This article is to understand the provisions of Section 135 of the Companies Act, 2013 (Act) in relation to the Corporate Social Responsibility (CSR).
CSR implies a concept, whereby companies decide voluntarily to contribute to a better society and a cleaner environment – a concept, whereby the companies integrate social and other useful concerns in their business operations for the betterment of its stakeholders and society in general in a voluntary way.
Importance of Corporate Social Responsibility
Corporate Social Responsibility (CSR) is an immense term which is used to explain the efforts of a company in order to improve society in any other way.
- CSR improves the public image by publicizing the efforts towards a better society and increase their chance of becoming favorable in the eyes of consumers.
- CSR increases media coverage as media visibility throws a positive light on the organization.
- CSR enhances the company’s brand value by building a socially strong relationship with customers
- CSR helps companies to stand out from the competition when companies are involved in any kind of community.
Applicability of Corporate Social Responsibility
In terms of the Act, every company having
- Net worth of rupees five hundred crore or more, or
- Turnover of rupees one thousand crore or more, or
- A net profit of rupees five crore or more
during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board.
A foreign company having its branch office or project office in India, which fulfills the criteria specified above
However, if a company ceases to meet the above criteria for 3 consecutive financial years then it is not required to comply with CSR Provisions till such time it meets the specified criteria.
Therefore to decide the applicability of CSR, three parameters were fixed. First parameter is Net worth of the Company, second is Turnover and third is net Profits of the Company. A company qualifies any of the above parameters is required to comply the provisions of the Act related to CSR.
Composition of the Corporate Social Responsibility Committee
- Corporate Social Responsibility Committee (CSRC) of the Board shall consist three or more directors, out of which at least one director shall be an independent director.
- Further, where a company is not required to appoint an independent director under sub-section (4) of section 149 of the Act, it shall have in its CSRC two or more directors.
- Consisting of 2 directors in case of a private company having only two directors on its Board
- Consisting of at least 2 persons in case of a foreign Company of which one person shall be its authorised person resident in India and another nominated by the foreign company
Duties of the CSR Committee
- The CSR Committee shall formulate and recommend a CSR policy to the Board. CSR policy shall point out the activities to be undertaken by the company as enumerated in Schedule VII.
- CSR Committee shall recommend the amount of expenditure to be incurred on the CSR activities to be undertaken by the company.
- CSR Committee shall monitor the CSR policy of the Company from time to time.
- The committee shall establish the transparent controlling mechanism for the implementation of the CSR projects or programs or activities undertaken by the company
ROLE OF CSR COMMITTEE
The CSR Committee constituted in pursuance of Section 135 of the Companies Act, 2013 shall be required to carry out the following activities:
a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
b) Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
c) Monitor the Corporate Social Responsibility Policy of the company from time to time.
Functions 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
- Recommend the amount of expenditure to be incurred on the activities referred to in clause (i)
- Monitor the CSR Policy of the company from time to time
- Institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.
Responsibility of Board of Directors (BoD):
The BoD of every company on which CSR is applicable shall:
- after considering the recommendations made by the CSR Committee, approve the CSR Policy for the Company and disclose contents of such Policy in Board report.
- ensure that the activities as are included in CSR Policy of the company are undertaken by the Company
- shall disclose the composition of the CSR Committee in Board Report
- ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy. The CSR projects/programs/activities undertaken in India only shall amount to CSR Expenditure.
Note: The Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities and shall specify the reasons for not spending whole of earmarked amount (if it fails to spend some) in Board Report.
CSR Policy elaborates the activities to be undertaken by the Company as named in Schedule VII to the Act and spend. The activities should not the same which are done by the company in its normal course of business
- A list of CSR projects or programs which a company plans to undertake specifying modalities of execution of such project or programs and implementation schedules for the same
- Monitoring process of such projects or programs
- A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company.
- The activities mentioned in the policy must be undertaken by the company
Expenses under Corporate Social Responsibility Polices
The Board of every company, which is covered under the above parameters, is mandated to ensure that the Company spends, in every financial year, at least two per cent (2%) of the average net profits of the Company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.
For the purposes of calculation of “net profit”, the calculation shall be made in accordance with the provisions of Section 198 of the Act.
Disclosure of the composition of Corporate Social Responsibility Committee
A Company covered under the above mentioned provisions is required to disclose the composition of the Corporate Social Responsibility Committee in its Board’s Report prepared under sub-section (3) of Section 134 of the Act.
Activities under CSR: The activities that can be done by the company to achieve its CSR obligations include eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing 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 and such other matters as may be prescribed.
Local Area: Under the Companies Act, preference should be given to local areas and the areas where the company operates. Company may also choose to associate with 2 or more companies for fulfilling the CSR activities provided that they are able to report individually. The CSR Committee shall also prepare the CSR Policy in which it includes the projects and programmes which is to be undertaken, prepare a list of projects and programmes which a company plans to undertake during the implementation year and also focus on integrating business models with social and environmental priorities and process in order to create share value.
The company can also make the annual report of CSR activities in which they mention the average net profit for the 3 financial years and also prescribed CSR expenditure but if the company is unable to spend the minimum required expenditure the company has to give the reasons in the Board Report for non compliance so that there are no penal provisions are attracted by it.
Display of CSR Activities on its Website
The BoD shall disclose contents of CSR policy in its report and the same shall be displayed on the company’s website, if any.
With respect to CSR Reporting, the provisions are as follows :
- The Board’s Report referring to any financial year initiating on or after the 1st day of April 2014 shall include an annual report on CSR.
- In case of a foreign company, the balance sheet filed shall contain an annexure regarding report on CSR.