Corporate Social Responsibility - Detailed Analysis with FAQs

Corporate Social Responsibility

What is CSR?

Corporate social responsibility (CSR) is a broad concept that varies across companies and industries. To be socially responsible, a company should prioritise accountability to itself and its shareholders. Many companies that have implemented CSR programs have experienced significant growth, enabling them to contribute back to society. While CSR is often associated with large corporations, it is not exclusive to them. Businesses of all sizes can practice CSR and make a positive impact. It is important to note that the visibility and success of a corporation increase its responsibility to establish ethical standards for its peers, competition, and industry.

CSR initiatives aim to create a positive impact on society, the environment, and the local community in which a business operates. These initiatives not only benefit external stakeholders but also generate internal advantages for the company. By actively supporting worthy causes, a company can enhance employee satisfaction and improve staff retention. Furthermore, when a company demonstrates its commitment to making a broader positive impact, individuals in society are more inclined to engage with and support such companies. This goes beyond mere business transactions, as people appreciate and value companies that prioritise social responsibility and strive to make a meaningful difference in the world.

Benefits of CSR

• Strengthened brand positioning
• Greater sustainability
• Stakeholders' engagement
• Accelerated capital growth
• Increased sales and customer loyalty
• Positive business reputation

Applicability

According to Section 135(1) of Companies Act,2013 Every Company having net worth of rupees five hundred crore of more, or turnover of rupees ten thousand crore or more, or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute Corporate Social Responsibility Committee of the Board.

The companies mentioned above shall constitute Corporate Social Responsibility Committee as under Rule 5 of CSR Rules 2014:

According to section 135(9) of Companies Act, 2013, Where the amount to be spend by a company u/s 135(5) does not exceed fifty lakh rupees, then there is no requirement to constitute CSR Committee.

Section 135(2) of the Companies Act pertains to the requirement for companies to disclose the composition of their CSR committee in their board report u/s 134(3).

Section 134 (3): - Functions of CSR Committee:

The CSR committee is responsible for formulating and recommending the CSR policy to the board. The CSR policy should outline the specific activities that the company intends to undertake in areas or subjects specified in Schedule VII.

• The CSR committee is responsible for formulating and recommending the CSR policy to the board. The CSR policy should outline the specific activities that the company intends to undertake in areas or subject in Schedule VII.
• Recommend the Amount of Expenditure
• Monitor the CSR policy

Section 135(4) - says that the Board after considering the recommendations made by the CSR committee approve the CSR policy by passing Board resolution and place it on company’s website, if any.

Section 135(5) -  The Board ensure that the company shall spend 2% of average net profits of last three immediately preceding financial years.

Provided that company shall give preference to local areas for spending the amount for CSR activities.

Provided further that If a company fails to spend the specified amount on CSR activities, the board is obligated to provide reasons for the unspent amount in its report. Unless the unspent amount is associated with an ongoing project, it must be transferred to a fund as outlined in Schedule VII within six months after the end of the financial year.

Additionally, if a company spends an amount exceeding the CSR requirements, it is permitted to offset the excess amount against the spending requirement for the next three years.

Section 135(6) - If a company has an ongoing project that fulfils the prescribed conditions as per its CSR policy, it must transfer the unspent amount to a special account called the Unspent Corporate Social Responsibility Account within 30 days after the end of the financial year. This account should be opened by the company in any scheduled bank. The company is then obligated to spend this amount towards its CSR obligations within three financial years from the date of transfer. If the amount remains unspent after the completion of the third financial year, it should be transferred to a fund specified in Schedule VII within 30 days.

Penalty Provisions

Section 135(7) If a company fails to comply with the provisions stated in subsection 5 and 6, it will face penalties. The penalty amount will be either twice the required transfer amount to the specified fund or unspent CSR account, or one crore rupees, whichever is less. Additionally, any officer of the company who is responsible for the default will be subject to a penalty of one-tenth of the required transfer amount to the specified fund or unspent CSR account, or two lakh rupees, whichever is less.

Activities not amounting to CSR

As per Rule 4 and Rule 6 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, following shall not amount to CSR Activities for the purpose of Section 135.

1. The CSR projects or programs or activities undertaken outside India.
2. The CSR projects or programs or activities that benefit only the employees of the company and their families.
3. Contribution of any amount, directly or indirectly, to any political party under section 182 of the Companies Act, 2013.
4. Any activity undertaken in pursuance of normal course of business of a company.
5. One-off events such as marathons/ charitable contribution/ advertisement/ sponsorships of TV programmes etc.
6. Expenses incurred by companies for the fulfilment of any other act/ statue of regulations (such as labour laws, land acquisition act,2013, apprentice act, 2013 etc.)

Some Circular by MCA on CSR

Examples of Corporate Social Responsibility

Starbucks has gained a strong reputation for its exemplary corporate social responsibility and dedication to sustainability and community well-being. Highlighted in its 2020 Global Social Impact Report, the company has achieved significant milestones. These include ensuring that all of its coffee is ethically sourced, establishing a global network of farmers and pledging to provide them with 100 million trees by 2025. Additionally, Starbucks has taken a leading role in incorporating green building practices into its stores, contributing numerous hours of community service, and introducing a groundbreaking college program for its employees. These achievements showcase Starbucks' unwavering commitment to making a positive impact on various fronts.

Some FAQs

Q: Whether the &"average net profit" criteria for section 135(5) is net profit before tax or net profit after tax?

A: Computation of net profit for section 135(5) is as per section 198 of the Companies Act,2013 which is primarily profit before tax (PBT).

Q: Whether display of CSR policy of a company on website of the company is mandatory or not?

A: According to section 135(4) of the Companies Act, the board of directors of a company must approve its CSR policy, taking into account the recommendations of the CSR committee. The contents of this policy should be disclosed in the company's report, and if the company has a website, the policy should also be displayed there. In simpler terms, if a company has a website, it needs to upload its CSR policy on the website along with disclosing it in the company's report.

Q: Can the CSR expenditure be spent on the activities beyond Schedule VII?

A: General circular no. 21/2014 dated June 18, 2014, of MCA has clarifies that the statutory provision and provision of CSR rules, 2014, is to ensure that activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act,2013. 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 schedule VII of the act, are broad-based and are intended to cover a wide range of activities. The general circular also provides an illustrative list of activities that can be covered under CSR. In a similar way many more can be covered. It is for the board of the company to take a call on this.

Q: Whether section 135 apply on Section 8 company or not?

A: If a Section 8 company falls within the CSR threshold and does not engage in activities outside the scope of Schedule VII, then CSR obligations are applicable to that company. In simpler terms, if a Section 8 company meets the CSR criteria and its activities align with Schedule VII, it must comply with CSR requirements.