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Sep 09, 2021
8 min read

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What is CSR?

Corporate Social Responsibility (CSR) is a concept that suggests that it is the responsibility of companies to contribute towards the economic, social and environmental development of the society of which they are an integral part. India was the first country in the world to make CSR mandatory in 2014, following an amendment to the Companies Act, 2013.

Who is Liable to Fulfil CSR Norms?

  • Companies that have a net worth of INR 500 Crores or more

  • Companies having an annual turnover of INR 1,000 Crores or more

  • Companies having a net profit of INR 5 Crores or more

The Compliance Framework

A. Constitution of CSR Committee

  • Three or more directors out of which one shall be independent director

  • A company without independent director can have a committee without independent director

  • If a private limited company has two directors, the committee can have only two directors.

The committee shall work towards the following:

  • To formulate and recommend to the board of Directors CSR Policy.

  • To recommend the amount of expenditure to be incurred on specified activities along with calculation of the same.

  • To monitor the policy from time to time.

  • To prepare a transparent monitoring mechanism for ensuring implementation of the projects or activities proposed to be undertaken by the company.

B. Amount of contribution to be made under CSR

The company will be required to set aside an amount equal to 2% of the average net profits of the said company made during the 3 immediately preceding financial years for CSR activities.

C. Mode of carrying CSR Activities

  • Trust/society/ section 8 company set up by the company either singly or along with any other company

  • Trust/society/ section 8 company set up by Central Government or state government

  • Independent entity (shall have a track record of three years)

  • Collaborating with other companies

D. Activities covered under CSR Policies

  • Eradicating hunger, poverty and malnutrition.

  • Promoting preventive health care and sanitation.

  • Contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation.

  • Making available safe drinking water.

  • Promoting education.

  • Employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects.

  • Promoting gender equality and 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.

  • 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.

  • 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 art and handicrafts.

  • Measures for the benefit of armed forces veterans, war widows and their dependents.

  • Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports.

  • Contribution to the Prime Minister's National Relief Fund or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women.

  • Contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt.

  • Rural development projects.

  • Slum area development.

  • Disaster management, including relief, rehabilitation and reconstruction activities.

E. Activities that do not qualify as CSR expenditure

  • Projects or programs or activities that benefit only the employees of the company and their families

  • Expenses incurred by companies for the fulfillment of any Act or Statute

  • Contribution of any amount directly or indirectly to any political party

  • Activities undertaken by the company in pursuance of its normal course of business.

F. Reporting requirement

  • Director’s report to General Meeting to include a report about CSR initiatives

  • Company website to disclose Company’s CSR Policy

G. Penalties in case of failure to make contribution under CSR

If the company fails to spend the specified amount on CSR, the Board shall:

  • Specify the reasons for not spending the amount in the Annual Report

  • Transfer such unspent amount to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

The following proposal in the Companies Amendment Bill, 2019 has not been notified: The company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

The Bigger Picture

The Finance Minister has given her assurance that the government is not against wealth creators. In fact, Gandhiji’s perspective of trusteeship, invoked by her in the Parliament, is a powerful argument by which, “we seek not to destroy the capitalist, we seek to destroy capitalism”. In 1931 when he wrote in Young India, the debate on the purpose of a corporation and modern corporate law began in the Harvard Law Review - Adolf Berle argued that profit was the sole purpose of a corporation; E. Merrick Dodd gave a rejoinder the next year arguing that profit-making and social service were together the purpose of a corporation. The shareholder versus stakeholder debate has continued in legal academia since.

ESG - Environmental, Social and Corporate Governance –is already a global trend, extremely significant in developed countries. Hence, social responsibility is an accepted purpose for the modern corporate, valued positively in the market, yet, in India we are in a space where fulfilling CSR norms are mandated with a high compliance burden.

Way Forward

It is necessary to relook the CSR mandate that increases compliance costs. So much official time and effort has gone into this one item, we seemed to have lost its fundamental objective – empathy. The Government should make the CSR obligation voluntary and allow the market to recognise and reward companies that are socially responsible, just like the trend is globally.

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