Corporate Social Responsibility (CSR) means the contributions made by companies to a better society and a cleaner environment. It is a concept whereby companies integrate social and other useful concerns in their business operations for the betterment of their stakeholders and society in general.
Section 135 of the Companies Act, 2013 (“Act”) provides that certain companies must mandatorily contribute a certain amount towards CSR activities.
Applicability
The provisions of CSR applies to every company which fulfil any of the following conditions in the preceding financial year:
Net worth of INR 500 Crore or more, or
Turnover of INR 1000 Crore or more, or
Net profit of INR 5 Crore or more
Corporate Social Responsibility Committee
Every company falling under any of the above thresholds, 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. Where the amount to be spent by the company doesn’t exceed fifty lakh rupees, the requirement for constitution of the Corporate Social Responsibility Committee shall not be applicable and the functions of such committee shall in such cases be discharged by the Board of Directors of such company.
However, where a company is not required to appoint an independent Director within the provisions of Companies Act, 2013, it shall have its Corporate Social Responsibility Committee two or more Directors.
The Board Report under Section 134(3) shall disclose the composition of Corporate Social Responsibility Committee.
Duties of Corporate Social Responsibility Committee
- The Corporate Social Responsibility Committee shall 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* of the Companies Act, 2013.
- Recommend the amount of expenditure to be incurred on the activities identified in Corporate Social Responsibility Policy.
- Monitor the Corporate Social Responsibility Policy of the company from time to time.
*The government makes the amendment in the schedule from time to time as per the prevailing needs of the society and the people of the Country.
Duties of the Board
1. Upon receipt of recommendation provided by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy.
2. Disclose contents of the Corporate Social Responsibility Policy in the Board R
3. Place the Corporate Social Responsibility Policy on the website of the Company if any.
- Ensure that the activities included in the Corporate Social Responsibility Policy are undertaken by the Company
5. Ensure that the Company spends, in every financial year, at least two percent of the average net profit of the Company made during the three immediately preceding financial years.
CSR Expenditure
the Board of every company shall ensure that the company spends in every financial year, at-least two percent of the average net profits of the Company made during the three immediately preceding financial years [where the Company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years will be considered] the net profit shall be calculated in accordance with the provisions of Section 198 of the Companies Act, 2013.
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:
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 8[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].
If the company spends an amount in excess of the requirements, such company may set off such excess amount against the requirement to spend in the succeeding financial years.
Any amount remaining unspent 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.
Penalties
If a company is in default in complying with the provisions of sub-section (5) or sub-section (6) of section 135 of the Companies Act, 2013, 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.
Conclusion
In conclusion, the Companies Act mandates that eligible companies establish a robust Corporate Social Responsibility (CSR) framework, ensuring that businesses contribute to societal welfare. By forming a dedicated CSR Committee and mandating at least 2% of net profits towards CSR activities, the law emphasizes ethical responsibility. The provisions, including penalties for non-compliance, highlight the importance of transparency, accountability, and a focus on local communities. This regulatory approach fosters sustainable development and encourages companies to integrate social and environmental considerations into their core operations, aligning business success with societal progress.
Anshuman Aggarwal | Company Secretary, LL.B., B.com.