Basics of corporate social responsibility (CSR)

The provisions relating to Corporate Social Responsibility (CSR) are governed by Section 135 of the Companies Act, 2013 and Schedule VII of the Act read with Companies (Corporate Social Responsibility Policy) Rules, 2014.

Section 135 of the Companies Act, 2013:

Every company having any of the three:

• Net worth of Rs. 500 crore or more.
• Turnover of Rs. 1,000 crore or more.
• Net profit of Rs. 5 crore or more.

during any financial year,

Shall mandatorily have a Corporate Social Responsibility Committee.

Private companies are also in the ambit of CSR.

Any Financial Year referred here implies any of the three preceding financial years [refer General Circular No. 21/2014, dated: 18.06.2014].

The CSR committee shall:

• Formulate and recommend a CSR Policy to Board indicating the activities to be undertaken as specified in Schedule VII and amount of expenditure to be incurred on such activities.
• Monitor company’s CSR Policy from time to time.

The Board of Directors shall:

• Review recommendations made by the CSR Committee.
• Approve company’s CSR Policy.
• Disclosure of contents of the Policy in company's report/website.
• Ensure that company spends at least 2% of its average net profits during previous 3 financial years on CSR activities.

Computation of net profit for section 135 is as per section 198 of the Companies Act, 2013 which is primarily PROFIT BEFORE TAX (PBT) [refer General Circular No. 01/2016, dated: 12.01.2016].

Composition of CSR Committee:

a. CSR Committee should have at least 3 directors of which at least 1 should be an independent director.

b. An unlisted public company or a private company covered under CSR provisions, which is not required to appoint an independent director pursuant to section 149(4) of the Act, shall have its CSR Committee without such director.

c. A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

d. With respect to a foreign company, the CSR Committee shall comprise of at least two persons of which one person shall be resident in India as specified under Section 380(1)(d) of the Act.

Exclusion from CSR:

Every company which ceases to be a company covered under threshold criteria specified under Section 135(1) of the Act for 3 consecutive financial years shall not be required to -

• constitute a CSR Committee; and
• comply with the CSR provisions, till such time it meets the criteria specified in Section 135(1).

Which activities would not qualify as CSR:

• The CSR projects or programs or activities that benefit only the employees of the company and their families
• One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc.
• Expenses incurred by companies for the fulfilment of any other Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act, 2013, Apprentice Act, 1961 etc.)
• Contribution of any amount directly or indirectly to any political party.
• Activities undertaken by the company in pursuance of its normal course of business.
• The project or programmes or activities undertaken outside India.

Schedule VII to Companies Act, 2013:

Activities which may be included by companies in their CSR Policies:

a. 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;

b. romoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects;

c. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centres, and other such facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

d. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund setup by the Central Government for rejuvenation of river Ganga;

e. 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; promotion and development of traditional arts and handicrafts;

f. Measures for the benefit of armed forces veterans, war widows and their dependents;

g. Training to promote rural sports, nationally recognised sports, and para-Olympic sports and Olympic sports;

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;

Contributions or funds provided to technology incubators located within academic institutions which are approved by the central government;

Rural development projects;

Slum area development.