Introduction
On 27th February 2014, Government of India came up with Companies (Corporate Social Responsibility Policy) Rules 20 I 4. Enactment of Companies Act, 2013 by the Ministry of Corporate Affairs, Government of India was one of the world’s largest experiments of introducing the CSR as a mandatory provision by imposing statutory obligation on Companies to take up CSR projects towards social welfare activities. This has made India the only country which has regulated and and mandated CSR for some select categories of companies registered under the Act. This intention behind this Initiative is to push the nation towards achievement of sustainable development goals and public-private partnership in transforming India.
Key features of Corporate Social Responsibility Policy are summarised below:
- Companies (including its holding or subsidiary) having net worth of Rs. 500 crore or more or turnover of Rs. 1000 crore or more or net profit of Rs. 5 crore or more during any financial year lie under the ambit of this Act.
- Such companies shall ensure to spend ( on CSR) 2% of the average net profits of the Company made during the three immediately preceding financial year.
- CSR Board: CSR is a Board-driven process. The responsibilities of the Board of a CSR-eligible company includes the following:
- approve the CSR policy& disclose contents of such policy in its report and company’s website
- ensure that the activities included in the CSR policy are undertaken by the company
- ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years
- satisfy itself regarding the utilisation of the disbursed CSR funds
- if the company fails to spend at least two per cent of the average net profits of the company, the Board shall specify the reasons for not spending the amount and transfer the unspent CSR amount as per provisions of sections 135(5) and 135(6) of the Act.
- CSR Committee: Eligible companies shall constitute CSR Committee as under the act. The CSR Committee shall:
- formulate and recommend the CSR policy to the Board;
- recommend the amount of expenditure to be incurred on CSR activities
- monitor the CSR policy of the company from time to time
- formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy,
- For companies covered under Section 135(9) of the Act and not required to have CSR Committee, these functions shall be carried out by the Board itself.
- CSR Activities: The CSR activities shall be undertaken by the company, as per its stated CSR Policy, excluding activities undertaken in pursuance of its normal course of business
- The Board of a company may decide to undertake its CSR activities approved by the CSR committee, through a registered trust/society/or a section 8 company established by the company or its holding or subsidiary.
- A company may also collaborate with other companies for undertaking projects or programs in such a manner that the CSRR committees of respective companies are in a position to report separately on such projects or programs.
- Mechanisms for monitoring the CSR process
- CSR is a Board-driven process, and the Board of the company is empowered to plan, decide, execute, and monitor the CSR activities of the company based on the recommendation of its CSR Committee.
- CSR-mandated companies are required to file details of CSR activities annually in MCA21 registry. Companies are required to make necessary disclosures in the financial statements regarding CSR including non-compliance.
- CSR Reporting: The Board’s Report of a company covered under these rules pertaining to a financial year commencing on or after the le day of April, 2014 shall include an annual repoft on CSR
- Role of Government in the approval and implementation of the CSR programmes
- The Government has no direct role in the approval and implementation of the CSR programmes /projects of a company. Board of the company is empowered to plan, approve, execute, and monitor the CSR activities of the company based on the recommendation of its CSR Committee.
- Role of Government in monitoring compliance of CSR provisions by companies
- Government monitors the compliance of CSR provisions through the disclosures made by the companies in the MCA 21 portal.
- For any violation of CSR provisions, action can be initiated by the Government against such non-compliant companies as per provisions of the Companies Act, 2013
- Excess expenditure on CSR:
- If a company spends more than the requirement provided under section 135, excess amount can be set off against the mandatory 2% CSR expenditure, the excess amount can be set off against the required 2% CSR expenditure up to the immediately succeeding three financial years subject to compliance with the conditions stipulated under rule 7(3) of the Companies (CSR Policy) Rules, 2014. This position is applicable from 22nd January 2021 and has a prospective effect. Thus, no carry forward shall be allowed for the excess amount spent, if any, in financial years prior to FY 2020-21
- Is it is mandatory for companies to carry out CSR in their local areas?
- The spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals (SDGs). Thus, the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.
- Different modes of incurring CSR expenditure: CSR expenditure can be incurred in multiple modes:
- ‘Activities route’, which is a direct mode wherein a company undertakes the CSR projects or programmes as per Schedule VII of the Act, either by itself or by engaging implementing agencies
- ‘Contribution to funds route’, which allows the contributions to various funds as specified in Schedule VII of the Act.
- Contribution to incubators and R&D projects, and contribution to institutes/ organisations, engaged in research and development activity, as specified under the Act
- Funds specified in Schedule VII of the Act for the purpose of CSR contribution
- Swachh Bharat Kosh
- Clean Ganga Fund
- Prime Minister’s National Relief Fund (PMNRF)
- Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund)
- Any other fund set up by the Central Government
- Implementing Agency for undertaking CSR activities:
- Entity established by the company itself or along with any other company
- Entity established by the Central Government or State Government
- Statutory bodies – any entity established under an Act of Parliament or a State
- Other bodies –section 8 company, registered public trust/ society.
- Role of International Organisation in CSR activities
- an international organisation cannot act as an implementing agency
- Companies can engage international organisations for the limited purposes of designing, monitoring, and evaluation of the CSR projects or programmes, or for capacity building of personnel of the company involved in CSR activities
- CSR Project Timelines
- the maximum permissible time period shall be three financial years excluding the financial year in which it is commenced i.e., (1+3) financial years.
- Un Spent Funds
- If Unspent amount pertains to ‘ongoing projects’, such funds to be transferred to a separate bank account of the company to be called as ‘Unspent CSR Account’
- If Unspent amount pertains to ‘other than ongoing projects then it has to be transferred to any fund included in Schedule VII of the Act
- CSR Enforcement: The non-compliance is a civil wrong and shall attract penalties:
- For company- Twice the unspent amount required to be transferred to any fund included in Schedule VII of the Act or Unspent CSR Account, as the case may be, or one crore rupees, whichever is less.
- For every officer in default- 1/10th of the unspent amount required to be transferred to any fund included in Schedule VII of the Act or Unspent CSR Account, or two lakh rupees, whichever is less
- The penalty does not relieve the company from the obligations under the law, and the penalty is over and above the obligated amount required to be transferred
- CSR Reporting & Disclosure
- Reporting of CSR is mandatory in Board’s Report