The United Nations Industrial Development Organization (UNIDO) defines Corporate Social Responsibility (CSR) as “a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.” CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders. Through CSR programs, philanthropy, and volunteer efforts, businesses can benefit society while boosting their brands.
India is the one of the first country in the world which had made corporate social responsibility (CSR) mandatory, following an amendment made on 14th April to the Company Act, 2013. Corporate can after this amendment, invest their profits in areas such as education, poverty, gender equality, and hunger as part of any CSR compliance.
The Companies Act, 2013 has formulated Section 135, Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII prescribes mandatory provisions for Companies to fulfil their CSR.
Definition of Corporate Social Responsibility
Companies (Corporate Social Responsibility) Rules, 2014 under Section 2(c) defines CSR as “Corporate Social Responsibility (CSR)” means and includes but is not limited to:
(i) Projects or programs relating to activities specified in Schedule VII to the Act or
(ii) Projects or programs relating to activities undertaken by the board of directors of company of a company (Board) shall in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.
Importance of Corporate Social Responsibility
Business and Society are correlated with each other – as business fulfils the needs of society and society gives business the resources required to it. Corporate Social Responsibility (CSR) is a useful tool for any organization that wants to be renowned. Ignorance of this concept and its neglect may have effects on the image and implementation of future strategies of any type of organization. A company’s role in its community is a factor in increasing profitability, promoting company image, reducing costs, and elevating employee morale and customer loyalty, among other benefits.
Some benefits of CSR can be understood under the following heads:
Increased Employee Satisfaction
An organization where employees feel that the work they do matters and that they are valuable asset to their company feel motivated to do their best to help the organization succeed. Offering employees opportunities to volunteer in the community during regular office hours is a great opportunity for personal growth and development. Further, while doing such social work, employees act as a brand ambassador for the organization and how employees feel for their organization will be evident in their interaction with the community.
Improved Public Image
In today’s world, those organizations associated with corporate responsibility are gaining fast praise and recognition for their contributions. When local communities witness companies making an effort to help out in one way or another, it greatly aids those companies in receiving a positive reputation and an increase in business.
Increased Customer Loyalty
Customers are loyal to brands that share a set of corporate beliefs and values that align with their own. People today prefer brands that center upon authenticity, local sourcing, ethical production, a great shopping experience, and giving back to society. CSR programs are an opportunity for organizations to display their corporate values and reach those customers who share a similar set of ideals.
Corporate Social Responsibility under Companies Act 2013
Section 135 of the Companies Act 2013 gives the provision for Corporate Social Responsibility. The section reads as follows:
(1) 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 consisting of three or more Directors, out of which at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more Directors.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company in areas or subject, 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.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. 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:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred to in sub-section (6), transfer such unspent amount to a Fund specified in Schedule VII, within a period of six months of the expiry of the financial year.
Provided also that if the company spends an amount in excess of the requirements provided under this sub-section, such company may set off such excess amount against the requirement to spend under this sub-section for such number of succeeding financial years and in such manner, as may be prescribed.
Explanation.—For the purposes of this section “net profit” shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.
6) Any amount remaining unspent under sub-section (5), pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its Corporate Social Responsibility Policy, shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
(7) If a company is in default in complying with the provisions of sub-section (5) or sub-section (6), the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or one crore rupees, whichever is less, and every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.
(8) The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.
(9) Where the amount to be spent by a company under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such Committee provided under this section shall, in such cases, be discharged by the Board of Directors of such company.
Understanding the Provision of Section 135
Companies Covered under Section 135
Rule 3 of the CSR Rule 2014 states that Every company including its holding or subsidiary, and a foreign company having its branch office or project office in India which fulfils the criteria specified in sub-section (1) of section 135 of the Act shall comply with the provisions of section 135 of the Act.
Sub-section (1) of the section states the applicability of the CSR Provisions. The provision applies to companies having:
- Net worth of rupees 500 crore or more, or
- Turnover of rupees 1000 crore or more, or
- Net profit of rupees 5 crore or more during any financial year
(Net worth for the purpose of this section includes: Paid up Share Capital + all reserve (including free reserves and securities premium account) – accumulated losses.)
If any of the above conditions are fulfilled by a company during the immediately preceding financial year, then such companies constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
Hence, these rules apply the following class of companies if they fulfil the criteria mentioned under sub-section (1)
- Every company, and
- Holding company, and
- Subsidiary company, and
- Foreign company
In the case of Bilfinger Neo Structo Private Limited it was held that; The provisions of CSR would not be applicable on a company where neither of the three criteria- the net worth nor turnover nor the net profit is being met by the company are being fulfilled.
Disclosure of Board Report
Sub-section (2) states that the Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
Role of Corporate Social Responsibility Committee
Sub-section (3) states the work of CSR Committee. It states that –
- CSR Committee will formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company.
- It shall also recommend the amount of expenditure to be incurred on the activities.
- It shall monitor the CSR Policy of the company.
Duty of Board of Directors
Sub-section (4) states that the Board shall take the recommendations made by the CSR Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website.
Further, it shall be the duty of the Board that the activities included in the Corporate Social Responsibility Policy are carried-out by the company.
Amount to be spent on Corporate Social Responsibility
Sub-section (5) states that the Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, or,
When company has not completed three financial years since its incorporation, during such immediately preceding financial year, shall be spent for every financial year, shall be spent for every financial year commencing from 1st April 2014.
