written by | May 13, 2022

What is Corporate Social Responsibility under Companies Act 2013?

The notion of Corporate Social Responsibility is mostly concerned with the obligation of corporations to the well-being of society and our environment. Corporates must be able to contribute to the well-being of society. They draw the community's resources, such as raw materials, Human Resources, etc. The Ministry of Corporate Affairs has adopted CSR as a concept in the Ministry of Corporate Affairs. In accordance with section 135 in the Companies Act of 2013 and Companies Rules, 2014, it aims to encourage CSR initiatives. Its scope has seen major changes, from a view of it as a charitable endeavour in contrast to the obligations of corporations to society.

Did you Know?

Following an amendment to the Companies Act, 2013, in April 2014, India became the first country in the world to make corporate social responsibility (CSR) mandatory. As part of any CSR compliance, businesses can invest their revenues in sectors such as education, poverty, gender equality, and hunger.

What Does Corporate Social Responsibility Mean?

Let’s begin with the knowledge of CSR meaning. Corporate social responsibility aims to hold corporations accountable for their actions that impact the world and society. The company can actively look for positive change or alter its business practices to minimise the negative consequences that they have previously had to endure.

At one time, companies' only social obligation was to make more money and improve the economy. The companies that had this view didn't consider the wider impact they could have had. CSR programs can help companies recognise their impact on society, and they can then develop a strategy to ensure that their impact is positive.

CSR programs can improve your company's reputation in the public's eye. If people are impressed by your business and the good you do, they're more likely to patronise your business. Corporate social responsibility is becoming more commonplace, and customers raise the expectations of their customers. So, accountability can aid in the survival of your business.

Potential employees and stakeholders will also be looking at how your organisation is adhering to CSR guidelines when deciding to invest in or implement.

Also Read: Learn all about Section 186 of the Companies Act, 2013

Applicability of CSR

Section 135 of Companies Act, 2013 applies to any company under the act and any earlier Companies Law, having a net worth of over ₹500 crores. This also applies to companies having a turnover exceeding ₹1,000 crores

Also, these rules apply if your company generates a net profit of more than ₹5 crores during any fiscal year. The further circular states the term "any financial year" is any one of the three previous financial years.

Corporate Social Responsibility in India

After knowing the CSR definition, let’s examine the idea that CSR does not come as a new concept in India. Many companies are active in CSR initiatives, and however, the amount is comparatively small.

In the United States, CSR activity is more of a type of voluntary expenditure than a legal obligation. In India, Heritagepeople used to follow three kinds of charitable actions. These were Dakshina, Dana and Diksha. Dakshina could be the kind that was exchanged for something. Diksha was given to facilitate your spiritual growth, and Dana could be the type that was considered to be the purest kind of charity that was done without any expectation in exchange. This was a task that people performed voluntarily and without thought.

It is a legal requirement for businesses in India to adhere to CSR actions. In other nations like France, the UK, Germany etc., there are guidelines for voluntary compliance.

The government of India has issued a notification under Section 135 of the Companies Act 2013 to govern CSR actions. It encourages more disclosure and transparency. 

The CSR provision is that businesses need to satisfy the criteria by spending a minimum of 2% of their annual profits over the past three years on CSR initiatives.

Some companies fail to adhere to the rules for CSR. In such conditions, they must explain their non-compliance in their board report. This is in addition to the requirement of "Comply or provide an explanation. If they fail to reason why they are not complying and cannot give a reason, they need to face the penalties.

There is No Role for the Government in CSR Monitoring

The Circular stresses that the government does not have any responsibility for monitoring CSR initiatives. It puts the company's management burden on monitoring the effectiveness and quality of a CSR project.

The circular says that the government does not have any responsibility in selecting an appropriate authority to approve and implement CSR programmes for a business. It isn't responsible for engaging experts from outside to monitor the effectiveness of CSR spending by companies.

Highlights of CSR Committee

  • Each company that falls within the requirements of the CSR regulations must form a CSR committee. This committee should include three or more directors, with at least one director who is an independent director. 
  • Private companies and unlisted companies with no requirement to appoint any independent directors should form CSR committees without an independent director. 
  • In the case of an international company, it is necessary to establish a CSR committee consisting of only two directors. Out of these, one should be an Indian resident. CSR policies must define the CSR initiatives to conduct throughout the business. 
  • The policy also specifies the number of expenses the company should make on CSR actions. 
  • The company's board of directors will examine the suggestions of CSR committee members. Then it will be able to approve the CSR policy of a business.

Implementation of Corporate Social Responsibility

Below are the ways to carry out the activities that come under Schedule VII which company needs to carry out:

  • It is only permitted in CSR-related projects or activities;
  • The company needs to execute in the local area within India and in the region where the business operates.
  • It is also executed with the aid of a registered trust or a charitable corporation in India established by a parent/subsidiary company or is not owned by any of these corporations if it can carry out similar activities for at least 3 years.
  • The company can also use 5% of CSR to provide instruction to employees and personnel of the company in the implementation of CSR actions.
  • Every eligible company needs to publish its CSR actions in isolation. However, these activities may be carried out together with other companies.

Reporting of CSR Activities

Businesses must publish an annual report on their CSR activities on their websites each year. The Board of Directors of the business has to create a report annually about CSR activities using the perfect format. The report should contain a short overview of CSR policy. 

It should also have the composition of the CSR committee and the average net profit for the three previous financial years, and the amount the company used for CSR activities. If the business fails to use its net profit on CSR activities, the company has to justify the non-compliance in the Board report.

Also Read: Article of Association Meaning - What Are Different Forms of Article of Association & Importance Explained

Penalty

The Board members of directors of the company need to make public all information about its CSR policy and its implementation on an annual basis. If the company does not comply with CSR regulations, the company is subject to a fine that will not exceed ₹50,000, and the maximum limit is ₹25,00,000.

Furthermore, the default Officer is punishable by a fine that is not lower than ₹50,000, and it could go up to ₹5,00,000. Or imprisonment for 3 months or a combination of both. The act provides penalties in case of non-disclosure of details about CSR actions. However, it does not make them accountable in case of not engaging in CSR actions.

Conclusion

The circular reaffirms that activities are not eligible as CSR-related expenses if they:

  • Expenses to fulfil the requirements of regulatory statutes.
  • Benefit only family members of employees one-off events.
  • Contributions to political parties.
  • Activities that the company conducted outside of India.
  • Activities in the regular business activities.

The circular also states that the corpus contribution of trusts or societies for Section 8 companies etc., can be considered a CSR expenditure if the corporation is solely created to carry out CSR actions. It can also happen when the corpus is established exclusively to serve a specific purpose directly related to an item on Schedule VII.

FAQs

Q: What does section 135 of the companies act dictate?

Ans:

Section 135 of the Act dictates that each company with a specific turnover, net profits, or net worth must compulsorily establish a CSR committee.

Q: What is the importance of corporate social responsibility?

Ans:

CSR demonstrates that your business is interested in various social issues instead of just the issues that affect your profit margins. It will attract many customers who share such values.

Q: What is the applicability of CSR?

Ans:

All companies registered under the Section 135 of the 2013 Act Companies Act need compliance with his act.

Q: What is the corporate social responsibility definition?

Ans:

The term CSR or Corporate Social Responsibility refers to policies and practices that corporations undertake to positively impact the world.

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