Understanding The Concept Of Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a philanthropic approach of a Corporate towards society and social development. It is well said that Social Responsibility becomes an integral part of the wealth creation process which if managed properly should enhance the competitiveness of business and maximise the value of wealth. It allows organizations to do their bit of society, environment, and customers or for those matter stakeholders.

The existence of CSR, not as a concept but as a practice can be traced in India from the 1950’s and now it has become a big branch by itself with the backing of legalisation introduced from time to time. Today CSR has also become a part of Business Environment. The government perceives CSR as the business contribution to the nation’s sustainable development goals.
Corporate Social Responsibility or CSR is a business model that company follows to integrate social and environmental concerns in their business operations. CSR is Company’s effort to pay back the stakeholders and public, who contributed in their growth and success. CSR cannot be termed as charity. It is a way to make social good towards various aspects of society and environment. CSR also helps company to make brand name towards its customers and also bolsters the goodwill & growth amongst the general public.
Ministry of Corporate Affairs (MCA) has made Corporate Social Responsibility mandatory for certain class of Companies from 01.04.2014 as per the provisions of Section 135 of Companies Act 2013 along with Companies(Corporate Social Responsibility Rules) 2014 & Schedule VII.

APPLICABILITY OF CSR :

Every Company including its holding & subsidiary company having
1) Net worth of Rupees 500 Crore or more, or
2) Turnover of Rupees One Thousand Crore or more, or
3) Net profit of Rupees 5 crore or more.
* Every Foreign company defined under section 2(42) of the Act having its branch office or project office in India which fulfils the above criteria shall comply with the provision of Section 135 of the Act along with rules.

CSR COMMITTEE:

1.Every class of Company mentioned above has to constitute a Corporate Social Responsibility Committee comprising three directors about of whom One should be independent director.
2.In case of Unlisted Public Company or Private Company which is not required to appoint independent directors, can constitute Corporate Social Responsibility Committee without such director.
3.In case of Private Company where there are only two directors can constitute Corporate Social Responsibility Committee with only two directors.
4.In case of Foreign Company, Corporate Social Responsibility Committee shall be constituted by atleast two persons, one person should be its authorized person resident in India [Section 380(1)(d))] and another person shall be nominated by foreign Company.

DUTIES OF CORPORATE SOCIAL RESPONSIBILITY COMMITTEE:

1. Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the Company as specified in Schedule VII.
2. Recommend the amount of expenditure to be incurred on the activities referred to in clause (i)
3. Monitor the CSR Policy of the company from time to time,
4. Institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.

ROLE OF BOARD OF DIRECTORS:

The Board of every Company shall:
1) After taking account the recommendation from CSR committee, approve the CSR activities and disclose the contents of the same in the Board Report and the same shall be displayed on Company’s website, if any.
2) Ensure that the activities as are included in CSR Policy are undertaken by the Company.
3) Ensure that the Company spends at least two percent of average net profit made during the three immediately preceding financial years.
4) Disclose the contents of CSR policies in its report.
5) Place the same on Company’s website.

* If company fails to spend such amount, it shall disclose it in the Board Report and specify the reasons for not spending the amount.

CSR – Spending, Policies & Activities:

Few important points of CSR spending are as follows –
1.The companies covered by section 135 are required to spend at least 2% of their average net profits during the three immediately preceding financial years.
2.The section postulates that “net profit” shall be calculated in accordance with the provisions of section 198.
3.Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.
4.Where the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount.
5.The CSR committee shall formulate and recommend CSR policy to the Board.
6.The policy shall indicate the activities to be undertaken by the company as specified in Schedule VII.
7.The CSR Committee shall recommend the amount of expenditure to be incurred on the activities referred in CSR Policy
8.The CSR Policy of the company shall be monitored by CSR committee from time to time.

