CORPORATE SOCIAL RESPONSIBILITY (CSR) UNDER COMPANIES ACT, 2013 (PART I)

[Dr. Sanjiv Agarwal]

Definition of Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) as introduced in the Companies Act, 2013 is not a new concept. It has many dimensions but can be best understood as follows:

Corporate Social Responsibility (CSR) is the continuing commitment by business to behave ethically and contribute to economic as well as social development while improving the quality of life of the workforce and their families as well as of the local community and society at large.

CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies. Thus, CSR is not charity or mere donations.

CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operation and growth.

Earlier there were only voluntary guidelines for CSR issued by Ministry of Corporate Affairs but now there is a mandatory provision for CSR obligations to be discharged by companies, as stipulated in section 135 of the Companies Act, 2013 made effective from 1^st April, 2014.

Section 135 of Companies Act, 2013 –Corporate Social Responsibility

Section 135(5) of Companies Act, 2013 has made it mandatory for companies to spend 2 percent of their average net profit of preceding three financial years towards CSR activities.

The following companies are required to mandatorily constitute CSR Committee at the Board level:

• Companies that have a turnover of Rs 1,000 crore or more or
• Companies that have a net worth of Rs 500 crore or more, or
• Companies that have recorded a net profit of Rs 5 crore or more during any financial year.

CSR Committee shall be a board level committee duly constituted by the Board of directors. It should have a minimum of three directors but can have more than three also. The members of the CSR Committee shall be directors and none else. The Board report will also disclose the composition of CSR committee. Atleast one director of CSR Committee shall be an independent director.

The CSR Committee shall formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall specify the sectors along with specific activities/projects/programmes to be undertaken during the financial year and acted upon. The policy shall be approved by the Board.

The, CSR Committee shall, inter alia, perform the following functions (sub section 3)-

1. formulate CSR policy of the company.
2. identify CSR activities to be undertaken by company.
3. recommend to the Board a CSR policy which indicates CSR activities to be undertaken from those specified in Schedule VII to the Companies Act, 2013.
4. recommend the amount of expenditure on such CSR activities (i.e. budget of CSR activities).
5. monitoring of CSR activities which will involve monitoring of both activities as well as amount spent/ unutilised vis- a-vis CSR policy.

CSR spends will have to be within the four walls of CSR policy irrespective of the fact that shareholders may have different suggestions to make. The further provisions and rules to be followed regarding CSR expenditure are explained hereunder.

(To be continued…….)

Discussions to this article

[SPIROTECH HEAT EXCHANGERS PVT LTD]

please clarify :

2 percent net profit means : preceding Average Financial year i.e 2011-12,2012-13 & 2013-14

or

2 percent net profit means : preceding Average Financial year i.e 2010-11,2011-12 & 2012-13

thanks