Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. The purpose of corporate social responsibility is to give back to the community, take part in philanthropic causes, and provide positive social value. Businesses are increasingly turning to CSR to make a difference and build a positive brand around their Company. Section 135 of the Companies Act 2013 provides the threshold limit for the applicability of the CSR to a Company:
(a) Net worth of the Company to be Rs 500 crore or more; or
(b) Turnover of the Company to be Rs 1000 crore or more; or (c) net profit of the Company to be Rs 5 crore or more.
Corporate Social Responsibility, or CSR, can be understood as a form of corporate self-regulation integrated into the Company’s business model. This helps the Company ensure its active compliance with the law, ethical standards, and international norms. It combines economic, environmental, and social objectives with the growth of the Company and its operations.
The Companies Act, 195, did not have any sections or allied provisions mandating a company’s compliance with its rules. However, many companies in India, like Tata, Infosys, etc., were seen to be complying with various CSR policies and activities that helped them provide for the social good.
But later, in the Companies Act, 2013, through section 135, compliance with CSR was made mandatory for certain companies, clearly specified in the provisions. The government’s real intention here is to make the companies pay back a certain amount to society for the usage of the resources, which leads to a mutual upliftment.t
Provisions of the Companies Act on CSR
Many companies go beyond and tackle problems of the environment and social underdevelopment. They become a draw for ethical investors. And help improve their valuations. Finally, mandating CSR is akin to levying an additional tax and asking the companies to spend the proceeds themselves. The focus of corporate social responsibility is to boost shareholder trust and increase long-term profits sustainably and ethically by taking ownership of corporate decisions and improving them.
Section 135 of the Companies Act deals with CSR Policy, and according to section 135(1), every Company has:
- Net Worth of INR 500 Crore or more OR
- Turnover of INR 1000 Crore or more OR
- a Net Profit of INR 5 Crore or more
During any financial year, a CSR Committee and Board shall be constituted, consisting of 3 or more directors, out of which at least one director shall be independent. And this committee shall:
- Formulate and recommend to the Board a CSR Policy
- Recommend the amount to be spent on CSR
iii. Monitor the CSR Policy from time to time.
Hence, we can say that any company, including its holding, subsidiary company, and foreignCompanyy with its branch office or project situated in India, fulfilling the criteria specified under section 135 of the Act shall comply with the same along with the rules laid down under Companies (Corporate Social ResponsibilityPolicy) Rules, 2014.
Section 135(2), further requires the disclosure in Boards Report, the composition of the CSR Committee which is required to be formed. The CSR Committee would then make specific recommendations regarding the CSR policies and activities. The Company should then provide approval for the same to disclose the contents of such policy in its report and place the same on the Company’s Website. And the Company also ensures that whatever is disclosed in the report and the website is complied with as part of the CSR mandate.
The board must ensure that the Company spends 2% of the average net profits earned by the Company during the immediately preceding financial years to comply with its CSR Policy. While spending this, it should also prioritize the local areas or the area surrounding the place where they are conducting their business. This will also help the Company build its credibility and stand out to consumers and society in general.
While building or developing the CSR policies, the Company can include the following:
- eradicate extreme hunger and poverty
- promotion of education
- promoting gender equality and empowering women
- Reducing child mortality and improving maternal health
- combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria, and other diseases
- ensuring environmental sustainability
- employment-enhancing vocational skills
- social business projects
- Contribution to the Prime Minister’s National Relief Fund, Minister’s fund set up by the Central Government or the State Governments for socio-economic development and relief, and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities, and women, and
- Such other matters as may be prescribed.
By conducting CSR policies, the Company is returning to one of its stakeholders, among many others, to society. For this, we can also see that the Company adopts Trusts, Societies, and Section 8 Companies by making them take appropriate steps to carry out such programs and activities.
It should be noted that, as per section 135 of the Companies Act, any activity undertaken by a company for the upliftment and benefit of its employees and their family members cannot be termed as SR activities. This should have been done in India.
The contributions that are made by the companies in the form of political donations are not CSR Activities.
Consequences for Non-Compliance
No particular penalty is specified for defaulting on the CSR norms or provisions laid down by the Companies Act. However, the Board of Directors should explain this in their Board Report.
Computation of Average Net Profit
As per Companies (Corporate Social Responsibility Policy) Rules, 2014, Net Profit for CSR Compliance means the Net Profit of a company as per its financial statement prepared in accordance with applicable provisions of the Companies Act, but does not include the following:
- Any profit arising from the Overseas Branch or branches of the Company
- Any dividend received from other companiesthat are covered under and comply with the provisions of section 135 of the Act.
It should also be noted that, in any financial year for which relevant financial statements were prepared in accordance with provisions of the Companies Act, 1956, no recalculations shall be required following the provisions of the Companies Act, 2013.
In the case of a foreign company covered under these rules, net profit means a net profit as per the Company’s profit and loss account prepared in accordance with section 381 (1) (a) read with section 198 of the Companies Act, 2013.
Hence, we can now conclude that the CSR provisions have been included in the Companies Act, 2013, to ensure that companies return one of their most important stakeholders,l ike every other stakeholder, for the resources being used and thereby ensure that they are also uplifted and grow with the Company.
