Corporate Social Responsibility (CSR) Compliance

Section 135 of the Companies Act, 2013 and The Companies (Corporate Social Responsibility Policy) Rules, 2014 deals with Corporate Social Responsibility.

Corporate Social Responsibility (CSR) attributes to the voluntary efforts made by businesses to contribute to a better society and a cleaner environment. It is an idea through which companies incorporate social and other beneficial issues into their business activities for the improvement of their stakeholders and society.

Section 135 of the Companies Act, 2013 (“Act”) states that specific companies are required to contribute a defined amount towards CSR initiatives. According to the Act, ‘Corporate Social Responsibility’ refers to and encompasses, but is not restricted to:

• Projects or programs associated with activities described in Schedule VII to The Act.
• Projects or programs concerning those activities that are executed by the Board of Directors of a company in compliance with the recommendations of the CSR Committee of the Board as per the established CSR Policy, along with the stipulation that such policy will address subjects outlined in Schedule VII of the Act.

Applicability on Companies for Corporate Social Responsibility under the Companies Act, 2013

If the Company fulfill the following criteria immediately preceding financial year shall be eligible for the Corporate Social Responsibility:

• Rs 500 Crore net worth or more
• Rs 1000 Crore turnover or more
• Rs 5 crore net profit or more Applicability of Corporate Social Responsibility Committee
• Every Company must create a (CSR) Corporate Social Responsibility committee in which CSR provisions is applicable
• The CSR Committee should be made up of three or more directors, with at least one director being an independent director.
• An unlisted public company or a private company may form its CSR Committee without any independent director if an independent director is not mandated.
• A private company with only two directors on its Board must set up its CSR Committee with those two directors.
• For a foreign company, the CSR Committee must consist of at least two individuals, one of whom must be a person residing in India authorized to receive in place of foreign company – the services of notices and other documents. Moreover, the second person must be appointed by the foreign company.

Role of Corporate Social Responsibility Committee:

• Develop a Corporate Social Responsibility Policy that will delineate the company's activities in the areas or subjects specified in Schedule VII and suggest it to the Board.
• Suggest the amount of expenditure that should be undertaken for the actions mentioned in Schedule VII.
• Monitor the Corporate Social Responsibility Policy of the company from time to time.
• Formulate and recommend to the Board an annual action plan in execution of its CSR policy, which shall include the items mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014.

Function of Board of Directors

• The Board of Directors' role in the implementation of corporate social responsibility is laid out below:
• The CSR policy for the Company must be approved by the Board after the CSR Committee's recommendations have been reviewed.
• The Board must ensure that only the activities specified in the policy are followed.
• The Board of Directors will ensure that the company allocates a minimum of 2% of the average net profits earned during the three immediately preceding financial years in compliance with the CSR policy each financial year.
• If a company has not completed three financial years since its establishment, the average net profits will be determined for the financial years since its incorporation.
• The Board’s Report will reveal:
  •     CSR Committee’s structure
  •     The details of CSR Policy
  •     If CSR expenditure falls short of 2% according to CSR Policy, the reasons for the unspent amount, along with specifics     about the transfer of the unspent amount concerning an ongoing project to a designated fund (transfer within a six-month period following the conclusion of the financial year).

CSR Reporting

Regarding CSR Reporting, the stipulations are as follows:

• The Board’s Report concerning any fiscal year commencing on or after April 1, 2014, must include an annual report on CSR.
• For a foreign company, the balance sheet submitted should include an Annexure pertaining to a report on CSR.

CSR Policy

The activities that the Company will pursue as specified in Schedule VII of the Act are detailed in the CSR Policy. These activities must not be concurrent with those that the company conducts in its regular business operations. Moreover, the Act defines the following in regard to the CSR Policy:

• The Board must ensure that the contents of the CSR Policy are available on the company’s website.
• The activities listed in the policy need to be executed by the company.
• The company is permitted to collaborate with other companies to engage in projects or programs or CSR activities and must report separately on such initiatives or projects.
• The CSR policy will oversee the projects or programs.

