Corporate Social Responsibility (CSR) is also called corporate conscience, corporate citizenship, social performance, or sustainable responsible business. Business depends for its survival on the long-term prosperity of society. The concept of Corporate Social Responsibility was introduced in India within the legal framework by the Companies Act, 2013.
Section 135(1) of the Companies Act, 2013 read with the CSR Rules stipulates that the CSR provision is applicable to companies (including its holding and subsidiary, as well as foreign companies having its branch office or project office in India) satisfying any of the following criteria during the immediately preceding financial year:
- Companies having net worth of rupees Five hundred crores or more, or
- Companies having turnover of rupees One thousand crores or more, or
- Companies having a net profit of rupees Five crores or more (as calculated under Section 198 with other adjustments as referred in Rule 2(h) of CSR Rules.)
Sub-section (9) of section 135 inserted by the Companies (Amendment) Act, 2020 provides that where the amount to be spent by a company does not exceed fifty lakh rupees, the requirement under sub-section (1) for the constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee shall be discharged by the Board of Directors of such company.
Any Company that triggers any of the aforesaid conditions must form a Corporate Social Responsibility Committee of the Board to formulate and monitor the CSR policy of a company.
- A CSR Committee must have at least 3 directors.
- At least one of the 3 directors must be an independent director.
However, CSR Rules exempt unlisted public companies and private companies that are not required to appoint an independent director from having an independent director as a part of their CSR Committee.
The CSR Committee of a foreign company shall comprise of at least 2 members, one of whom must be a citizen of India who is allowed to accept notices and other documents on behalf of the foreign company and the other person nominated by the foreign company.
Note: In the case where a private company has only 2 directors on the Board, the CSR Committee can be constituted with these 2 directors. Where a company is not required to appoint an independent director under section 149(4), it shall have in its Corporate Social Responsibility Committee 2 or more directors.
Functions of CSR Committee
The Corporate Social Responsibility Committee shall:
- Formulate a CSR Policy and recommend it to the Board, which shall indicate the CSR activities to be undertaken by the company;
- Recommend the amount of expenditure to be incurred on the CSR activities;
- Monitor the CSR Policy of the company from time to time.
The CSR Committee formulates and recommends to the Board, an Annual Action Plan in pursuance of its CSR policy, which shall include the following:
- The list of CSR projects or programmes that are approved to be undertaken;
- The manner of execution of such projects or programmes;
- The modalities of utilization of funds and implementation schedules for the projects or programmes;
- Monitoring and reporting mechanism for the projects or programmes; and
- Details of need and impact assessment, if any, for the projects undertaken by the company: For companies covered under Sec 135(9) and not having CSR Committee these functions shall be carried out by the Board itself.
CSR Registration & Documentation
Implementation of CSR: The Board shall ensure that the CSR activities are undertaken by the company itself or through –
- A company formed under section 8 of the Act, or a registered public trust or a registered society, either singly or along with another company, under sections 12A and 80G of the Income Tax Act, 1961, or such entity with at least three years of experience in similar activities.
- Any entity established under an Act of Parliament or a State legislature.
CSR Registration: Companies can undertake CSR activities on their own or only through implementing agencies that are registered with MCA. Rule 4(2) of the amended Rules mandates all the prescribed categories of implementing agencies to register itself with the Central Government by filing Form CSR-1 electronically with the Registrar, with effect from the 1st day of April 2021.
CSR Form-1: In case the company itself carries out the CSR activities, there is no requirement of filing Form CSR-1. Form CSR-1 shall be signed and submitted electronically by the entity and shall be verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.
On submission of Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically.
Utilisation Certificate: It is the responsibility of the Board to satisfy itself that the CSR funds disbursed to various implementing agencies and on various projects are being utilised for the given purpose. Since the modified Rules came into force effective January 22, 2021, the Chief Financial Officer or the person responsible for financial management shall certify such utilisation of the funds for FY 2020-21 onwards.
