Setting the stage
In today’s corporate world, profit is not the only parameter which is used to measure success! Companies are now also judged by the impact they have on society. Corporate Social Responsibility (CSR) is a powerful weapon which can be used by companies to give back to society. Corporate social responsibility is not just a moral obligation in India; it is a legal obligation.
Defining Corporate Social Responsibility (CSR)
The main aim of CSR is to promote sustainable and responsible business philosophy and to encourage companies to incorporate activities in their business operations which address environmental and social concerns. With CSR the companies get an opportunity to contribute to the development of the country. CSR is when the company cares and connects with communities and people. In simple words, the company tries to do good things for customers, employees, society, and the environment.
Legal framework governing CSR in India
The Ministry of Corporate Affairs in India has notified under Section 135 of the Companies Act, 2013 about CSR. Along with the section, Companies (Corporate Social Responsibility Policy) Rules, 2014 were also introduced by the Indian government. The provisions of CSR were made effective from 1st April, 2014.
Section 135 of Companies Act, 2013
Section 135 states that some companies have to compulsorily contribute a certain amount towards the corporate social responsibility activities. The Companies Act, 2013 states that CSR includes and means but is not limited to:
- Programs or projects which are related to activities specified under Schedule VII of Companies Act, 2013.
- Programs or projects related to activities which are based on the suggestions made by the CSR committee and approved by the company’s board of directors. All the activities have to follow the CSR policy of the company and should also be related to Schedule VII’s topics.
When does CSR apply?
CSR is applicable to all the companies:
- Who have a net worth of more than Rs. five hundred crore.
- Who have a turnover of more than Rs. thousand crores.
- Who have net profit of more than Rs. five crore.
The company’s board of directors must ensure that the company which fulfils the above criteria spends at least two percent of their average net profits which is made during immediately preceding three financial years, every financial year.
If the company still has not completed 3 financial years then in that case, the company must spend two percent of average net profit which is made during the immediately preceding financial year.
Why does CSR matter?
Some of the benefits of corporate social responsibilities are:
- CSR helps the companies in increasing brand recognition.
- With CSR activities the reputation of the company also boosts.
- Corporate social responsibility also plays a key role in strengthening the public trust.
- The loyalty of the customer is also increased with CSR activities.
- With a boost in brand, loyalty, and reputation the growth of the company also accelerates.
- The retention rate of the employees is also increased when a company
What counts as CSR? – activities listed in Schedule VII
- Eradicating malnutrition, hunger, poverty
- Promoting safe drinking water, sanitisation, health care
- Promoting women empowerment, gender equality, support to senior citizen groups
- Promoting vocational skills, livelihood enhancement, education
- Protection of flora and fauna, environmental sustainability, clean ganga funds, conservation of natural resources
- Protection of culture, art, national heritage, restoration work, traditional arts, public libraries
- Support to CAPF and CPMF families, war widows, armed force veterans
- Disaster management
- Development of slum areas
- Making contributions in public funded activities
- Projects on rural development
- Making contributions in public funded institution
- Contribution made to Prime Minister Care, PM national relief funds, other welfare programs by government
- Training for national sports, rural sports, olympic, paraolympic
- Support for research and development projects in art, science, technology etc.
Consequences of non-compliance
If any company fails to comply with the CSR activities then they will be liable for penalties. If any company is not fulfilling the requirement of CSR spending or fails to transfer the amount into a specified fund then they may be fined with Rs. 1 crore. The officers who are responsible for the same may also be penalised up to Rs. 2 lakh.
Introduction to the CSR committee
The corporate social responsibility committee which is CSR committee is a board level committee which is responsible for managing and overseeing all activities related to CSR. Let’s take a look at the composition of the CSR committee and their role.
Composition of CSR committee
- The committee consists of at least 3 directors, one shall be an independent director amongst them.
- If the company is a private company or unlisted public company then there is no requirement of an independent director, it shall have 2 or more directors.
- If the company is a foreign company then there should be at least 2 people who are resident of India.
- The requirement of having an CSR committee only arises when CSR spending amount by the company exceeds Rs. 50 lakh.
Role of CSR committee
Some of the key role of CSR committees are:
- One of the main roles of the CSR committee is to formulate CSR strategies.
- The next important role of the committee is to recommend the amount of expenditure for CSR activities.
- The CSR committee also monitors the CSR policy and activities.
- The impact and progress is also monitored of all CSR activities by the CSR committee.
- All the reporting of the CSR related activities to the board is done by the committee.
Landmark judgments shaping CSR in India
| Case | Particulars |
| Technicolor India (P.) Ltd. vs. Registrar of Companies (2012) | The company failed to comply with CSR rules under section 135. No amount was spent or transferred to the prescribed fund incase of non-spending which led to penalties. |
| MCA vs. Non-Compliant Companies (2020) | The MCA had launched an investigation against the companies which did not follow CSR obligations. The government stated that excuses like no suitable project or lack of time will not be entertained. All the companies have to strictly follow the CSR rules and regulations. |
| Hindustan Zinc Limited vs. Registrar of Companies (2017) | It was argued by the company that the CSR projects did not match the main activities of the business. The court emphasised that main aim of CSR activities is for the benefit of the society, it does not need to align with business interests. |
Wrapping up
We can conclude that CSR is not a personal choice, it’s a law which is to be followed by all companies in India. The business has to be step beyond profit making and should take active part in activities which contribute to environmental and social welfare. The companies failing to do so might end up paying huge fines.
Frequently Asked Questions (FAQs)
Are donations given by political parties counted as CSR activities?
The donations which are made by the political parties are not considered as CSR expenditures as per the Companies Act, 2013.
