Background and Meaning:
Corporate Social responsibility (CSR), is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. Corporate Social Responsibility (CSR) is about integrating economic, environmental and social objectives with a Company’s operations and growth.
CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies use CSR to integrate economic, environmental and social objectives with the company’s operations and growth.
Companies Act, 1956 does not talk about Corporate Social Responsibility. Though, many business houses like TATA, Reliance, Infosys were spending certain amount out of their profit every year on Public good through their TRUSTs established on activities like education, rural rehabilitation and inclusive growth, energy conservation, water sustainability, afforestation, waste management, awareness on carbon footprint etc.
The Government thought it fit to incorporate provisions on CSR in Companies Act, 2013 and make it mandatory on certain companies who come under the provisions of section 135. The Government wants the corporate sector to give back a small portion of the wealth created out of various resources of the society and its surroundings thereby ensuring relief to the under privileged sections of the society.
Provisions of the Companies Act, 2013 –
Section 135 of Companies Act, 2013 provides for Corporate Social Responsibility. According to sub-section (1), every Company having –
- Net Worth of Rs. 500 Crore or more OR
- Turnover of Rs. 1000 Crore or more OR
- a Net Profit of Rs. 5 Crore or more
during any financial year shall constitute a Corporate Social responsibility Committee of the Board consisting of three of more directors, out of which at least one director shall be an independent director. Such committee shall –
i. Formulate and recommend to the Board, a CSR policy;
ii. recommend the amount to be spent on CSR;
iii. monitor the CSR policy from time to time.
Thus, every company including its holding or subsidiary and a foreign company having its branch office or project office in India, which fulfills the criteria specified under section 135 of the Act shall comply with the Act and Companies (Corporate Social responsibility Policy) Rules, 2014.
Further, sub section 2 of section 135 provides for disclosure in Board’s Report, the composition of Corporate Social Responsibility Committee, which is required to be formed under section 134(3). The board of every such company shall after taking in to consideration the recommendations made by CSR committee, approve CSR policy for company and disclose contents of such policy in its report and also place it on Company’s website. Further, the board has to ensure that the activities as are included n CSR Policy of the Company are undertaken by the Company.
The board of every such Company shall ensure that the Company spends, in every financial year, at least 2% of average net profits of the Company made during the three immediately preceding financial years, in pursuance of its CSR policy. The Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities. If Company fails to spend the amount, the Board shall, in its report under section 134 (3) (o), specify the reason for not spending the amount.
An organization can accomplish sustainable development if CSR becomes an integral part of its business process. Companies can gain from such initiatives as they would enhance their reputation, image and goodwill among all sections of society. After all, the society at large is also a stake holder.
The following activities may be included by companies in their Corporate Social Responsibility Policies.
- eradicating extreme hunger and poverty;
- promotion of education;
- promoting gender equality and empowering women;
- reducing child mortality and improving maternal health;
- combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
- ensuring environmental sustainability;
- employment enhancing vocational skills;
- social business projects;
- contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
- Such other matters as may be prescribed.
A company may also conduct/implement its CSR programmes through Trusts, Societies
or Section 8 Companies which are not set up by the company itself provide such Trust, Society shall have track record 3 years in undertaking similar project or programs.
The CSR projects or programs or activities that benefit only the employees of the company and their family members, shall not be considered as CSR activities in accordance with section 135 of the Act.
CSR activities or programs undertaken in INDIA only shall amount to CSR expenditure. Political contributions shall not be considered as CSR activity. Further, the Board of Directors of the company shall, after taking in to consideration recommendations of CSR committee, approve the CSR policy for the Company and disclose contents of such policy in its report and the same shall be displayed on the company’s website, if any. Companies (Corporate Social Responsibility Policy) Rules, 2014 prescribed format for such disclosure.
Significantly, there is no penalty for defaulting on CSR norms. Only an explanation is to be given by the board in its report for such non-compliance.
Companies (Corporate Social Responsibility Policy) Rules, 2014 :
In exercise of the powers conferred under section 135 and section 469 (1) & 1(2) of the Companies Act, 2013, the Central Government has made rules. These rules shall come in to force on April 01, 2014.
Calculation of average net profit :
As clarified vide Companies (Corporate Social Responsibility policy) Rules, 2014, Net Profit means the Net Profit of a company as per its financial statement prepared in accordance with applicable provisions of the Act, but does not include –
i. any profit arising from Overseas Branch or branches of the company
ii. any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
It is further provided that net profit, in respect of financial year for which relevant financial statements were prepared in accordance with provisions of the Companies Act, 1956, shall not be required to be re-calculated in accordance with the provisions of the Companies Act, 2013.
In case of foreign company covered under these rules, net profit means a net profit as per profit and loss account of the company prepared in terms of section 381 (1) (a) read with section 198 of the Companies Act, 2013.
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