or more, a turnover of Rs. 1,000 crore or more, or a net profit of Rs. 5 crore or more during any financial year must comply with CSR obligations.
  • Prescribed CSR activities: Schedule VII lists a range of activities that qualify as CSR initiatives, such as eradicating hunger and poverty, promoting education, gender equality, and environmental sustainability, among others. Companies can choose from these areas to develop their CSR projects.
  • Board oversight: The board of directors is responsible for ensuring compliance with CSR requirements. They must constitute a CSR committee, which oversees the implementation of CSR policies and projects.
  • Disclosure and Reporting: Companies must disclose their CSR initiatives in their annual reports, specifying the amount spent and the projects undertaken. Non-compliance must be adequately justified.

Scope of CSR under Schedule VII of Companies Act, 2013

Schedule VII of the Companies Act, 2013, is a critical component of the CSR framework. It specifies the activities that qualify as CSR activities and provides clarity on the types of projects and initiatives that companies can undertake to fulfil their CSR obligations. These activities are broadly categorised into thirteen areas:

  • Healthcare- This category of CSR includes eradication of poverty and malnutrition, hunger, making available safe drinking water, and promoting health care, including preventive health care and sanitation.
  • Education and skill development- This category of CSR activities includes livelihood enhancement projects, promoting education, including special education and employment enhancing vocational skills, especially among children, women, elderly, and the differently abled.
  • Gender equality and empowerment- This category of CSR activities includes empowering women, promoting gender equality, measures for reducing inequalities faced by socially and economically backward groups, setting up homes and hostels for women and orphans, and setting up old age homes, daycare centres and such other facilities for senior citizens.
  • Environment- This category of CSR activity includes ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining the quality of soil, air and water.
  • National heritage- This category of CSR includes protection of national heritage, art and culture, including restoration of buildings and sites of historical importance and works of art; setting up of public libraries; and the promotion and development of traditional arts and handicrafts.
  • Armed forces- This category of CSR activities includes measures for the benefit of armed forces veterans, war widows and their dependents.
  • Sports- This category of CSR activities includes training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports.
  • Relief fund- This category of CSR activities includes contributions made 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.
  • Rural development- This category of CSR activities includes all kinds of rural development projects, including infrastructure projects run for the benefit of those areas.
  • Technology incubators- This category of CSR includes contributions or funds provided to technology incubators located within academic institutions that are approved by the Central Government.
  • Slum area development- This category of CSR activities includes all initiatives taken for slum area development and all infrastructural projects that are started for the development of the slums.
  • Swachh Bharat- This category of CSR activities includes all sorts of contributions to the Swachh Bharat Kosh set up by the Central Government for the promotion of sanitation and the Clean Ganga Fund (CGF) set up by the Central Government for rejuvenating the river Ganga.
  • Disaster management- This category of CSR initiatives includes all activities that are done for disaster management, including relief, rehabilitation and reconstruction activities.

Establishment of CSR Committee under the Companies Act, 2013

Corporate Social Responsibility (CSR) has become increasingly important in India with the implementation of Section 135 of the Companies Act, 2013. This regulation requires companies to allocate a percentage of their profits towards initiatives that contribute to the betterment of society and the environment. The fundamental idea behind this mandate is to create an influence on society that extends beyond profit making endeavours.

Criteria for establishing CSR Committee

The requirements of CSR provisions mentioned in Schedule VII of the Companies Act, 2013 mainly rely on the situation and organisational setup of a company. As per the Act, the following types of companies are required to constitute a CSR Committee:

  • Companies with a net worth of INR 500 crore or more
  • Companies with a turnover of INR 1,000 crore or more
  • Companies with a net profit of INR 5 crore or more during the preceding financial year

Companies falling under the ambit of this criteria have to allocate a minimum of 2% of their profits earned over the past three financial years towards CSR initiatives. It’s worth noting that these CSR obligations are applicable not only to Indian companies but also to foreign companies operating in India that meet the prescribed criteria.

Responsibilities of the CSR Committee

An important aspect of the implementation of CSR is the establishment of a Corporate Social Responsibility Committee (CSR Committee) within the company’s structure. This committee plays a role in ensuring that CSR initiatives are in line with the objectives outlined in Schedule VII of the Companies Act, 2013.