List of Activities that Qualify as CSR are mentioned in the schedule VII such as:

• CSR emphasizes removing hunger, poverty and malnutrition. They promote health care including preventive health care and sanitation facilities (including contributions to Swachh Bharat Kosh) which are set up by the central government to promote sanitation and safe drinking water.  
• They promote education which includes special education, livelihood enhancement projects and job-oriented vocation skills especially among children, women, elderly, and differently abled individuals.
• They promote gender equality, empower women, setting up homes/ hostels for women and orphans. They also set up day care centers, old age homes, and other facilities for senior citizens and offer measures for reducing inequalities faced by social and economically backward groups.
• They ensure ecological balance, environmental sustainability, protection of flora and fauna, agroforestry, animal welfare and conservation of natural resources. They also maintain quality of soil, air and water which includes contribution to the clean Ganga fund by Central Government for the revival of river Ganga.  
• They protect natural heritage, restore art and culture including buildings and sites of historical importance and setting up public libraries. They also promote and develop traditional art and handicrafts.
• They provide measures for the benefit of war widows and their dependents, (CAPF) Central armed police forces, (CAMF) Central para military forces veterans and their dependents including widows and armed force veterans.   
• training to promote, paralympic sports, Olympic sports, rural sports and nationally recognized sports,
• For the socio-economic development and relief and welfare of scheduled caste, tribes and other backward classes, minorities and women, they contribute to the Prime minister’s national relief fund or Prime Minister’s citizen assistance and relief in emergency situations fund (PM CARES Fund) and other funds by central government.
• They contribute in research and development in science, technology, engineering and medicine fields funded by Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government.
• They also make contributions to public funded Universities Department of Biotechnology (DBT); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH) ,Indian Institute of Technology (IITs); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organization (DRDO); Indian Council of Agricultural Research (ICAR); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Indian Council of Medical Research (ICMR) and Council of Scientific and Industrial Research (CSIR) engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs)
• Rural development projects
• Slum area development
• Disaster management, which includes rehabilitation, relief, and reconstruction activities.

Net Profit for CSR Applicability

Every company which abide by the CSR provisions must spend 2% of the average net profits made during the previous three years according to the CSR policy. The computation of net profit for CSR is as per Section 198 of the Companies Act, 2013.

Section 198 states that in calculating a company's net profits, consideration should be given for the grants and subsidies obtained from any governmental or public entity established or empowered for this purpose.

Transfer and Use of Unspent Amount

A company is required to transfer any unspent CSR amount to the designated funds within six months from the conclusion of the financial year:

• A donation made to the Prime Minister’s National Relief Fund.
• Any other fund initiated by the central government with regard to socio-economic development, relief, and welfare of scheduled castes, minorities, tribes, women, and other backward classes.
• A donation made to public sector undertaking and an incubator supported either by the central government, the state government,
• Contributions made to National Laboratories and Autonomous Bodies, Public-funded universities, Indian Institute of Technology (IITs)

In situations where there remains an unspent amount related to an ongoing project under the company’s CSR policy, the company shall deposit the unspent amount into a dedicated account to be established by the company, referred to as ‘Unspent Corporate Social Responsibility Account’, in any scheduled bank within 30 days from the end of the financial year.

In accordance with the CSR policy, the business is required to allocate the funds in the "Unspent Corporate Social Responsibility Account" to its commitments within three financial years of the transfer.

If the company does not utilize the funds by the end of the three financial years, the funds are to be transferred to the specified fund outlined above within a timeframe of 30 days following the conclusion of the third financial year.

Fines and Penalties for Non-Compliance

If a company does not adhere to the requirements concerning CSR expenditure, transferring, and utilizing the unspent funds, the company will face a penalty of Rs. 1 crore or double the amount that should have been transferred by the company to the CSR fund listed in Schedule VII of the Act or the Unspent Corporate Social Responsibility Account, depending on which amount is lesser.

Additionally, each officer of that company who fails to comply will be obligated to pay Rs. 2 lakh or one-tenth of the amount that needs to be transferred by the company to the CSR fund detailed in Schedule VII or the Unspent Corporate Social Responsibility Account, whichever amount is lesser.