CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility is the way companies manage their businesses to produce an overall positive impact on society through economic, environmental, and social actions. Corporate social responsibility (CSR), also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business/ businesses. Business depends for its survival on long term prosperity of the society.

It is certainly a business approach that creates a long term consumer and employee value by not only creating a ‘green strategy’ on the natural environment but also considering every dimension of how a business operates in social, cultural, and environment.

The applicability is been described under section 135 of the Companies act 2013, where the companies which fulfill any of the following criteria during the immediately preceding financial year are under the category of applicability:-

TURNOVERNET WORTHNET PROFIT
Rs.1000 Crore or moreRs.500 Crore or moreRs.5 Crore or more

Cessation

Thus, the CSR Rules specify that a company which does not satisfy the specified criteria for a consecutive period of three financial years is not required to comply with the CSR obligations, implying that a company not satisfying any of the specified criteria in a subsequent financial year would still need to undertake CSR activities unless it ceases to satisfy the specified criteria for a continuous period of three years.

CSR Activities

  • The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.
  • The CSR Committee of the company may decide to undertake its CSR activities approved by the Board, through
    1. A company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or along with any other company, or
    2. A company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature.
  • Further, if the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified above, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilization of funds of such projects and programs and the monitoring and reporting mechanism.
  • A Company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
  • The CSR projects or programs or activities undertaken in India only shall amount to CSR Expenditure.
  • The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act.
  • Companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track records of at least three financial years but such expenditure, including expenditure on administrative overheads, shall not exceed five percent of total CSR expenditure of the company in one financial year.
  • Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.

List of CSR Activities

Some activities are specified in Schedule VII as the activities which may be included by companies in their Corporate Social Responsibility Policies. The entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities as illustratively. These are activities related to:

  1. Eradicating hunger, poverty, and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of 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; setting up old age homes, daycare centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  4. 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 including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga;
  5. 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;
  6. Measures for the benefit of armed forces veteran, war widows, and their dependents;
  7. Training to promote rural sports, nationally recognized sports, para Olympic sports, and Olympic sports;
  8. 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 Castes, the Scheduled Tribes, other backward classes, minorities, and women;
  9. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  10. Rural development projects.
  11. Slum area development where ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.
  12. Disaster management, including relief, rehabilitation, and reconstruction activities.

However, in determining CSR activities to be undertaken, preference would need to be given to local areas and the areas around where the company operates.

CSR Expenditure

  • Every company shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. This amount will be CSR expenditure.
  • The company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities. Expenditure incurred on specified activities that are carried out in India only will qualify as CSR expenditure. Such expenditure includes a contribution to the corpus or on projects or programs relating to CSR activities. 
  • Expenditure incurred in undertaking a normal course of business will not form a part of the CSR expenditure. Companies would need to clearly distinguish those activities which are undertaken specifically in pursuance of the normal course of business and those that are done incrementally as part of the CSR initiatives.

Computation of net profit

“Net profit” as per the explanation of Section 135(5)means that net profit shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198. The net worth, turnover, and net profits are to be computed in terms of Section 198 of the 2013 Act as per the profit and loss statement prepared by the company in terms of Section 381 (1) (a) and Section 198 of the 2013 Act. Every company will have to report its standalone net profit during a financial year for the purpose of determining whether or not it triggers the threshold criteria as prescribed under Section 135(1) of the Companies Act.

  • Indian company: The CSR Rules have clarified the manner in which a company’s net worth will be computed to determine if it fits into the ‘spending’ norm. In order to determine the ‘net profit’, dividend income received from another Indian company or profits made by the company from its overseas branches have been excluded. Moreover, the 2% CSR is computed as 2% of the average net profits made by the company during the preceding three financial years.
  • Foreign company: The CSR Rules prescribe that in case of a foreign company that has its branch or a project office in India, CSR provision will be applicable to such offices. CSR Rules further prescribe that the balance sheet and profit and loss account of a foreign company will be prepared in accordance with Section 381(1) (a) and net profit to be computed as per Section 198 of the Companies Act. It is not clear as to how the computation of net worth or turnover would be arrived at in case of a branch or project office of a foreign company Profits from any overseas branch of the company, including those branches that are operated as a separate company would not be included in the computation of net profits of a company. Besides, dividends received from other companies in India that need to comply with the CSR obligations would not be included in the computation of the net profits of a company.

Disclosure Requirements

It is mandatory for companies to disclose in the Board’s Report, an annual report on CSR. The report of the

Board of Directors attached to the financial statements of the Company would also need to include an annual report on the CSR activities of the company in the format prescribed containing following particulars –

• A brief outline of the company’s CSR policy, including an overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects or programs. 

• The Composition of the CSR Committee. 

• Average net profit of the company for last three financial years 

• Prescribed CSR Expenditure 

• Details of CSR spent during the financial year.

• In case the company has failed to spend the two percent of the average net profit of the last three financial years or any part thereof, the company shall provide the reasons for not spending the amount in its Board report. 

• A responsibility statement of the CSR Committee that the implementation and monitoring of CSR policies are in compliance with CSR objectives and Policies of the company. 

If the company has been unable to spend the minimum required on its CSR initiatives, the reasons for not doing so are to be specified in the Board Report. If a company has a website, the CSR policy and the report containing details of such activities have to be made available on the company’s website for informational purposes.

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