The CSR Committee is a key institution for the effective execution of CSR activities by companies falling within the purview of Section 135. It serves as an intermediary between the company’s management and CSR projects. The primary responsibilities of the CSR Committee include:

  • Formulating CSR Policies: The committee is given the responsibility of creating and proposing a CSR policy to the board. This policy usually outlines the activities that will be carried out, the regions in which they will take place, and how they will be implemented.
  • Budget allocation: Determining the expenditure for corporate social responsibility (CSR) initiatives while ensuring compliance with legal obligations is one of the main responsibilities of the committee. Generally, this allocation of funds should not be more than 2% of the net profits from the preceding three fiscal years, as stipulated in the relevant legislation.
  • Monitoring and implementation: Another important responsibility of the committee is to oversee the implementation of CSR projects, monitor their progress, and ensure they align with the CSR policy and Schedule VII. This helps in the effective implementation of the policy designed and helps attain the social impact desired from such activities.
  • Reporting and disclosure: Regularly reporting the CSR activities in the company’s annual report, specifying the projects undertaken, the amount spent, and the impact created, is one of the key tasks of the CSR committee, as it helps in maintaining transparency among the stakeholders.
  • Exercising due diligence: Due diligence of the CSR activities ensures that the company’s CSR activities are conducted in compliance with relevant laws and regulations and do not discriminate against any stakeholder group.

Importance of CSR Committee

The establishment of the CSR Committee is important. As per Section 135 of the Companies Act, 2013, the committee should consist of three directors, with at least one being an independent director. This composition ensures that there is a representation that facilitates decision making and governance.

The Companies Act 2013 includes a list of CSR activities in Schedule VII. While it may not encompass every option, this Schedule serves as a guide for companies to choose projects that will have a positive impact on society. It covers the major areas that need to be addressed. The activities mentioned in Schedule VII cover areas such as reducing poverty, promoting education, improving healthcare, ensuring sustainability and many more.

The CSR Committee plays a role in ensuring that the chosen CSR projects align with the categories specified in Schedule VII. Additionally, they should strive to strike a balance between local and national initiatives so that their CSR endeavours benefit both their community and society at large.

Impact of CSR on corporate practices in India

The implementation of CSR has led to various significant impacts, both positive and negative, on corporate practices in India. Some of these are discussed in the following two categories: 

Positive Impacts

  • Enhanced corporate accountability: Promoting transparency and accountability within corporations CSR obligations necessitates that companies disclose their initiatives, policies and expenditures related to responsibility. This further leads to building trust for the companies.
  • Positive social and environmental impact: Companies have actively engaged in a range of environmental initiatives, which have brought about changes in society. These efforts have resulted in advancements in education, healthcare and infrastructure within communities that the companies serve.
  • Stakeholder engagement: Engaging with stakeholders has become increasingly important for companies. Nowadays, customers, investors and employees take into account a company’s CSR initiatives when making decisions. Implementing CSR efforts can greatly improve a company’s reputation. It also enhances its brand value.
  • Collaboration with NGOs and social enterprises: Numerous companies have partnered with Non-Governmental Organisations (NGOs) and social enterprises to successfully carry out Corporate Social Responsibility (CSR) initiatives by utilising their specialised knowledge and capabilities.

Negative Impacts

  • Risk of greenwashing: Certain corporations might use CSR as a way to engage in greenwashing, which is a deceptive strategy where they present themselves as environmentally conscious, without actually making significant improvements. This does not deceive the public. It undermines the overall credibility of CSR.
  • Tokenism: There is another concern raised about how companies may engage in what’s called “tokenism” when they fulfil their CSR obligations. This means that some businesses might prioritise CSR initiatives that have an impact rather than addressing more substantial societal or environmental challenges. Such behaviour can undermine the essence of CSR and result in a negative perception from the public.
  • Diversion of funds: One major worry revolves around the situation where a company’s funds are redirected from its core business operations towards corporate social responsibility initiatives. This problem arises when organisations are obligated to allocate a portion of their profits, towards causes they may end up diverting funds from crucial business activities, like research and development expansion or employee well being. This diversion can impede growth and innovation, potentially impacting the company’s long term sustainability.
  • Lack of accountability: The absence of measures and effective monitoring systems to ensure compliance with CSR initiatives can lead to companies not fulfilling their commitments adequately. When there is supervision, companies might redirect funds meant for CSR to engage in superficial efforts that make their social initiatives appear positive without actually achieving tangible results.

Case Studies

PDKF and Airbnb collaboration

Corporate Social Responsibility (CSR) is an integral aspect of the corporate landscape in India, governed by the Companies Act, 2013. In the Act, Schedule VII lists the activities that are considered Corporate Social Responsibility (CSR). It urges companies to contribute to gender equality and empowerment causes. An excellent example of CSR collaboration is the partnership between the Princess Diya Kumari Foundation and Airbnb, which showcases how corporate entities are dedicated to uplifting the society.

The Princess Diya Kumari Foundation is an organisation that was created by Princess Diya Kumari of Jaipur, who is a prominent member of a royal family in Rajasthan. The foundation, established in 2013, is dedicated to fostering growth, empowering women, enhancing education and improving healthcare services in Rajasthan and other regions. PDKF engages in initiatives such as providing healthcare aid to communities, supporting entrepreneurs and preserving the cultural heritage of Rajasthan.

