Corporate Social Responsibility (CSR) attributes to conventions and protocols embarked by enterprises with an aim of construing a positive impact on the society. By practicing CSR, businesses tend to get conscious of the impact they are having on various aspects of society, including economic, social, public health, promoting education, and environmental, etc.
Section 135 of Companies (Corporate Social Responsibility) Rules, 2014 and Schedule VII under Companies Act, 2013 have made CSR a mandatory and a statutory obligation, making India the first country to have done so.
Every company falling in any of the following categories shall constitute a CSR Committee:
- net worth of Rs. 500 crore or more or
- turnover of Rs. 1000 crore or more or
- net profit of Rs. 5 crore or more
CSR AMOUNT EXPENDITURE
Section 135 (1) gives us clear idea about the amount of expenditure to be done by companies falling under the criterion. It provides solutions for both excess and less expenditure as required by the law.
An eligible company shall:
- Spend at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of Corporate Social Responsibility Policy, and
- If the company spends in excess of the required amount, such company may set of that excess amount in subsequent years. This is because of the reason that it is not necessary that the whole amount is spent in the same year, when the CSR Project is ongoing project (multi-year project) not exceeding three years.
- If the required amount is not spent, pursuant to the ongoing project, then the unspent amount shall be transferred to a special account to be opened with a Scheduled Bank which shall be called as the Unspent Corporate Social Responsibility Account.
CONSTITUTION OF CSR COMMITTEE
- It’s not mandatory for every company falling under criterion of CSR to constitute CSR Committee
- Where the amount to be spent by a company, does not exceed INR 50 lakhs, the requirement for constitution of the Corporate Social Responsibility Committee shall not be applicable. In this case, the functions of CSR Committee shall be discharged by the Board of Directors.
DISCHARGING CSR ACTIVITIES
Companies (Corporate Social Responsibility Policy) Amendment Rules 2020, brought a specific criterion of how and from which route CSR activities are to be discharged by the eligible company.
It prescribes that the CSR activities shall be discharged by the company itself or by the following ways:
- a company which is incorporated under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80 G of the Income Tax Act, 1961 (43 of 1961): founded by the company, either singly or together with any other company,
- a company which is incorporated under section 8 of the Act or a registered trust or a registered society, founded by the Central Government or State Government
- a company incorporated under an Act of Parliament or a State legislature
- a company incorporated under section 8 of the Act, or a registered public trust or a registered society, registered under section 12A and 80G of the Income Tax Act, 1961, and retaining entrenched credentials of at least three years in venturing such similar activities.
INTRODUCTION OF FORM CSR-1
- Each of the entity who contemplates to shoulder any CSR activity, shall get itself registered with the Central Government by filing form CSR-1 electronically with the Registrar, w.e.f 1st April, 2021
- Such Form CSR-1 shall be verified digitally by a Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice
- Subsequent to form submission, a unique CSR Registration Number would be generated impromptu by the system
KEY PROVISIONS RELATED TO CSR
- ADMINISTRATIVE OVERHEADS are the general management and administrative expenses to be performed by the company for discharging CSR activities but it does not include designing, implementation, monitoring CSR Project. Rule 7 provides that the administrative overheads shall not exceed five percent of total CSR expenditure of the company for the financial year.
- INDEPENDENT AGENCY: Companies with an average CSR obligation exceeding INR 10 crore in the three preceding financial year will have to employ an Independent Agency to assess the CSR impact
- EXPENDITURE: Rule 7 provides that any profits from CSR activities shall not form part of business profit. It shall be used for the CSR Project only. However, if the company spends any excess amount than the required amount, that shall be set off in succeeding financial years. In case of any retained CSR amount, the same shall be transferred by the company to any fund constituted in schedule VII of the Act.
- WEBSITE DISPLAY: Disclosure of the composition of the CSR Committee, and CSR Policy and Projects approved by the Board is mandatory to be displayed on the website for public access.
- INTERNATIONAL ORGANISATION: The concept of International Organizations have been brought through these amendments. It means an organization notified by the Central Government as an international organization under section 3 of the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), that happen to be falling under the provisions of the said Act. The eligible company may engage international organization for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy.
PENALTIES FOR DEFAULT
Although there is no penalty for default of non expenditure of the required amount, but the company have to disclose the reason for non expenditure in the Board Report.
- If the company fails to give disclosure for the same and fails to follow the provisions for setting off the excess expenditure or transferring the unspent amount to special account, then the company is liable for penalty.
- The amendment brought strict penalties in this regard.
- If a company contravenes the aforesaid facts, it shall be liable to a penalty of twice the amount or INR 1 crore, whichever is less, and every officer who is in default shall be liable to a penalty of one-tenth of the amount required or INR 2 lakhs, whichever is less.
Besides giving effect to changes introduced in Section 135 of Companies Act, before 2021 regarding transfer of unspent CSR amount and regarding setting off of excess CSR expenditure, the Companies (Corporate Social Responsibility Policy), Amendment Rules, 2021 have introduced new rules regarding engagement of International Organizations, impact assessment of CSR contributions etc.
Although some concepts such as meaning of CSR, CSR Policy, CSR Implementation, were present in earlier rules, it appears to be more detailed and structured in amended rules.
The new provisions were the need of the hour, as they have taken away the discretion of the company, as well as enhanced clarity and brought uniformity in procedures to be followed in certain respects.
Although some provisions are indefinite, like transferring of unspent CSR amount into funds already mentioned in Schedule VII, due to non-establishment of “National CSR Fund” till now; the overall cap of 5% Administrative Overheads has also brought certain concerns.
Considering the amendments as a whole, it has led to the path of better Governance of the companies for Corporate Social Responsibility.