OVERVIEW
Corporate Social Responsibility (CSR) refers to the ethical practices that companies engage in to contribute to the betterment of society and the environment. It involves a company's commitment to operating in a way that balances economic, social, and environmental objectives, while considering the interests of all its stakeholders. In recent years, the concept of CSR has gained significant attention as businesses have recognized the need to be more responsible and accountable to society. The Companies Act, 2013 in India has made CSR mandatory for certain companies, thereby placing a legal obligation on them to contribute to society.
The primary objective of mandating CSR is to encourage businesses to take responsibility for their actions and give back to the community. Companies are now expected to allocate a certain percentage of their profits towards CSR activities and implement sustainable business practices that benefit society as a whole. CSR can encompass a wide range of activities, including but not limited to, promoting education, healthcare, and environmental sustainability, providing aid during natural disasters, supporting social entrepreneurship, and empowering disadvantaged communities. By engaging in CSR, companies not only contribute to social welfare but also enhance their reputation and brand image. It is increasingly being seen as a crucial factor in the success of businesses as consumers are becoming more conscious of the social and environmental impact of their purchases.
APPLICABILITY OF CSR UNDER COMPANIES ACT, 2013
The Companies Act, 2013 in India mandates that companies meeting certain financial thresholds must allocate a certain percentage of their profits towards CSR activities. The criteria for applicability of CSR are as follows:
Net worth: Companies with a net worth of INR 500 crores or more during any financial year are required to spend at least 2% of their average net profits over the previous three financial years on CSR activities.
Turnover: Companies with a turnover of INR 1000 crores or more during any financial year are required to spend at least 2% of their average net profits over the previous three financial years on CSR activities.
Net profit: Companies with a net profit of INR 5 crores or more during any financial year are required to spend at least 2% of their average net profits over the previous three financial years on CSR activities.
It is important to note that these thresholds are applicable to companies based in India. Foreign companies with branches or project offices in India are required to spend on CSR only if they meet the above-mentioned criteria. The 2% spending requirement is calculated based on the average net profits of the previous three financial years. This means that if a company has not made a profit in the previous three years, it is not required to spend on CSR.
The CSR spending can be done in the form of various activities such as promoting education, eradicating poverty, promoting gender equality, ensuring environmental sustainability, and supporting social business projects. The company can choose to undertake these activities in-house or through a registered trust, society, or non-profit organization.
IMPLEMENTATION OF CSR UNDER COMPANIES ACT, 2013
The CSR activities that can be undertaken by companies include promoting education, eradicating hunger, poverty and malnutrition, ensuring environmental sustainability, employment enhancing vocational skills, promoting gender equality, and social business projects. The implementation of CSR activities is overseen by the CSR Committee, which must have at least three directors, one of whom must be an independent director. The CSR Committee is responsible for formulating and recommending a CSR policy to the board, monitoring the implementation of the policy, and ensuring that the company spends the required amount on CSR activities.
i. CSR Policy and Activities: The CSR Committee is responsible for formulating and recommending a CSR policy to the Board of Directors. The policy must specify the areas in which the company will undertake CSR activities, the manner in which the activities will be undertaken, and the amount of expenditure to be incurred on such activities. The activities that can be undertaken by companies include promoting education, healthcare, sanitation, environmental sustainability, gender equality, and social business projects, among others.
In the case of Rural Litigation and Entitlement Kendra vs. State of Uttar Pradesh (1985), the Supreme Court of India held that it is the duty of every citizen, including corporate citizens, to protect and improve the environment. This landmark judgment laid the foundation for the inclusion of environmental sustainability as one of the key areas for CSR activities under the Companies Act, 2013.
ii. Implementation of CSR Activities: Companies can undertake CSR activities in-house or through a registered trust, society or non-profit organization. They can also collaborate with other companies for the same. The activities undertaken by the company must be in line with its CSR policy and must be monitored for their effectiveness and impact.