Creation of Capital Assets using CSR Amount
The CSR amount may be spent by a company for the creation or acquisition of a capital asset, which shall be held by a company having charitable objects and CSR Registration Number or by the beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or a by a public authority.
However, any capital asset created by a company prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, shall within a period of 180 days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than 90 days with the approval of the Board based on reasonable justification.
Whether company can donate its CSR contribution to NGO?
A Company may undertake its CSR activities approved by the CSR committee by donating its CSR contribution to NGOs registered as a Trust/ Society/ Section 8 Company only if it is created exclusively for undertaking CSR activities and established by the company or its holding/subsidiary/associate company under section 8 of the Act or otherwise.
However, if such trust, society, or company is not established by the company or its holding/subsidiary/associate company, then it shall have an established track record of three years in undertaking similar programs or projects;
Also, the company shall specify the projects or programs in which CSR contribution will be utilized and the ways to utilize such funds with their monitoring and reporting mechanism of such specified projects/programs.
- The board shall ensure that the administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year.
- Any surplus arising out of the CSR activities shall not form part of the business profit of a company and shall be ploughed back into the same project or shall be transferred to the Unspent CSR Account and spent in pursuance of CSR policy and annual action plan of the company or transfer such surplus amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.
- CSR funds may be spent on creating or acquiring capital assets. Although, these capital assets cannot be held by the company. They must be held by any one of the following entities:
- A Section 8 company
- A registered public Trust or Society having charitable objects
- Beneficiaries of said projects
- Public authorities
Whether the amount spent in excess of the requirements provided under section 135, can be set off in next year?
Where a company spends an amount in excess of requirement provided under sub-section 135(5), such excess amount may be set off against the requirement to spend under section 135(5) up to immediately succeeding three financial years subject to the conditions that:
- the excess amount available for set-off shall not include the surplus arising out of the CSR activities, if any.
- the Board of the company shall pass a resolution to that effect.
The aforesaid provision is based on the amendment made to Sec 135(5) w.e.f. 22nd January 2021. Accordingly, while the excess amount spent, if any against the prescribed CSR dues of the FY ending 31st March 2021 may be carried forward for being set off during the next three financial years, the said carry forward shall not be allowed for excess amounts spent, if any during any FY which ended before 22nd January 2021.
The following expenditure will NOT be included in the list of CSR activities:
- Contribution of any amount directly or indirectly to any political party
- Activities benefiting employees of the company
- Activities on sponsorship basis for deriving marketing benefits for its products or services.
Transferring and Using of Unspent Amount in case of:
- No on-going project: The treatment of unspent amount of CSR in case of “on-going projects”. (‘Ongoing Project’ means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years. These can include projects that were initially not multi-year projects but were extended based on reasonable justification.) If the Company fails to spend the amount prescribed in Section 135(5) and such unspent amount is not related to any on-going project, then the Company shall transfer such amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.
- An on-going project: In case, there is an unspent amount related to ongoing project, such unspent amount shall be transferred by the company to a special account called the “Unspent Corporate Social Responsibility Account” which is to be opened by the company for that financial year in any scheduled bank.
This amount is required to be transferred within a period of 30 days from the end of the financial year. Such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer.
Penal provisions for not complying with the provisions of transferring unspent amount of a CSR project:
The following non-compliance may attract the following penalties as per section 135(7):
- On Company – Twice the amount required to be transferred to a fund specified in Schedule VII or Unspent CSR account, as the case may be or one crore rupees, whichever is less.
- On Every Officer in Default – 1/10th of the amount required to be transferred to a Fund specified in Schedule VII or Unspent CSR account or two lakh rupees, whichever is less.
- In case of any other non-compliance/default under any other provision of the section, or Rules, then the provisions of general penalty under section 450 of the Act shall be applicable
Calculation of Net profit:
Every company has 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: Net profit of a company as per its financial statement shall be calculated in accordance with the provisions of section 198, but shall not include the following:
- any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
- any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
Moreover, the 2% CSR is computed as 2% of the average net profits made by the company during the immediately preceding three financial years.
