Corporate Social Responsibility: Way More Than Just a Responsibility
CA. Dhwip Shah
The author is a member of the Institute. He can be reached at dhwipshah44@gmail.com and eboard@icai.in.
The concept of corporates acting responsible towards various stakeholders of society is not new but it is completely upgraded now and there has been a drastic revolution because of the term ‘Corporate Social Responsibility’ (CSR).
Even ages ago, corporates were taking a note that whether their business activities were done just to earn profits or it had some element of social welfare too. However, in the recent years, with growing focus on environmentalism, sustainable development, socio-economic development, the importance of ‘Corporate Social Responsibility’ has been taken to wider extent.
India is the first country to place so much importance on the term ‘Corporate Social Responsibility’ that it made it mandatory for corporates to comply with its provisions & rules through amendment in Companies Act, 2013. Read on…
Archie Carroll’s Pyramid of Corporate Social Responsibility
Archie Caroll, a renowned professor, has described ‘Corporate Social Responsibility’ as pyramid of responsibilities on corporates namely economic responsibilities, legal responsibilities, ethical responsibilities and philanthropic responsibilities. The same is explained through pictorial representation as below:
Philanthropic Responsibilities
Be a good corporate citizen
Ethical Responsibilities
Do what is just and fair • Avoid harm
Legal Responsibilities
Obey laws & Regulations
Economic Responsibilities
Be profitable
A Practical Dialogue on CSR under Section 135
‘Corporate Social Responsibility’ (CSR) is governed by section 135 of the Companies Act, 2013.
With the growing importance of ‘Corporate Social Responsibility’ (CSR) towards socio-economic development of nation, corporates are required to comply with the provisions failing which stringent penal provisions are imposed.
An attempt is made to explain the provisions of CSR in a very unique way:
There are two brothers named Mr Vyom and Mr Nirgranth. Mr Vyom had just recently incorporated a new company named Socially Responsible Management Pvt Ltd where as Mr Nirgranth is a Chartered Accountant by profession having expertise in company law. Mr Vyom was reading an article in the news paper regarding ‘Corporate Social Responsibility’ (CSR) and was highly impressed with the efforts taken by government towards CSR.
Mr Vyom, as a person is always motivated to contribute for the betterment of the society (we can clearly reconcile it too with name of his company). So he decided to consult his brother Mr Nirgranth having detailed knowledge of Companies Act & also complete understanding of CSR provisions; to understand various provisions and rules so that he can be a part of contribution towards socio-economic development of the nation.
Here is the summary of conversation that happened between two brothers which highlights and explains important provisions of ‘Corporate Social Responsibility’ under the Companies Act, 2013:
1. Vyom: What is the provision in Companies Act, 2013 relating to Corporate Social Responsibility (CSR)? Can you explain me in simple terms?
Nirgranth: Every company having net worth of Rs 500 crores or more OR Turnover of ₹ 1000 crores or more OR net profit of Rs 5 crores or more during the immediately preceding financial year is required to spend in every financial year atleast 2% of average net profit of 3 preceding financial years.
Provisions of section 135 are attracted to the company if, in the immediate preceding Financial Year, company falls into ANY of three below given criteria:-
2. Vyom: I also read, that the Company has to form a CSR committee of the Board. Can you explain me what is composition of such CSR committee, how many minimum and maximum directors can be in such CSR committee?
Nirgranth: Section 135 of Companies states that the CSR committee shall consist of 3 or more directors of which atleast one director should be an independent director.
3. Vyom: But according to my knowledge, private limited companies can be incorporated with only 2 directors in its board. So in that case how to form CSR committee of 3 Directors?
Nirgranth: In that case, private limited companies can form the CSR committee with 2 directors only.
4. Vyom: Please tell me; do all the companies are required to appoint independent director in its CSR committee because I also read in newspaper that many companies are exempted from appointing independent director; so for forming CSR committee do such exempted companies also require to appoint independent director?
Nirgranth: Companies that are not required to appoint independent director under Companies Act, 2013; its CSR committee can also be without independent director i.e. such companies are exempted from appointing independent director in its CSR committee.
