This Article is written by Ashima Gupta student of VIPS, Delhi.
Corporate Social Responsibility means a company’s sense of responsibility towards the society and the social and ecological environment in which the company operates. A company operates and Corporate Social Responsibility is conducting business while also considering social good. CSR is an act in which the economic and social concerns are incorporated in the business model. Corporate social responsibility may be a broad concept which will take many forms counting on the corporate and industry. Through CSR programs, and volunteer efforts, businesses can benefit society and also at the same time boost their brands. Corporate Social Responsibility has also become an important tool to work in the line of Sustainable Development Goal. The Corporate Social Responsibility Practices in India is based on a realistic approach. The focus is on development through partnership and alliances with sustainable development approaches.
Section 135 of the Companies Act, 2013 and Companies (Corporate Social Responsibility) Rules, 2014 are certain provisions which deal with Corporate Social Responsibility. Schedule VII provides the list of the activities that the companies are allowed to undertake as a part of the CSR initiative.
Section 135 of the Companies Act, 2013 makes it mandatory for every company that has a net worth of rupees five hundred crore or more, or a net profit of rupees five crore or more turnover of rupees one thousand crore or more during any financial year to constitute a Corporate Social Responsibility Committee of the Board. In the case of Bilfinger Neo Structo Private Limited it was held that in cases where neither of the three criteria being fulfilled the provisions of CSR would not be applicable.
COMPOSITION AND FUNCTION OF THE CSR COMMITTEE
The CSR committee should be consisting of three or more directors, out of which at least one director shall be an independent director. If no independent director is required to be appointed under sub-section (4) of Section 149 then the CSR Committee can be constituted without an independent director.
The composition of the Corporate Social Responsibility Committee has to be disclosed in the Board’s report under Section 134(3).
The primary function of the CSR committee is to formulate and monitor CSR policies. The CSR committee is supposed to formulate the policies and recommend the same to the board of directors. The CSR policies have to be formulated in accordance with Schedule VII. The CSR committee is also required to decide the budget that has to be spent on the CSR activities.
BOARD’S RESPONSIBILITY IN IMPLEMENTATION OF CSR
The duty of the board shall be in accordance with Section 135(4) of the Companies Act. The following are the key responsibilities of the board.
- The board is required to approve the CSR policies recommended by the CSR committee.
- The Board is required to specify the details about the policy developed and implemented by the company on the CSR initiatives taken during the year under Section 134 (3)(o).
- As per rule 9 of the Companies (Corporate Social Responsibility) Rules, 2014 the board is required to display the CSR policies on the company’s website.
- The board has to ensure that the CSR activities are undertaken by the Company.
The Company is required to spend at least 2% of the average net profit made during the three immediately preceding financial years.
THE DISCLOSURE REQUIREMENTS
An annual report on the CSR activities of the company has to be included in the prescribed format. The following are some things that have to be included in the report:
- The report has to include brief outline of the company’s CSR policy
- The composition of the CSR committee
- The average net profit of the company for the preceding 3 financial years
- Prescribed CSR expenditure i.e. two per cent of the average net profit
- A responsibility statement of the Corporate Social Responsibility Committee
- Details of spent/unspent CSR during the financial year
As per Schedule VII the following are some of the activities that can be undertaken as part of the Corporate Social Responsibility of the Company,
- Activities related to promotion of education and gender equality
- Activities empowering women;
- Activities that help in reducing child mortality
- Activities improving maternal health;
- Activities that are related combating the human immunodeficiency virus, malaria acquired immune deficiency syndrome and other diseases;
- Management of disasters ,including rehabilitation, relief and reconstruction activities
- Providing Training to promote nationally recognised sports, rural sports, Olympic sports and Paralympic sports
- Activities should be undertaken to protect of art, culture and national heritage including restoration of sites and building of historical importance and works of art
- Activities relating to employment enhancing vocational skills;
- Activities that ensure sustainability of environment
- Activities related to social business projects
- Activities related contribution made to the Prime Minister’s National Relief Fund or any other fund set up by the Central or the State Governments for socio-economic development and funds and relief for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, women and minorities
- Any other matter that may be prescribed.
Section 135(7) provides for the penalty in cases where the CSR policy is violated.
In case of Companies: Twice the amount required to be transferred to the Unspent Corporate Social Responsibility Account or the fund referred to under Schedule VII or Rs 1 crore whichever is less.
In case of officer: The officer is liable to pay one-tenth of the amount to be transferred to the Unspent Corporate Social Responsibility Account or the fund referred to under Schedule VII or Rs 2 lakh whichever is less.
MEASURES FOR CORRECTING VIOLATION OF CSR PROVISION
- In cases where the company fails to spend the threshold amount toward CSR activities, the reasons for the same has to be specified in Board’s report made under Section 134 (3) (o).
- A revised report can be prepared under Section 131 to seek the approval of the Tribunal in cases where the company fails to make the necessary CSR disclosures in the Board’s Report.
- Under Section 441 the company and its officers can rectify any violation of the CSR provision by applying for compounding of offence.
In the case of Technicolor India (P.) Ltd. v. Registrar Of Companies, the company had a CSR committee and met the net profit criteria given U/ s 135 of the Companies Act, 2013. The Company spent some amount as per their CSR Policy during the fiscal year 2017-18, which remained below the threshold mentioned in Section 135 (5) of the Act and the reason for it was provided by the company in its Director’s Report. However later it was discovered that the amount spent on the CSR and associated detail was incorrectly captured in the Director’s report hence the company forwarded an application to NCLT Bangalore. The tribunal allowed the application of the company to revise its report and gave the liberty to the company to file for compounding under section 441 of the Act.
In the case of M/s. Chintamani Estates Pvt. Ltd. there was a shortfall of expenditure that was required to be made under the provisions of the Act. The issue in this case was that this shortfall was not disclosed in the company’s statements. The firm contended that it did not have any mala fide intentions in doing so and it did make a revision in the Directors’ Report to accommodate the same. The bench of the Mumbai Court compounded off the debt.
In the case of M/s. Hira Power and Steels Limited, the court stated that the quantum of the Corporate Social Responsibility can only be quantified after the finalization of accounts at the closure of the Books of Accounts of a particular financial year. As a result, the amount to be contributed for a charitable purpose as Corporate Social Responsibility can only be intimated to the concerned authorities thereafter i.e. after the accounts of a particular financial year has been finalised.
The main purpose for legislating Corporate Social Responsibility was to bring a change in the attitude of the corporate institutions. A company uses the resources available in the society and it thus has a responsibility to give back to the society as well. The CSR provisions are a step towards holding the corporate institutions and companies accountable and with the mandatory provision in place, the companies now have a duty to consider the social and ecological impact of their business decisions. The Act provides for hefty penalties to be imposed in case there is contravention to the Corporate Social Responsibility provision. The officers of the company can also be made liable. This has increased the accountability of the companies. Though the new laws have definitely created a sense of responsibility in corporate institutions there are still some shortcomings that need to be addressed going forward.
- Companies Act 2013
- Corporate Social Responsibility (CSR) as Per Companies Act, 2013https://taxguru.in/company-law/corporate-social-responsibility-csr-companies-act-2013.html
- M/s. Hira Power and Steels Limited
- Re: M/s, Chintamani Estates Pvt. Ltd. 2017 SCC OnLine NCLT 11240
- Technicolor India (P.) Ltd. v. Registrar Of Companies 2020 (7) TMI 423