What is Corporate Social Responsibility in India?
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 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 which is integrated into the business model by the company. This helps the company ensure its active compliance with the law, ethical standards, and also international norms. And it integrates economic, environmental, and social objectives with the growth in the company and its operations.
The Companies Act, 1956 were not having any sections or allied provisions which mandated the company’s compliance with CSR policies. But many companies in India like Tata, Infosys, etc. were seen to be complying with various CSR policies and activities which were helping 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. And the real intention here by the Government was to make the companies pay back a certain amount to the society for the usage of the resources such that there is a mutual upliftment happening.
Provisions of Companies Act on CSR
Many companies go beyond and tackle problems of the environment and of social underdevelopment. They become a draw for ethical investors. It helps 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 in a sustainable and ethical way by taking ownership of corporate decisions and improving them.
Section 135 of the Companies Act is dealing 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 shall constitute a CSR Committee and Board consisting of 3 or more directors, out of which at least one director shall be an independent director. 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 a foreign company 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 responsibility Policy) 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 certain 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 they should also ensure that whatever is disclosed in the report and the website are complied with as a part of the CSR mandating.
It is the duty of the Board of the company to ensure that the company is spending at least 2% of the average net profits earned by the company during the 3 immediately preceding financial years, for complying with its CSR Policy. And while spending this it should also ensure that it is keeping in priority the local areas or the area which is surrounding the place, they are conducting their business. This will also help the company build its credibility and standing within the consumers and also in society in general.
While building or developing the CSR policies, the company can include the following:
- eradicating 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 or any other 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 the CSR policies, the company is in a way returning to one of its stakeholders among many others which is the society here. And for this, we can also see that company adopts Trust, Societies, and also 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 Companies Act, any activity which has been taken up by the company for the upliftment and benefit of their employees and their family members cannot be termed as CSR activities. And this should have been taken up in India.
The contributions which are made by the companies in the form of political contributions are not CSR Activities.
Consequences for Non-Compliance
There is no particular penalty being specified for defaulting of the CSR norms or provisions laid down by the Companies Act. But an explanation should be given by the Board of Directors in their Board Report regarding the same.
Computation of Average Net Profit
As per Companies (Corporate Social Responsibility Policy) Rules, 2014, Net Profit for the purpose of 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 Overseas Branch or branches of the company
- any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
It should also be noted that, in case of any financial year for which relevant financial statements were prepared in accordance with provisions of the Companies Act, 1956, shall not be required to be re-calculated following the provisions of the Companies Act, 2013.
And in the case of a foreign company covered under these rules, net profit means a net profit as per profit and loss account of the company prepared in terms of 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 for ensuring that the companies are returning one of their most important stakeholders like every other stakeholder for the resources being used and thereby ensuring that with the company the society is also getting uplifted and is growing.