Corporate Social Responsibility Social Performance through Regulation

LEGAL FORUM

A company may also implement its CSR programmes through non-profit organisations, such as trust, or company incorporated under Section 8 of the Act (not for profit company), or society, or foundation, or any other entity operating within India

Traditionally, the aim of doing business is to engage in activities that generate profits, while being socially responsible has remained a voluntary choice of the promoters. However, the Companies Act, 2013 (‘Act’) has introduced the concept of doing business with a social responsibility by introducing specific provisions relating to Corporate Social Responsibility (CSR). India is one of the few countries in the world to execute the concept of CSR through a statutory provision. Since CSR impacts almost every area of business operations, it is, therefore, important to understand the concept for better implementation.

This article discusses the manner in which companies need to comply with CSR provisions of the Act and the draft CSR rules made available for public comments. The implementation of the CSR provisions is likely to be effective from 2014-15, as per the draft rules.

Execution of CSR

Companies eligible for CSR: CSR is not a mere charity or donation; rather it is a way of conducting business by doing common good. CSR activities may be conducted as an ongoing programme or as a new project undertaken in normal course of business. Section 135 of the Act requires the companies (which qualify the criterion given below) to constitute a corporate social responsibility committee (CSR Committee) to undertake CSR activities:

• Net worth is RS 500 crore or more; or

• Turnover is Rs 1000 crore or more; or

• Net profit is Rs 5 crore or more during any financial year.

The company undertaking CSR shall give preference to the local area and surrounding areas of operation.

Composition of CSR Committee: Companies required to execute CSR must constitute a CSR Committee that creates a blueprint of CSR policy and monitor their execution as well. This nodal body must be constituted out of the Board of Directors of the company. It would comprise three or more directors, out of which at least one director shall be an independent director. The CSR Committee is required to reflect its composition at the time of submitting its policy. However, the requirement of number of directors still needs clarification, because a private company requires just two directors for its constitution. Therefore, a qualifying private company for CSR would be required to appoint a new director.

Mandate of CSR Committee: The CSR Committee shall formulate and recommend to the Board, a CSR policy, which shall indicate the activities to be undertaken by the company as specified in Schedule VII of the Act, extracted below:

• Eradicating extreme hunger and poverty

• Promotion of education

• Promoting gender equality and empowering women

• Peducing child mortality and improving maternal health

• Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases

• Ensuring environmental sustainability

• Employment enhancing vocational skills

• Social business projects

• Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women

• Such other matters as may be prescribed

This above list is an inclusive list only and not an exhaustive one. Further, the CSR Committee is required to recommend the amount of expenditure to be incurred on the activities chosen and monitor the CSR policy of the company from time to time. In summation, the CSR Committee is responsible for listing the CSR policy to be undertaken by the company, allocating the expenditure and monitoring the execution.

Framework of CSR Policy: The CSR Committee is required to prepare the CSR policy, which shall include the following:

• Specification of CSR projects and programmes to be undertaken

• Preparation of a list of CSR projects/programmes which a company plans to undertake during the implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same

• CSR projects/programmes of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value

• Keeping a provision that surplus arising out of the CSR activity will not be part of the business profits of a company

• Specifications of the CSR corpus would include two percent of the average net profits, any income arising therefrom, and surplus arising out of CSR activities.

The company indulging in CSR activities shall establish a monitoring mechanism to ensure that the allocated CSR corpus is spent for the intended purpose only.

Approval of the CSR Policy and Format of Annual CSR Report: The Board of every company undertaking CSR programmes shall, after taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the company. The Board report would prepare an annual report (‘Report’) of CSR policy. The Report would outline the CSR policy and the ethos of the company and would include a website link of the CSR policy. Additionally, the details as to average net profits of three preceding financial year and threshold limit of this amount i.e. two percent and the details of the expenditure done in a year in CSR are required to be mentioned in the Report. If a company fails to spend such amount, the Board shall specify the reasons for not spending the amount in the Report.

Execution of CSR Policy through Non-Profit Organisations: A company may also implement its CSR programmes through non-profit organisations, such as trust, or company incorporated under Section 8 of the Act (not for profit company), or society, or foundation, or any other entity operating within India. These bodies are just required to specify the CSR programmes being undertaking by them and establish a monitoring mechanism to ensure that their spending is for the designated purpose. Generally, only such CSR activities will be taken into consideration which are undertaken within India and are not exclusively for the benefit of the employees of the company or their family members.

Undoubtedly, conducting of CSR activities through the provisions of the Act is a welcome step towards making companies socially sensitive and returning benefits to society. In times to come, it is expected that the legislators would consider making appropriate amendment(s) in the law to provide penal consequences for non-compliances of CSR provisions.

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