Airbnb, a company operating in the hospitality industry, has demonstrated a dedication to social responsibility in accordance with Schedule VII of the Companies Act, 2013. This provision under the schedule mandates that companies allocate a portion of their profits to CSR endeavours. Airbnb has contributed towards its corporate social responsibilities under the Act by collaborating with organisations and governments to address important concerns such as affordable housing, disaster response and the advancement of sustainable tourism.

Primary Focus of the collaboration

The collaboration between PDKF and Airbnb exemplifies the potential synergy between a traditional philanthropic organisation and a tech-driven multinational corporation. This partnership focuses on two primary areas:

  • Heritage preservation: Rajasthan, famous for its history, is a destination for tourists. However, the ongoing maintenance of landmarks and historical sites presents a challenge. In order to address this issue directly, PDKF and Airbnb have joined forces to launch initiatives focused on rejuvenating and preserving these heritage sites in Rajasthan. Through these efforts, they actively contribute to the growth of the tourism industry in the state.
  • Community empowerment: The partnership between these two organisations extends beyond collaboration, encompassing a shared commitment to uplift and empower communities through training and employment prospects in the hospitality and tourism fields. Airbnb’s expertise in the hospitality industry aligns seamlessly with PDKF’s mission of skill enhancement and economic empowerment. This collaborative effort does not only generate employment opportunities; it also enhances the overall standard of services offered to travellers.

CSR Initiative by Reliance Industries

Reliance Industries, under the leadership of Mukesh Ambani, has demonstrated a robust commitment to CSR activities. Their CSR initiatives cover a wide array of areas, including education, healthcare, rural development, and environmental sustainability.

  • Eradicating extreme hunger and poverty: Reliance Foundation, the philanthropic arm of Reliance Industries, actively supports programmes which are aimed at reducing poverty and hunger. These initiatives are aligned with the first objective of Schedule VII, which encourages companies to contribute to poverty alleviation for the lower strata of the society.
  • Promoting education: Education is a key focus area for Reliance’s CSR efforts. Through initiatives like the Dhirubhai Ambani Scholarship Programme, Reliance is promoting education, especially for underprivileged children. This is in line with the second objective of Schedule VII which primarily discusses promoting education.
  • Promoting gender equality and empowering women: Reliance Industries has taken various steps to promote gender equality, including creating opportunities for women in the workforce. This is in consistency with the third objective of Schedule VII, which emphasises gender equality and women empowerment in society.

These are some of the CSR initiatives, among many others, that are done by the Reliance Foundation, which is the CSR unit of Reliance Industries.

Tata’s CSR initiative for national heritage

Tata Group has made significant strides in preserving India’s national heritage. Through various initiatives and partnerships, the group has taken steps to protect and promote cultural, historical and artistic treasures across the country. Some notable examples of these efforts include:

  • Support for museums and art galleries: The Tata Group has long been a patron of museums and art galleries across India. They have provided support and logistical assistance in the preservation and display of artefacts, paintings and sculptures that showcase India’s cultural heritage.
  • Heritage restoration process: Tata Group has been actively engaged in the preservation and restoration of sites, landmarks and significant buildings. Their efforts have included projects like the ‘refurbishment of the Ahilya Fort’, which dates back to the 17th century, in Maheshwar and the ‘Jamshedji Jeejeebhoy Agiary’, a 19th century building located in Mumbai.
  • Promotion of traditional art and crafts: The Tata Group has been actively involved in supporting artisans and craftsmen, ensuring the preservation of art forms. Through their promotion and sale of crafts, textiles and artwork, the group has played a significant role in safeguarding India’s cultural heritage.

These are some of the CSR initiatives taken by the Tata Group to promote the national heritage of our country.

CSR spending trends in India

India has seen steady growth in CSR spending in recent years. The same is clearly evident from the comparative CSR report given on the national CSR portal. In the financial year 2021-2022, India saw an expenditure of Rs. 25,932.79 crore on CSR activities. This has grown from Rs. 17098.57 crore in the financial year 2017-18. The health sector has been the most prominent one for CSR activities by companies in India, followed by the education sector. The major companies contributing to CSR activities include Reliance Industries Limited, Tata Consultancy Services, Infosys Limited, ITC Limited, NMDC Limited, Mahanadi Coalfields Limited and Wipro Limited. Maharashtra has received the maximum contribution through CSR in India, followed by Karnataka, Gujarat, Tamil Nadu and other states. In the financial year 2021-22, about 10,443 companies spent more than the prescribed amount, which is 2% of the average net profits of the previous 3 years, on CSR activities. In the financial year 2020-21, this number was 9,935. 