Net Profit Considered for CSR Spending:

Net Profit means the net profit of a company as per its financial statement prepared in accordance with Section 198 of the Act, but shall not include the following, namely: ‐

1.Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise.
2.Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
3.Profit from premium of shares/Debentures.
4.Profit from sales of Forfeited share.
5.Profit in terms of capital natures (in terms of undertaking of company or any part of thereof).
6.Profit from the sale of immovable property/fixed assets/any capital nature.
7.Any surplus change in carrying amount of an assets or liability recognized in equity reserves.

Following shall not be considered as expenditure:

1.Income tax and any other tax on income
2.Compensation, damages or other payments made voluntarily
3.Loss of capital natures including loss on sale of undertaking of company or any part of thereof
4.Any transfer to assets/liabilities revaluation/equity reserves.
Impact of CSR Provision:
The new Companies Act 2013 was much awaited. With the new Act coming into force, lots of new provisions came in picture. One such new provision was relating to CSR activities. This provision was much debated. Many companies said that this new provision will create financial burden on them as they need to spend specified percentage of their profits. Now, since the new Act is in force, every company is following the new regulation. Considering the intent of law that companies take so many resources from society they should give back something to it, the provision of CSR is justified. Also there are few good points for Companies like:

* The companies can spend less than specified percentage. In such case the board need to disclose the reason for lower spending in its report.

* The Institute of Chartered Accountants of India (ICAI) also issued a guidance note that clarifies that no provision is required in books of companies for CSR spending. The need to book only actual expenditure.
Also the above spending will help in benefitting the underprivileged who are deprived of basic necessities. Since the new provision is only one and half year old, it is difficult to analyze its benefit. But in long run the society as a whole would surely stand benefitted from it. In cost benefit analysis of this provision, its sure that its benefit will exceed its cost.

CSR ACTIVITIES:

(1) The CSR activities shall be undertaken by the company, as per its stated CSR Policy, excluding activities undertaken in pursuance of its normal course of business.
(2) The Board of a company may decide to undertake its CSR activities approved by the CSR committee, through a registered trust, society ,its holding , subsidiary, a company established by the company or associate company under section 8 of the Act or otherwise:
* if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects;
(3) The Company may collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs.
(4) The CSR projects or programs or activities undertaken in India only to the amount of CSR expenditure.
(5) The CSR projects or programs or activities that benefit only the employees of the company and their families cannot be considered as CSR activities as per the Act.
(6) Contribution either directly or indirectly to political parties cannot be considered as CSR activities.
CSR POLICY:
The CSR Policy of the company shall include the following
(a) A list of CSR projects or programs which a company plans to undertake falling under the Schedule VII of the Act,
(b) Monitoring process of such projects or programs
(c) That the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of company.
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities relating to: —

* Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swachh Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.

* Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

* Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

* Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga;

* Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

* measures for the benefit of armed forces veteran, war widows and their dependents;

* Training to promote rural sports nationally recognized sports and Olympic sports;

* PM Relief fund: contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
- Inserted vide Notification dated 24.10.2014

* Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

* Rural development projects.

* Slum area development.
Explanation. —For the purposes of this item, the term ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.
In item (i), after words "and sanitation", the words "including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation" shall be inserted;
In item (iv), after the words "and water "the words "including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga" shall be inserted;
(Amendment Dated 30.05.2019) In exercise of the powers conferred by sub- section (1) of section 467 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following further amendments to Schedule VII of the said act, namely :- In the said Schedule VII, after item (xi) and the entries relating thereto, the following item and entries shall be inserted, namely.

* Disaster management, including relief, rehabilitation and reconstruction activities.
Amount spent in above activities are qualified as CSR activities the interpretation of Sch. VII is broad and open and its scope is wide to help of Corporate.

MISCELLANEOUS POINTS:

The Company should give preference to local area and area around it where it operates, for spending the amount earmarked for Corporate Social Responsibility.
The Board’s Report of a company on which CSR is applicable shall include an annual report on CSR containing particulars of CSR Activities
In case of a foreign company, the balance sheet filed under shall contain Annexure regarding report on CSR.
Content By-ACS Abhishek Ojha
Practicing Company Secretary
Contact: 08619683719, 09799064079
Mail-id: [email protected]