Corporate Social Responsibility under Companies Act

Corporate Social Responsibility (CSR) assumes significance as it permits companies to engage in projects or programs related to activities related to social welfare and improvement enlisted under the terms of Companies Act, 2013. There is an element of flexibility in company activities by allowing them to select their preferred CSR engagements that are in agreement with the overall CSR policy of the company. In this article, we review the applicability of CSR, policy of CSR, role of Board of Directors and activities of CSR.

Definition of Corporate Social Responsibility (CSR)

The term Corporate Social Responsibility or CSR has been defined as under, but is not limited to:

Projects or programs with reference to activities that are specified in the Schedule; or
Projects or programs related to activities undertaken by the Board in pursuance of recommendations of the CSR Committee according to the declared CSR policy subject to the condition that such policy covers subjects explained in the Schedule.

Applicability of Corporate Social Responsibility to Companies

Corporate Social Responsibility is required for all companies viz. private limited company, limited company. The following companies are necessary to constitute a CSR committee:

Companies with a net worth of Rs.500 crores or greater, or
Companies with a turnover of Rs.1000 crores or greater, or
Companies with a net profit of Rs.5 crores or greater.

If any of the above financial strength criteria are met, the Corporate Social Responsibility (CSR) provisions and related rules will be applicable to the company. These companies are required to form a CSR committee consisting of its directors. This committee oversees the entire CSR activities of the Company. Note: Corporate Social Responsibility is a requirement for companies meeting the above criteria. On the other hand, Section 8 Companies are incorporated solely for not-for-profit purposes.

Role of Board of Directors in CSR

The board of directors of a company plays a significant role in the CSR activities of the company. The role of the Board is as follows:

Approval of the CSR policy.
Ensuring its implementation.
Disclosure of the contents of CSR policies related to its report.
Placing the same on the Company’s website.
Ensuring that statutory specified amount is spent by the company with reference to CSR activities.
It’s significant to note that there is no penalty if the particular amount is not spent on CSR activities. In such a case, the board’s report must identify the reason for such short spending.

CSR Committee and Policy

All qualifying company required to have a CSR committee are required to spend at least 2% of its average net profit for the directly preceding 3 financial years on CSR activities. Additionally, the qualifying company shall be necessitated to comprise a committee (CSR Committee) of the Board of Directors (Board) comprising of 3 or more directors. The CSR Committee will prepare and recommend to the Board, a policy which will specify the activities to be undertaken (CSR Policy); advocate the amount of expenditure to be incurred on the activities referred and monitor the CSR Policy related to the company. The Board will take into account the recommendations made by the CSR Committee and support the CSR Policy of the company.

Activities permitted under Corporate Social Responsibility (CSR)

The following activities can be performed by a company to accomplish its CSR obligations:

Eradicating extreme hunger and poverty
Promotion of education
Promoting gender equality and empowering women
Reducing child mortality
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.

Importance to Local Areas and Neighborhoods

Under the terms of Companies Act, preference must be given by companies in its CSR activities to local areas and the areas where the company operates. Company may possibly also choose to link with 2 or more companies for fulfilling the CSR activities provided that they are competent to report individually. The CSR Committee will also prepare the CSR Policy in which it includes the projects and programmes which is to be undertaken, organize a list of projects and programmes which a company plans to embark on during the execution year and also focus on integrating business models with social and environmental priorities and process for the reason of creating share value. The company can, in addition, make the annual report of CSR activities in which they declare the average net profit for the 3 financial years and also approved CSR expenditure but if the company is not capable to spend the minimum required expenditure the company has to provide the reasons in the Board Report for non-compliance so that there are no related penal provisions.

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Frequently Asked Questions

Common questions about Corporate Social Responsibility Compliance for Companies.

Corporate Social Responsibility (CSR) refers to projects or programs undertaken by companies related to activities specified in the Schedule of the Companies Act, 2013 or as recommended by the company's CSR Committee and approved by the Board, subject to their CSR policy covering subjects mentioned in the Schedule.

Companies with a net worth of Rs. 500 crores or more, a turnover of Rs. 1000 crores or more, or a net profit of Rs. 5 crores or more in any financial year are required to constitute a CSR Committee consisting of their directors.

The Board of Directors plays a crucial role in approving the CSR policy, ensuring its implementation, disclosing the policy contents in their report and on the company's website, and ensuring that the statutory prescribed amount is spent on CSR activities.

Companies qualifying for CSR are required to spend at least 2% of their average net profit for the immediately preceding three financial years on CSR activities.

Activities permitted under CSR include eradicating poverty and hunger, promoting education and gender equality, improving healthcare, ensuring environmental sustainability, enhancing vocational skills, and contributing to relief funds for socio-economic development and welfare of underprivileged sections.

Yes, under the Companies Act, companies must give preference to local areas and areas where they operate while undertaking CSR activities.

Yes, companies can collaborate with one or more companies for fulfilling their CSR activities, provided they are able to report their CSR activities individually.

The CSR Committee is responsible for preparing the CSR policy, recommending projects and programs to be undertaken, suggesting the expenditure amount, and monitoring the CSR policy implementation.

No, there is no explicit penalty for not spending the prescribed CSR amount. However, the company's Board Report must provide reasons for not being able to spend the minimum required expenditure.

Companies are required to disclose the contents of their CSR policy in their annual report and on their website. They must also report the average net profit for the preceding three financial years and the approved CSR expenditure.