Foreign company: In the case of a foreign company that has its branch or a project office in India, CSR provision will be applicable to such offices. Net profit means the net profit of such company as per profit and loss account prepared in terms of Section 381(1)(a), read with section 198 of the Act.
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 which need to comply with the CSR obligations would not be included in the computation of net profits of a company.
“CSR Policy” means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee, and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan.
The CSR Policy outlines the activities that the Company would conduct in accordance with Schedule VII of the Act. The activities should not be the same as those carried out in the usual course of business by the company.
- The Board should post the contents of the CSR Policy on the company’s website.
- The company must carry out the tasks outlined in the policy.
- The Company will collaborate with other organisations on initiatives, services, or CSR activities and report separately on each of these activities.
- The projects or initiatives will be monitored under the CSR policy.
Reporting of CSR is mandatory in Board’s Report:
It is mandatory for companies to disclose in its Board’s Report in the Annual report on CSR. The report of the Board of Directors attached to the financial statements of the Company shall include an annual report on the CSR activities of the company in the format prescribed containing the following particulars:
- A brief outline of the company’s CSR policy, including 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.
A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy are in compliance with CSR objectives and Policy of the company. If the company has been unable to spend the 2% of the average net profit of the last three financial years 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. In the case of a foreign company, the balance sheet filed under section 381(1)(b) shall contain an Annexure regarding a report on CSR.
The activities are undertaken by a Company in pursuance of its statutory obligation, but shall not include the following, namely: –
- Activities undertaken in pursuance of normal course of business of the company; Provided that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23 subject to the conditions that:
- Such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act;
- Details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s Report;
2. Any activity is undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level;
3. Contribution of any amount directly or indirectly to any political party.
4. Activities benefiting employees of the company.
5. Activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services;
6. Activities carried out for the fulfillment of any other statutory obligations under any law in force in India;
Further, 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. This provision has to be followed in letter and spirit.
List of Permitted Activities to be included in accordance with Schedule VII of the Companies Act, 2013
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 covers a wide range of activities as illustratively. These are activities related to:
|1. Eradicating poverty, malnutrition, and hunger, improving health services, including preventive health care and sanitation, and providing clean drinking water are all priorities.|
|2. Improvements in education, including special education and jobs, as well as livelihood development programmes for children, women, the elderly, and the differently-abled.|
|3. Improving gender equality by establishing homes and hostels for orphans and women.|
|4. Introducing policies aimed at reducing inequality within socially and economically disadvantaged groups.|
|5. Environmental sustainability, ecological balance, flora and fauna health, animal welfare, agroforestry, natural resource conservation, and soil, air, and water quality maintenance, as well as a contribution to river Ganga rejuvenation|
|6. Preservation of national heritage, architecture, and culture, including the preservation of historic buildings and works of art, the establishment of public libraries, and the promotion and production of traditional arts and handicrafts.|
|7. Areas where professional military forces, war widows, and their dependents will profit.|
|8. Rural sports, nationally recognized sports, Paralympic sports, and Olympic sports all benefit from training.|
|9. Contribution to the Prime Minister’s National Relief Fund or any other Central Government-established fund for socioeconomic development that provides relief and welfare to Scheduled Castes, Scheduled and Backward Classes, minorities, and women.|
|10. The Central Government must sanction any contributions or funds made to technology incubators.|
|11. Projects for rural growth|
|12. Relief, recovery, and restoration efforts are all part of disaster management.|
|13. Slum area growth, defined as any area declared as such by the Central Government, any State Government, or any other competent authority under any law in force at the time.|
Remedial Actions in the Event of a Breach of CSR Provisions:
- If the company fails to make the necessary CSR disclosures in its Board’s Report, it can prepare a revised report after obtaining Tribunal approval under Section 131.
- If the company does not spend the required amount on CSR operations, the Board must explain the reason in its report filed under Section 134.
- The company must transfer the unspent sum from the 2% threshold limit to a special account to be opened by the company called the Unspent CSR Account, and such amount must be spent by the company in accordance with its CSR Policy obligation within three years of the date of such transfer.