Unspent Corporate Social Responsibility Funds
Sub-section (6) talks about the remaining unspent amount of a company in pursuant to any ongoing project pursuance of its Corporate Social Responsibility Policy.
As per The Companies (CSR Policy) Rules, 2014, ‘Ongoing Project’ means a multi-year project undertaken by a company in fulfilment of its CSR obligations, whose timeline does not exceed three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification.
- In such conditions, the funds will be transferred by the company within a period of thirty days from the end of the financial year to a special account which is to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account.
- Such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer.
- If the company fails to do the same, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
Penalty in cases of non-compliance with the provisions of section 135
Sub-section (7) talks about the penalties in cases of default in complying with provision sub-section (5) or (6).
Liability of company – the company shall be liable to a penalty of twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, or one crore rupees, whichever is less.
Liability of officer in default – every officer of the company who is in default shall be liable to a penalty of one-tenth of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or two lakh rupees, whichever is less.
Special Direction by Central Government
Sub-section (8) states that the Central Government may give any general or specific directions to a company or class of companies to ensure the compliance of provisions of section 135, and such company or class of companies shall comply with the provisions.
Constitution of the CSR Committee
Rule 5 of the CSR Rules states the following regarding the formation of CSR Committee:
- Minimum 3 or more directors must form CSR Committee.
- An unlisted public company or a private company shall have its CSR Committee without any independent director if an independent director is not required.
- A private company having only two directors on its Board shall constitute its CSR Committee with two directors
- In case of a foreign company, the CSR Committee shall comprise of at least 2 persons of which one person shall be a person resident in India authorized to accept on behalf of the foreign company – the services of notices and other documents. Also, the other person shall be nominated by the foreign company.
Corporate Social Responsibility Policy
Rule 6 of the CSR Rules lays down the provision of CSR Policy. It states that the CSR Policy among other things shall include –
- a list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and
- monitoring process of such projects or programs.
Further, the activities should not the same which are done by the company in its normal course of business and the Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the activities included in Schedule VII.
List of Activities under Schedule VII of Companies Act, 2013
Schedule VII of the Act lays down the activities which a company can undertake for fulfilment of their CSR obligations. The activities include:
- eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water;
- promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
- promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
- ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund setup by the Central Government for rejuvenation of river Ganga;
- protection of National Heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
- measure for the benefit of armed force veterans, war widows and their dependents, Central Armed Police Forces (CAPF) and Central Para Military Forces (CPMF) veterans, and their dependents including widows;
- training to promote rural sports, nationally recognized sports, Paralympic sports and Olympics sports;
- contribution to the Prime Minister’s National Relief Fund or Prime Minister’s Central Assistance and Relief in Emergency Situations Fund (PM CARES Fund) or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Schedule Tribes, other backward classes, minorities and women;
- (a) Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and (b) Contributions to public funded Universities; Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH); Ministry of Electronics and Information Technology and other bodies, namely Defense Research and Development Organisation (DRDO); Indian Council of Agricultural Research (ICAR); 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, including relief, rehabilitation and reconstruction activities.
CSR Activities undertaken by various companies in India
In FY21, as many as 1,619 companies spent on 8,000 CSR projects.
94% of the total expenditure during the year was done by 1,599 non-Public Sector companies. Reliance Industries spent Rs 922 crore and Tata Group’s flagship company Tata Consultancy Services was the second highest spender at Rs 674 crore while Wipro was third, with Rs 246 crore. Overall, Tata Group companies collectively spent nearly 1,000 crore on CSR in the year.
CSR Activities done by some well-known companies:
ITC – ITC has educated about 2,52,329 children through its 2,334 Supplementary Learning Centres. They have also supported empowered about 15378 women members through 1183 self – help groups.
Tata Power – Tata Power has made it its topmost priority to empower women through its Self-Help Groups in Kutch Region of Gujarat. This initiative provides financial aid and loans for housing, purchasing cattle, capital for business, education, marriage and medical purposes.
Infosys – They have takes up projects like the restoration of water bodies in Karnataka and metro station construction in partnership with Bangalore Metro Rail Corporation Limited. Also, they are making a contribution in Sports through their GoSports Foundation. Their CSR initiative also includes a relief fund for Tamil Nadu, Karnataka and Kerala.
Reliance – Reliance has taken up the initiative of securing the life of villagers of Balangir district. They have a life insurance programme for them. The “Education for All” initiative was launched to provide access to quality education in India to everybody. They work to protect the right to education of underprivileged children, girl-child and differently-abled. They also contribute to disaster relief funds.
Tata Steel – Tata Steel, for the last 100 years, has been committed to the social development and upliftment of Jharkhand. The agenda of their CSR committee is to improve the quality of life of the communities it operates in. They also launched a train called “Lifeline Express” in 1991, a running hospital, that serves the needy regions of India. They have done numerous done AIDS awareness programmes.
AMUL – Over the years, Amul has contributed to rural health and development through Tribhuvandas Foundation. They have also established Swarnjayanti Gram Swarozgar Yojana, a holistic self-employment programme in Kheda district. They also successfully run tree plantation drives, blood donation camps and rural sanitation programmes. They also provide scholarships through their Amul Scholar schemes.