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Corporate Social Responsibility

Introduction

A business organization derives its needs from the society in the form of human and natural resources in order to create products and services which generate profits. In this process, the business affects and shapes the society in innumerable ways both positively and negatively. The concept of Corporate Social Responsibility seeks to ensure that the business maximizes positive consequences in its process. Thus, CSR can be defined as a management concept whereby  companies integrate social and environmental concerns in their business  operations and interactions with their stakeholders. CSR is generally  understood as being the way through which a company achieves a balance  of economic, environmental and social imperatives. CSR though infuses a form of duty and responsibility of companies towards the society, it is not entirely just social work and charity. Rather, it has a dynamic aspect of bolstering the company reputation and creating and maintaining goodwill. Several studies have proved the importance of a company’s CSR in attracting top management, its employees, its customers and other stakeholders. This article provides an overview of the CSR system in India, its compliance and issues revolving around it.

 

Corporate Social Responsibility – Legal Compliance and Rules

Clause 135 of Companies Act,2013 governs CSR activities. This provision is applicable to companies with an annual turnover of 1000 crore or more, or a net worth of 500 crore or more or a net profit of 5 crore or more. This section is applicable to all companies including public; private companies and companies registered under Sec 8 of the Companies Act,2013 and foreign companies having its branch office in India.

This provision mandates that all companies must spend at least 2% of their average net profit of the previous three years on CSR activities. If the company fails to spend the required amount, the board is required to provide reasons in its board report unless the unspent amount is for some ongoing project, the same must be transferred to a fund specified under schedule VII within 6 months of the expiry of that financial year. 

If the unspent amount is for an ongoing project, the same must be transferred within 30 days to a special account opened in a scheduled bank by the company called the Unspent CSR Account and this amount must be spent for CSR within 3 financial years from the date of transfer failing which the same shall be transferred to the fund mentioned in schedule VII within 30 days.

Subsection (3) lists the following functions of the CSR committee:

  • To formulate and recommend CSR policy in areas specified under schedule VII.
  • To recommend the necessary expenditure to be spent on activities and 
  • To monitor and suggest changes to the policy from time to time.

According to the Companies Amendment Act,2020, when the amount spent by a company does not exceed 50 lakhs, there is no mandatory requirement to form a CSR committee. According to the CSR Rules, the CSR committee shall have 3 or more directors with at least one independent director. Unlisted private and public companies don’t have to follow this requirement. At the same time, foreign companies should have at least 2 directors in the committee, with one of them being resident in India notified to the registrar under Sec 380 of the Companies Act. 

 

What are the matters specified under Schedule VII of the Companies Act?

  1. eradicating extreme hunger and poverty; 
  2. promotion of education; 
  3. promoting gender equality and empowering women; 
  4. reducing child mortality and improving maternal health; 
  5. combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; 
  6. ensuring environmental sustainability; 
  7. employment enhancing vocational skills;
  8. social business projects; 
  9. 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
  10. such other matters as may be prescribed.

 

High -level Committee’s CSR Report and Recommendations, 2019

CSR Audit- The committee recommended that CSR activities should be brought under the statutory financial audit by making it part of the financial statements incorporated in schedule III of the act.

Tax Benefit- The committee recommended that all CSR activities under Schedule VII should be given uniform tax benefit and the CSR expenditure should be made deductible from income earned for the purpose of taxation. Also, CSR implementing agencies should be treated as partners and not as service providers or vendors in order to avoid the indirect taxes on them.

CSR Expert- The committee recommended that if the board of directors want to, they should be able to engage a CSR professional whose eligibility criteria shall be prescribed by the government.

 

Conclusion

In 2014, India became the first-ever country to mandate a minimum CSR spending for companies. However, India’s CSR system is not without challenges. Some of the main issues are the perception by many companies that CSR is separate from company activities. This attitude must be changed with CSR activities more oriented towards the company’s brand and also coordinated with its overall activities. Moreover, the local communities show a lack of interest in CSR activities. Lack of transparency on the success rates of the projects, their audits, etc., does not allow to create trustworthy businesses. A lack of well-organized NGOs working at the grassroots level that could connect such local communities with big corporations is also a reason for the slow growth of CSR spending. These issues must be addressed both at the rule making level and implementation of projects in order to develop a healthy CSR spending contributing to economic growth. 

By: Sneha Muthukumar, Sastra Deemed University.

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