These stats clearly indicate that the companies are making efforts to get involved in CSR activities with the motive of bringing about positive change in society.

Impact of CSR Rules, 2021 on Schedule VII of Companies Act, 2013

The CSR Rules, 2021 have introduced some changes and clarifications that affect the implementation of CSR activities under Schedule VII of the Companies Act, 2013. The changes brought upon are discussed in the following sub-points.

Eligible CSR Activities

The CSR Rules, 2021, have expanded the list of eligible CSR activities beyond what is specified in Schedule VII. Companies now have the flexibility to undertake CSR activities in areas such as research and development, incubators, and contributions to technology incubators.

CSR Reporting and Compliance

The CSR Rules, 2021 provide a more structured framework for CSR reporting and compliance. Companies must now adhere to the reporting formats and disclosures specified in the Rules, ensuring greater transparency and accountability.

CSR Impact Assessment

While the Companies Act, 2013, did not explicitly mandate CSR impact assessment, the CSR Rules, 2021 encourage companies to assess the impact of their CSR projects. This shift emphasises the need for measurable and sustainable CSR initiatives.

Conclusion 

The inclusion of Schedule VII, in the Companies Act, 2013 has played a role in promoting responsible business practices in India. This legislation mandates that certain eligible companies allocate a portion of their profits towards activities that benefit society and the environment.

Since its implementation, Schedule VII has brought about changes in the landscape of India. It has encouraged businesses to move beyond their profit oriented goals and actively engage in addressing environmental challenges. The government’s commitment to addressing a range of concerns is evident through the specific focus areas outlined in Schedule VII, including poverty alleviation, education, gender equality and environmental sustainability.

Moreover, the obligation for companies to set up a CSR Committee and formulate a defined CSR policy has fostered transparency and accountability in the utilisation of CSR funds. This guarantees that CSR activities are in line with the company’s principles and are carried out efficiently.

Although Schedule VII has made progress in promoting CSR practices in India, there are still challenges to overcome. Ensuring the utilisation of CSR funds is the most prominent challenge. Measuring the impact of CSR initiatives to ensure sustainability requires constant monitoring and evaluation. Furthermore, there have been discussions regarding the definition of a “qualifying company” and suggestions for inclusivity to encourage businesses to engage in CSR activities.

In the years to come, it will be crucial for various stakeholders, like the government, businesses and civil society organisations, to join forces and improve upon the CSR framework mentioned in Schedule VII. By tackling obstacles and embracing developments in CSR, India can forge ahead in creating a corporate sector that not only drives economic growth but also serves as a driving force for positive social and environmental transformation.

Frequently Asked Questions (FAQs)

  1. What is Schedule VII of the Companies Act, 2013?

Schedule VII is a part of the Companies Act, 2013, which outlines the activities that qualify as Corporate Social Responsibility (CSR) initiatives for companies in India.

  1. Which companies are required to comply with CSR provisions under the Companies Act, 2013?

As per the Companies Act, 2013, companies with a net worth of Rs. 500 crore or more, or a turnover of Rs. 1,000 crore or more, or a net profit of Rs. 5 crore or more in a financial year are required to comply with CSR provisions.

  1. What are the key CSR activities mentioned in Schedule VII?

Schedule VII includes a list of CSR activities such as eradicating hunger and poverty, promoting education, gender equality, healthcare, environmental sustainability, and more.

  1. How much should companies spend on CSR activities?

As per the Companies Act, 2013, companies must spend at least 2% of their average net profits of the preceding three financial years on CSR activities.

  1. Can companies collaborate with other organisations for CSR activities?

Yes, companies can collaborate with other entities, including non-profits, for CSR projects. They can also establish their own CSR foundations or trusts.

  1. Is there a reporting requirement for CSR activities?

Yes, companies are required to disclose their CSR initiatives in their annual reports, specifying the projects undertaken and the amount spent.

  1. Are there any tax benefits associated with CSR spending?

Yes, CSR spending is eligible for tax benefits under Section 80G of the Income Tax Act, 1961 allowing companies to deduct the amount spent on CSR from their taxable income.

  1. How is average net profit calculated for the purpose of section 135 of the Act? 

To determine the expenditure on CSR initiatives, it is necessary to calculate the profit as per Section 198 of the Act. This calculation should exclude the items mentioned in rule 2(1)(h) of the Companies (CSR Policy) Rules, 2014. The net profit of a company can be derived by making certain adjustments specified in Section 198 of the Act, such as excluding capital payments and receipts from income tax and setting off losses. Profit before tax (PBT) is used to compute profit in accordance with Section 135 of the Act.

  1. Is there any portal whereby NGOs can approach companies for CSR funding?

Yes. There are a number of portals that can be used by NGOs to get CSR funding. These include the MCA Portal, CSRBOX etc.

References

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