5. Vyom: Whether CSR provisions are applicable only to private limited company or applicable only to public limited company or applicable only to section 8 company or applicable to every company?
Nirgranth: Section 135 of the Act reads “Every company……” So provisions of CSR is applicable to all the companies whether private limited, public limited or section 8.
6. Vyom: What if the company has not completed 3 years from its incorporation? So how to calculate 2% of average net profit in such case?
Nirgranth: In such case, 2% of average net profit of the years since its incorporation is to be taken into consideration.
7. Vyom: Whether the ‘average net profit’ criterion is Net profit before tax or Net profit after tax?
Nirgranth: Computation of net profit criterion is net profit before tax.
8. Vyom: How to compute net profit for particular financial year?
Nirgranth: It is to be calculated as per section 198 of Companies Act, 2013.
9. Vyom: Which activities are considered as CSR activities?
Nirgranth: The activities enlisted in Schedule VII of Companies Act, 2013 are considered as CSR activities. However MCA has clarified that the activities enlisted in Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities. Activities like educational relief, medical relief, relief to poverty, promotion of sports etc. are included.
10. Vyom: How to calculate the amount to be spent by way of CSR & what is the year of spending the CSR amount? Please explain with illustration?
Nirgranth: Say for example the profit of the company for various years are as under:
| Financial year | Net profit calculated as per section 198 |
|---|---|
| 2015-16 | 2 cr |
| 2016-17 | 3 cr |
| 2017-18 | 3 cr |
| 2018-19 | 6 cr |
| 2019-20 | 4 cr |
In Financial year 2018-19, net profit calculated as per section 198 exceeds ₹ 5 crs, hence CSR provisions (i.e. provisions of section 135) are applicable to the company for Financial year 2019-20 and CSR activities is to be undertaken in FY 19-20.
Further in order to calculate the amount of CSR to be spent; 2% of average net profit of preceding three financial years is to be taken.
The preceding three financial years in this case are FY 2016-17, FY 2017-18 & FY 2018-19 and the amount to be spent in FY 2019-20 is atleast ₹ 8 lakhs [{(3cr+3cr+6cr)/3}*2%].
11. Vyom: What if the company is unable to spend amount of CSR as required (i.e what if the company is unable to spend atleast 2% of average net profit of 3 preceding financial years)?
Nirgranth: If the company fails to spend the amount of CSR as required by the provisions of the Act then following compliances needs to be done by the company as per Amended Companies Act:
a. The Board has to state the reasons for not spending (to the extent of amount of unspent) in its Director’s report vide provisions of section 134(3)(o). In the above illustration; the board has to state the reasons in the Director’s report of FY 2019-20.
b. IN CASE OF “NO ONGOING CSR PROJECTS”:
The company has to transfer such unspent amount to any of the following funds within 6 months of closure of financial year in which it was required to be spent (i.e. within 6 months from the end of FY 2019-20 in the above illustration):
- ~ Swacch Bharat Kosh fund set up by central government for promotion of sanitation
- ~ Clean Ganga Fund set up by central government for rejuvenation of river Ganga
- ~ Prime Minister National Relief fund or any other fund set up by central government for socio economic development and relief and welfare of SC/ST other backward classes, minorities and women.
c. IN CASE OF ANY “ONGOING CSR PROJECTS”:
In this case, the company is required to open a separate bank account to be termed as “UNSPENT CSR ACCOUNT” within 30 days of closure of financial year (i.e. within 30 days from the end of FY 2019-20 in the above illustration) and such amount shall be spent by the company on the ongoing project within a period of 3 years from the date of such transfer.
12. Vyom: What if in case of “ongoing projects”, such CSR amount still remains unspent after the end of 3 years?
Nirgranth: In such case the company shall transfer the amount to Swacch Bharat Kosh Fund or Clean Ganga Fund or Prime minister national relief fund within 30 days of completion of 3 years.
13. Vyom: What is the meaning of ‘ongoing projects’ and what are the conditions to be fulfilled to qualify as ongoing projects?
Nirgranth: Ongoing projects shall mean any activity or program being undertaken by the company and still some expenditure is to be incurred for such activity or program which is being undertaken. Still MCA will prescribe conditions to qualify as ongoing projects in due course.
