CSR

Concept of Corporate Social Responsibility (CSR) suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates positive impact on society at large.

CSR highlights that the corporations need to focus beyond earning just profits and its their duty to return back to society.

In 2013, India enacted Section 135 of the Indian Companies Act prescribing a mandatory “CSR spend of 2% of average net profits… during the three immediately preceding financial years” for all companies meeting specified financial thresholds.

In other words, companies

  • having net worth of rupees five billion (Five hundred Cr INR) or more or
  • turnover of rupees ten billion(One thousand Cr INR) or more or
  • a net profit of rupees fifty million(Five Cr INR) or more
during any financial year
have to ensure that they spend 2% of average net profits made during the three preceding years on CSR activities.

Gist of Different CSR related Sections of Indian Companies Act is as below :-

Section 135. Corporate Social Responsibility
  1. Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
  2. The Board's report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
  3. The Corporate Social Responsibility Committee shall,—
    1. formulate and recommend to the Board, a Corporate Social Responsibility 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 (a); and
    3. monitor the Corporate Social Responsibility Policy of the company from time to time.
  4. The Board of every company referred to in sub-section (1) shall,—
    1. after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and
    2. ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
  5. The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
    Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
    Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
    Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
Section 134. Financial statement, Board’s report, etc
  1. The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.
  2. The auditors’ report shall be attached to every financial statement.
  3. There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include—
    1. the extract of the annual return as provided under sub-section (3) of section 92;
    2. number of meetings of the Board;
    3. Directors’ Responsibility Statement;
    4. a statement on declaration given by independent directors under sub-section (6) of section 149;
    5. in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178;
    6. explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—
      1. by the auditor in his report; and
      2. by the company secretary in practice in his secretarial audit report;
    7. particulars of loans, guarantees or investments under section 186;
    8. particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;
    9. the state of the company’s affairs;
    10. the amounts, if any, which it proposes to carry to any reserves;
    11. the amount, if any, which it recommends should be paid by way of dividend;
    12. material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;
    13. the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;
    14. a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;
    15. the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;
    16. in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal annual evaluation has been made by the Board of its own performance and that of its committees and individual directors;
    17. such other matters as may be prescribed.
  4. The report of the Board of Directors to be attached to the financial statement under this section shall, in case of a One Person Company, mean a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
  5. The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—
    1. in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
    2. the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;
    3. the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
    4. the directors had prepared the annual accounts on a going concern basis; and
    5. the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
      Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;
    6. the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
  6. The Board’s report and any annexures thereto under sub-section (3) shall be signed by its chairperson of the company if he is authorised by the Board and where he is not so authorised, shall be signed by at least two directors, one of whom shall be a managing director, or by the director where there is one director.
  7. A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of—
    1. any notes annexed to or forming part of such financial statement;
    2. the auditor’s report; and
    3. the Board’s report referred to in sub-section (3).
  8. If a company contravenes the provisions of this section, 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 the 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.

SCHEDULE VII

In exercise of the powers conferred by sub-section (l) of section 467 of the Companies Act, 20l3 (18 of 2013), the Central Government hereby makes the following amendments to Schedule Vll of the said Act, namely :-

(l) In Schedule VIl, for items (i) to (x) and the entries relating thereto, the following items and entries shall be substituted, namely :-

  1. eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water;
  2. promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  3. 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;
  4. 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 the promotion of sanitation;
  5. protection of national heritage, alt 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;
  6. measures for the benefit of armed forces veterans, war widows and their dependents;
  7. training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;
  8. 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;
  9. contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  10. rural development projects;
  11. slum area development.