Corporate Social Responsibility (“CSR”) as a formal concept did not exist in India prior to the enactment of the Companies Act, 2013. The concept evolved with the liberalization of the economy and the advent of various welfare centric laws such as Labour laws and Environment protection laws, etc. Recently, the concept of CSR has been formalized in the Companies Act, 2013 under section 135. The Ministry of Corporate Affairs has also published a notification known as the Companies (Corporate Social Responsibility Policy) Rules, 2014 to come into effect on 1st April 2014 to give effect to the aforesaid provisions in the companies Act, 2013. These developments in the field of Corporate Social Responsibility are important steps to create awareness and social consciousness among companies in India.
CSR mandatory under the Companies Act
Section 135 of the Companies Act makes it mandatory for companieshaving 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 any financial year to comply to the provisions laid out therein.The companies fulfilling the above criteria must constitute a CSR Committee according to the provisions of the said section. The Committee is entrusted with the function of preparing and formulating the CSR Policy of the company which shall disclose the activities, whether undertaken individually or in the form of a project or programme by the Company. It shall also allocate the expenditure to be incurred in such activities and design an efficient and transparent monitoring mechanism to be followed by the Board to ensure that the activities listed in the Policy are implemented by the company. The Board is required to approve the CSR Policy and ensure that the expenditure incurred in the activities stated are at least 2% of the average net profits of the Company in the immediately preceding three financial years.
CSR Rules effecting provisions under Section 135
The abovementioned Rulesunder Rule 5 lays down specific provisions regarding the composition of the CSR Committee for unlisted public or private companies and foreign companies covered under the Rule. Under Rule 4 the CSR activities may be implemented by a Company in collaboration with a trust, society or company according to the specifications laid down under the Rules. These activities must fall under any of the heads contained in Schedule VII of the Companies Act, 2013 which includes eradicating extreme hunger, promotion of education, environmental sustainability amongst others. The rules specifically provide that the activities which do not fall under the enlisted heads under Schedule VII and the expenditures incurred in activities performed in the normal course of business shall not be considered as CSR expenditure. Moreover under Rule 6, surplus arising out of CSR activities will not form a part of the business profit of the Company. Additionally CSR activities undertaken outside India or for the benefit of its employees and their families as well as any direct or indirect donations or contributions made to political parties shall not amount to CSR expenditure.
For effective implementation of the above provisions Rule 8 read along with the Annexure provided at the end of the Rules provide for a detailed report to be submitted with the Annual Report of the Company including the projects and programmes undertaken during that financial year and the detailed break-up of the expenditure incurred on the same. In case of failure to spend the prescribed minimum 2%, the Report must include reasons for such failure. Rule 9 also provides for disclosure of the CSR Policy of the Company along with the projects and programmes undertaken by it on its website if any.
The provisions of the CSR encourages companies to volunteer to engage in welfare activities and activities to improve their surroundings and local areas and is recognized as an important step towards achieving global standards of business excellence. However, the CSR Rules and provisions although mandatory do not prescribe any penalty for its non-compliance.