14. Vyom: One of my friend who is a director of foreign company told me that as far as foreign companies are concerned, they are not required to prepare director’s report, so in such case whether it is mandatory on the part of foreign companies to give reporting of CSR Activity?
Nirgranth: In case of foreign companies, the balance sheet filed by them shall contain an Annexure regarding report on CSR.
15. Vyom: Whether CSR expenditure by the company can be claimed as business expenditure?
Nirgranth: The amount spent by the company for CSR activities cannot be claimed as business expenditure as per Finance Act, 2014. Explanation 2 to section 37(1) of Income tax Act, 1961 states that any expenditure incurred relating to CSR u/s 135 of Companies Act, 2013 shall not be treated as expenditure for business purpose.
16. Vyom: What if the company to whom CSR provisions are applicable; donates the amount to charitable institutions such as trusts and/or societies and/or section 8 companies?
Nirgranth: Subject to compliance of Rule 4 of Companies (Corporate Social Responsibility Policy) Rules, 2014 by the company; if the company donates the amount to charitable institutions it will be deemed that CSR provisions are complied by the company as per clarification by MCA through circular No. 21/2014 dated 18.06.2014.
17. Vyom: It is quite possible that in order to comply with CSR provisions, company donates the amount to various charitable institutions like trusts and/or societies and/or section 8 companies and such charitable institutions is yet to utilize such CSR amount received. So will this be treated as non compliance?
Nirgranth: The Amendment in Companies Act has failed to address such issue. So even if such charitable institutions to whom amount has been donated fails to utilize such CSR amount then also it will be deemed as company has complied with CSR provisions.
However company has to also comply with proviso to Rule 4(2) of Companies (CSR Policy) Rules, 2014 which states that company to whom CSR provisions are applicable; can donate to charitable institutions (i.e. trusts and/or societies and/or section 8 companies) who has an established past track record of charitable activities of 3 years in undertaking similar programs or projects as that of the programs or projects in which company has given the direction for spending and the company monitors the modalities of utilization of such funds and its reporting mechanism. The 3 years are to be counted from date of such donation.
(In a nut shell; company has to comply with proviso to Rule 4(2) of Companies (CSR Policy) Rules, 2014)
18. Vyom: Whether any amount given directly or indirectly to political parties will be considered as CSR activity?
Nirgranth: Contribution of any amount whether directly or indirectly to any political parties under section 182 will not be considered as CSR activity.
19. Vyom: Can the Company collaborate with other Companies for projects or programs undertaken in CSR?
Nirgranth: Yes company can collaborate with such other companies. However reporting of CSR activities is to be done separately by such companies.
20. Vyom: What if the company undertakes CSR activities that benefits only the employees of the company & their families. Will it be treated as CSR activity?
Nirgranth: In the above case, it will not be treated as CSR activity as the rationale behind CSR activities is the benefit of the society as a whole and not to particular section or class.
21. Vyom: What are penal provisions in case of non compliance of CSR provisions of Companies Act, 2013?
Nirgranth: No specific penal provisions are laid down in section 135 of Companies Act, 2013 in case company fails to spend the amount required. However the company has to specify in its Director’s report the reasons for the amount remaining unspent under section 134(3)(o).
(i) So if the company fails to comply with the provisions of section 134 then:
a) The company shall be punishable with a fine of ₹ 50,000/- minimum which may extend upto ₹ 25,00,000/- and
b) Every officer who is in default shall be punishable with an imprisonment upto maximum 3 years or with a fine of minimum ₹ 50,000/- and maximum upto ₹ 5,00,000/- or both.
(ii) Further there is provision in Companies Act, 2013 vide section 450 which states that in case no specific penalty is provided in the Act then general penal provisions will be attracted which is as follows:
a) Company and every officer in default shall be punishable with fine maximum upto ₹ 10,000/- and
b) Further fine maximum upto ₹ 1,000/- per day during which such contravention continues in case of continuing offence.
Conclusion
Thanks Mr Nirgranth for answering to all my queries and giving me overall clarity on the subject of CSR and its provisions. I will ensure that my company takes all the measures and steps to comply with the provisions of CSR. ■