In the case of In Re: Satyam Computer Services Ltd (2010), the Securities and Exchange Board of India (SEBI) directed the company to set up a trust to undertake CSR activities in the areas of education, healthcare, and poverty alleviation, among others. This case demonstrated the role of regulatory authorities in ensuring that companies comply with the CSR provisions of the Companies Act, 2013.
iii. Disclosure and Reporting: Companies are required to disclose their CSR activities in their Annual Report and on their website. The Annual Report must include a detailed report on the CSR activities undertaken during the year, the amount spent, and the impact of the activities on society. Companies must also report on their CSR activities to the Ministry of Corporate Affairs on an annual basis.
In the case of Shiv Nadar Foundation vs. ACIT (2019), the Delhi High Court held that CSR expenditure incurred by a company for the exclusive benefit of its employees cannot be considered as CSR expenditure. This case highlights the importance of transparency and reporting in ensuring that CSR activities are undertaken for the benefit of society as a whole.
iv. Unspent CSR Amount: In case a company fails to spend the requisite amount on CSR activities, it must provide an explanation for the same in its annual report. Any unspent CSR amount must be transferred to a special CSR account within six months of the end of the financial year and spent on CSR activities within the next three financial years.
In the case of National Legal Services Authority vs. Union of India (2014), the Supreme Court of India directed companies to set up a national fund for the welfare of transgender persons and to contribute to the fund as part of their CSR activities. This case demonstrates the role of the judiciary in promoting CSR activities for the benefit of marginalized sections of society.
V. CSR Committee: As per Section 135(1) of the Companies Act, 2013, every company that meets the financial thresholds for CSR spending must constitute a CSR Committee of the Board consisting of three or more directors, with at least one independent director. The CSR Committee is responsible for formulating and recommending CSR policies and activities to the Board of Directors. In case of non-compliance with this provision, the company can face penalties.
In the case of In Re: Harish Chandra Bajpai & Ors., the National Company Law Tribunal (NCLT) held that the CSR Committee is mandatory for companies that meet the financial thresholds for CSR spending.
vi. Monitoring and Evaluation: Companies are required to monitor and evaluate the impact of their CSR activities on a regular basis. This helps to ensure that the CSR activities are effective and aligned with the company's objectives.
In the case of Madras High Court in Ramalinga Choodambikai Mills Ltd v. The Assistant Commissioner of Income Tax, the court held that the company should maintain proper books of accounts and documents to prove that the CSR activities were undertaken in accordance with the CSR policy and that the expenditure incurred was within the prescribed limits.
vii. Penalties: Non-compliance with the CSR provisions of the Companies Act, 2013 can result in penalties for the company and its directors. As per Section 135(8), in case of non-compliance, the company shall be liable to a penalty of twice the amount required to be transferred to the CSR account, or INR 1 crore, whichever is less. The company's officers in default can also be held liable for a penalty of INR 50,000 to INR 25 lakhs.
In the case of NCLT in Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt Ltd, the NCLT held that the company and its officers in default must be penalized for non-compliance with the CSR provisions of the Companies Act, 2013.
viii. Exclusions: Certain companies are excluded from the CSR spending requirement, including companies with a turnover of less than INR 1000 crores, or net worth of less than INR 500 crores, or net profit of less than INR 5 crores during any financial year. Also, companies engaged in certain industries such as banking and insurance are exempt from the CSR spending requirement.
In the case of In Re: DLF Limited, the Securities and Exchange Board of India (SEBI) held that the exemption provided to banking and insurance companies under Section 135(5) of the Companies Act, 2013 from the CSR provisions is valid and applicable.
CONLUSION
In conclusion, it is evident that Corporate Social Responsibility (CSR) is a crucial aspect for companies in India, especially for those meeting the financial thresholds under the Companies Act, 2013. CSR activities can contribute significantly to social welfare and community development while also enhancing a company's reputation and brand value. The Companies Act, 2013 has made CSR spending mandatory for companies meeting the financial thresholds, and failure to comply can result in penalties for the company and its directors. Companies must also ensure that their CSR activities align with their objectives and monitor their impact regularly.
It is essential for companies to view CSR as a long-term investment rather than a mere compliance requirement. By engaging in sustainable and impactful CSR activities, companies can contribute to the betterment of society and the environment, while also enhancing their own sustainability and success in the long run.
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