Analysis on Corporate Social Responsibility (CSR)

Through Corporate Social Responsibility, companies voluntarily contribute to a better society and environment. Corporate Social Responsibility can be defined as a Company's sense of responsibility towards the community and environment in which it operates. Expenses incurred towards CSR cannot be considered as donations or charity. The Companies Act, 2013 has formulated Section 135, Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII which prescribes mandatory provisions for Companies to fulfill their CSR.

Applicability

The provisions of CSR applies to:

Every company or Its holding company or Its subsidiary company or Foreign company having in the preceding financial year:

• Net worth > 500 crore or,
• Turnover > 1000 crore or,
• Net profit > 5 crore

Importance of Corporate Social Responsibility

CSR is an immense term that is used to explain the efforts of a company in order to improve society in any other way.

• Improved Public Image: Corporate Social Responsibility (CSR) initiatives help companies to project a positive image in the eyes of the public. By engaging in socially responsible activities, companies can demonstrate their commitment to society, and this can increase their chances of being viewed favorably by consumers and other stakeholders.
• Increased Media Coverage: CSR initiatives can also help companies to gain more media coverage. Media outlets are often interested in covering stories about companies that are making a positive impact in their communities, and this can help to raise awareness of the company's brand and reputation.
• Enhanced Brand Value: CSR initiatives can also help to enhance a company's brand value. By demonstrating a commitment to social responsibility, companies can build stronger relationships with their customers and other stakeholders. This can lead to increased loyalty and a more positive perception of the company's brand.
• Competitive Advantage: Companies that engage in CSR initiatives can also gain a competitive advantage over their rivals. By standing out as a socially responsible company, they can differentiate themselves from their competitors and appeal to consumers who are increasingly interested in buying from companies that are committed to making a positive impact on society.
• Employee Engagement: CSR initiatives can also help to improve employee engagement and morale. By involving employees in socially responsible activities, companies can foster a sense of purpose and pride among their workforce. This can lead to increased productivity, lower turnover rates, and a more positive workplace culture.

Role of Board of Directors

The role of the Board of Directors is as follows:

• The Board of Directors is responsible for approving and overseeing the implementation of a company's Corporate Social Responsibility (CSR) policy.
• The CSR policy must be recommended by the CSR Committee, and the Board must ensure that the company only undertakes activities that are consistent with that policy.
• The Board must ensure that the company spends at least 2% of its average net profits from the past three financial years on CSR activities.
• The Board must disclose information about the CSR Committee's composition, the contents of the CSR Policy, and any unspent CSR funds and the reasons for the same.
• If there are unspent funds, the Board must transfer the unspent amount to a specified fund within six months of the end of the financial year.
• The Board's role is to ensure that the company is fulfilling its social responsibility and contributing positively to society.

Transfer and Use of Unspent Amount

The specified funds for transfer of unspent amount are:

• A contribution made to the prime minister’s national relief fund.
• Any other fund is initiated by the central government concerning socio-economic development, relief and welfare of the scheduled caste, minorities, tribes, women and other backward classes.
• A contribution made to an incubator is funded either by the central government, the state government, public sector undertaking of state or central government, or any other agency.
• Contributions made to:
  • Public-funded universities
  • National Laboratories and Autonomous Bodies (established under the auspices of the Indian Council of Agricultural Research (ICAR)
  • Council of Scientific and Industrial Research (CSIR)
  • Department of Atomic Energy (DAE)
  • Indian Institute of Technology (IITs)
  • Indian Council of Medical Research (ICMR)
  • Defense Research and Development Organization (DRDO) Ministry of Electronics and Information Technology)
  • Department of Science and Technology (DST) engaged in conducting research in technology, science, medicine, and engineering aimed at encouraging Sustainable Development Goals (SDGs).
• In case of the unspent amount relating to an ongoing project under the company’s CSR policy, the amount shall be transferred by the firm in less than 30 days from the end of the financial year to an exclusive account to be opened by a firm in any scheduled bank.
• The account shall be designated as ‘Unspent Corporate Social Responsibility Account’, and the funds shall be used towards its obligations under the CSR policy within a period of three financial years from the date of the transfer.
• In a case where the company fails to utilize the funds at the end of the three financial years, the funds should be transferred to the specified fund mentioned above within a period of thirty days upon completion of the third financial year.

Constitution of the CSR Committee

• Every company to which CSR criteria is applicable shall constitute a Corporate Social Responsibility of the Board (i.e. CSR Committee).
• Minimum 3 or more directors must form a CSR Committee.
• Among those 3 directors, at least 1 director must be an independent director.
• An unlisted public company or a private company shall have its CSR Committee without any independent director if an independent director is not required.
• In case of a foreign company, the CSR Committee shall comprise of at least 2 persons of which one person shall be a person resident in India authorized to accept on behalf of the foreign company – the services of notices and other documents. Also, the other person shall be nominated by the foreign company.

Duties of the CSR Committee

• The CSR Committee is responsible for formulating and recommending a CSR policy to the Board.
• The CSR policy should identify the activities that the company will undertake, as outlined in Schedule VII.
• The CSR Committee should also recommend the amount of money to be spent on CSR activities.
• The Committee must monitor the company's CSR policy regularly.
• The Committee should also establish a transparent control mechanism to ensure that the CSR projects or activities are implemented successfully.

CSR Reporting

With respect to CSR Reporting, the provisions are as follows:

• For any financial year starting on or after April 1, 2014, the Board's Report must include an annual report on CSR.
• Foreign companies filing balance sheets must include an annexure with a report on CSR.

CSR Policy

CSR Policy elaborates the activities to be undertaken by the Company as named in Schedule VII to the Act and spend. The activities should not the same which are done by the company in its normal course of business

• Contents of CSR Policy should be placed on the company’s website by the Board.
• The activities mentioned in the policy must be undertaken by the company.
• The Company can join hands with other companies for undertaking projects or programs or CSR activities and report separately on such programs or projects.
• The CSR policy shall monitor the projects or programs.

List of Permitted Activities To Be Included in Accordance With Schedule VII of the Companies Act, 2013

The Board shall ensure that the activities included by a company in its CSR Policy fall within the purview of the activities included in Schedule VII. Some activities are specified in Schedule VII as the activities which may be included by companies in their Corporate Social Responsibility Policies. These activities are related to:

Fines and Penalties for Non-Compliance

• If a company fails to comply with the CSR spending provisions, they may be fined a minimum of Rs 50,000, up to a maximum of Rs 25 lakh.
• Any officer of the company who defaults in compliance may be subject to imprisonment for up to three years, a minimum fine of Rs 50,000, up to a maximum of Rs 5 lakh, or both.