Legal Framework for CSR in India

Legal Framework for CSR in India

Legal Framework for CSR in India

Previously CSR was largely seen as a voluntary philanthropic activity of the companies. Hence there was no department in the company which looked after it. Currently, there are two major legal frameworks for CSR in India and they include: Clause 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014.

Clause 135 Companies Act, 2013

Under 135 (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. Under 135 (2), the Board’s report should disclose the composition of the Corporate Social Responsibility Committee.

Under 135 (3) the Corporate Social Responsibility Committee should 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 [The Schedule VII mentions the list of activities which may be included by companies in their Corporate Social Responsibility Policies].

The list of activities is as follows:

  • Eradicating extreme hunger and poverty
  • Promoting education
  • Promoting gender equality and empowering women
  • Reducing child mortality and improving maternal health
  • Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
  • Ensuring environmental sustainability
  • Enhancing vocational skills
  • Promoting social business projects
  • Contribution to the Prime Minister’s National Relief Fund or any other fund setup 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, etc.

Under 135 (3), the Corporate Social Responsibility Committee should also recommend the amount of expenditure to be incurred on the activities and monitor the Corporate Social Responsibility Policy of the company from time to time.

Under 135 (4), the Board of every company referred to in sub-section (1) should 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. The Board should also ensure that the activities mentioned in the Corporate Social Responsibility Policy of the company are undertaken.

Most importantly, under 135 (5), the Board of every company referred to in sub-section(1), should ensure that the company spend at least two percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.[1]

Companies (CSR Policy) Rules, 2014[2]

The Companies (Corporate Social Responsibility Policy) Rules, 2014 came to force on the 1st April, 2014. It defines CSR as the projects or programmes relating to activities specified in Schedule VII of the Companies Act or projects relating to activities undertaken by the board of directors of a company subject to the condition that such subject is covered in Schedule VII of the Act.

Clause 3 of the Companies Rules, 2014 includes all companies which fulfills the criteria specified in sub-section (l) of section135 and having its branch office or project office in India to implement CSR. It urges the companies to constitute a CSR committee and comply with the provisions of the act.

The CSR committee of every company which fulfills the criteria specified in sub-section (l) of section 135 is supposed to register a foundation/institution for undertaking the CSR activities, either under the Trust Act, Societies Act or the Companies Act.

Read also: Corporate Social Responsibility; globally

The Companies Rules, 2014 also gives provision for more than two companies to collaborate and undertake CSR programs. The Board’s Report of company from the financial year 2014 shall include an annual report on CSR. In case of a foreign company, the balance sheet shall contain an annexure regarding report on CSR.

Some of the highlights of the rules are as follows:[3]

  • Programs benefitting only the company employees are not considered as CSR activities. Hence the companies must be careful in choosing programs or activities according to the schedule VII.
  • Monies spent on capacity building of staff under the CSR banner cannot exceed 5% of the expenditure
  • CSR expenditure shall include all expenditure including contribution to corpus, or projects related to CSR. But caution should be made to fall within the schedule VII purview.
  • Contribution made to any political parties cannot amount to CSR activity.

CSR amendments under the Companies (Amendment) Act, 2019

Until now, if a company was unable to fully spend its CSR funds in a given year, it could carry the amount forward and spend it in the next fiscal, in addition to the money allotted for that year. The CSR amendments introduced under the Act now require companies to deposit the unspent CSR funds into a prescribed under Schedule VII of the Act within the end of the fiscal year. This amount must be utilized within three years from the date of transfer, failing which the fund must be deposited in to one of the specified funds.

The new law prescribes for a monetary penalty as well as imprisonment in case of non-compliance. The penalty ranges from INR 50, 000 (US$700) to INR 2.5 million (US$35, 000) whereas the defaulting officer of the company may be liable to imprisonment for up to three years, or a fine up to INR 500, 000 (US$7,023), or both. The government however is reviewing these rules after the industry objected to the strict provisions, especially with respect to the jail terms for CSR violations, and is yet to operationalize them.

 

[1] The Companies Act, 2013, Retrieved from http://indiacode.nic.in/acts-in-pdf/182013.pdf

[2] The Companies (Corporate Social Responsibility Policy) Rules, 2014, the Gazatte of India, (95), February 28, 2014.

[3] Y. Ronald, ‘Legal Framework for CSR in India. Available at https://www.researchgate.net/publication/268226026 accessed on 5th April, 2021

 

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