Taxmann's Analysis – Unravelling CSR Legal Duty & Social Responsibility in Company Law

CSR Compliance:

Unveiling the Legal Obligation and Social Responsibility under the Company Law

1. Introduction

In today's rapidly evolving business landscape, the expectations placed upon corporations have transcended the traditional focus on profitability. A new paradigm has emerged, where businesses are not only evaluated based on their financial success but also on their contributions to society and the environment.

This paradigm shift has given rise to the concept of Corporate Social Responsibility (CSR), which embodies the belief that companies should actively engage in actions that benefit communities and promote sustainability. This article delves into the CSR obligations as per Companies Act, applicability of the CSR on different class of companies, minimum CSR spending, CSR execution, treatment of unspent CSR etc.

2. Understanding the CSR

The term CSR stands for “Corporate Social Responsibility” i.e. responsibility of the corporate towards the society. It is a concept that refers to a company's efforts to contribute to society and operate in an ethical and sustainable manner. CSR encompasses a range of activities and initiatives undertaken by businesses that go beyond their primary goal of making profits. Instead, they aim to have a positive impact on the environment, employees, customers, communities, and other stakeholders.

CSR is driven by the belief that businesses have a broader responsibility beyond their financial performance and should contribute to the sustainable development of society. By integrating social and environmental considerations into their strategies and operations, companies aim to create shared value for both their business and the communities they operate in.

CSR in India can be seen as both a social responsibility and a legal compulsion, depending on the perspective and context.

CSR as “Social Responsibility”

Many businesses in India view CSR as a social responsibility and voluntarily engage in activities to contribute to society. They recognize that businesses have an impact on the environment, employees, customers, and communities, and they choose to go beyond their primary goal of profit-making to create a positive impact. These companies proactively undertake CSR initiatives to address social and environmental challenges, promote sustainable development, and contribute to the well-being of stakeholders. They view CSR as a means to build trust, enhance reputation, and foster long-term sustainability.

Many corporate houses like TATA and Birla have been engaged in doing CSR voluntarily.

3. CSR a “Social Responsibility” or “Legal Compulsion”Indian Perspective

CSR as “Legal Compulsion”

From a legal standpoint, CSR is also a compulsory requirement (w.e.f. 01/04/2014) for qualifying companies in India. The Companies Act, 2013, mandates certain companies meeting specific financial thresholds to spend at least 2% of their average net profits on CSR activities. Failure to comply with this legal obligation can lead to penalties and legal consequences.

4. Companies Act and CSR applicability

The concept of Corporate Social Responsibility (CSR) was introduced through the Companies Act, 2013 which puts a greater responsibility on companies in India to set out a clear CSR framework.

Section 135 of the Companies Act, 2013 which came into effect on April 1, 2014, imposes obligations on certain companies regarding Corporate Social Responsibility (CSR) activities. The provision requires qualifying companies to allocate a specific portion of their profits towards CSR initiatives. This legal requirement aims to encourage businesses to take responsibility for their social and environmental impact. By mandating CSR spending, the law emphasizes the importance of companies' contribution to society, making it a regulatory obligation for eligible entities.

5. Meaning of CSR as per the Companies Act, 2013

As per rule 2(d) of the CSR rules “Corporate Social Responsibility (CSR)" means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these rules.

5.1. Activities that do not qualify as eligible CSR activities

Following activities are specifically excluded from the purview of the CSR activities:

(a) Activities are undertaken in pursuance of normal course of business of the company However, exemption is provided for three financial years, till FY 2022-23, to companies engaged in R&D activities for new vaccines, drugs, and medical devices in their normal course of business, related to COVID. This exclusion is allowed only in case the companies are engaged in R&D in collaboration with organisations as mentioned in item (ix)1 of Schedule VII and disclose the same in their Board reports.

1 Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the Central Government or State Government or Public Sector Undertaking or any agency of the Central Government or State Government; and Contributions to public funded Universitie listed in Sch- ix like Indian Institute of Technology (IITs); National Laboratories and autonomous bodies established under Department of Atomic Energy (DAE); Department of Biotechnology (DBT); Department of Science and Technology (DST); Department of Pharmaceuticals; Ministry of Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy (AYUSH) etc.

(b) Any activity undertaken by the company outside India except for training of Indian sports personnel representing any State or Union territory at national level or India at international level

(c) Contribution of any amount directly or indirectly to any political party under section 182 of the Act

(d) Activities benefitting employees of the company as defined in clause (k) of section 2 of the Code on Wages, 2019 (29 of 2019)

(e) Activities supported by the companies on a sponsorship basis for deriving marketing benefits for its products or services

(f) Activities carried out for fulfillment of any other statutory obligations under any law in force in India.

5.2. Whether Contribution in kind can be treated as CSR expenditure?

Section 135(5) states that “The Board of every company shall ensure that it spends…” Therefore, CSR contribution cannot be in kind and monetized as CSR expenditure.

6. Class of Companies under obligation to spend on CSR

Section 135 of the Companies Act, 2013 prescribes that the following class of companies are required to spend on CSR activities:

(a) Companies having net worth2 of Rs. 500 crores or more or

(b) Companies having turnover3 of Rs. 1,000 crores or more or

(c) Companies having a net profit of Rs. 5 crores or more during the immediately preceding financial year.

It is to be noted that every company including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfills the criteria as specified above shall comply with the CSR provisions.

2 Defined under section 2(57) of the Companies Act, 2013

3 Defined under section 2(91) of the Companies Act, 2013

6.1. Meaning of the Net Profits

Explanation to section 135 prescribes that the net profits shall be calculated as per the provisions of section 198 (i.e. calculation of net profits for managerial remuneration). Further, the following shall not be included in the calculation of the net profits for the purpose of CSR:

(a) Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

(b) Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.

However, in the case of the foreign net profit means the net profit of such company shall be as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381, read with section 198 of the Act.

7. Understanding the Applicability and implications of CSR Regulations on Section-8 Companies or Govt. Companies

Section 135(1) of the Companies Act, 2013 indicates that the Corporate Social Responsibility (CSR) provisions apply to all types of companies which fulfils the criteria as specified in section 135(1).

Section 8 companies and government companies are not exempted from CSR funding under the Companies Act, 2013. The High-Level Committee recommended exempting Section 8 companies, but the Company Law Committee disagreed, stating that all companies should comply with CSR provisions. Currently, there are no exemptions for Section 8 or government companies, and the Ministry of Corporate Affairs has clarified this through FAQs. Therefore, CSR provisions apply to these companies as well.

8. Minimum CSR spending

The company shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial year.

Where the company has not completed the period of 3 financial years since its incorporation, the average shall be calculated during such immediately preceding financial years.

Further, 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.

9. Composition of CSR committee

As per rule 2(d) of the CSR rules “Corporate Social Responsibility (CSR)" means the activities undertaken by a Company iThe class of companies falling under section 135 of the Companies Act, 2013 is required to form a Corporate Social Responsibility Committee of the Board.

Where the amount to be spent by a company on CSR does not exceed Rs. 50 lakhs, the requirement of the constitution of the CSR Committee shall not be applicable and the functions of such Committee shall be discharged by the Board. However, if a company is having any amount in its Unspent Corporate Social Responsibility Account as the company shall constitute a CSR Committee irrespective of the CSR amount.

9.1. Composition in case of the Listed Companies

In the case of the listed Companies, the CSR committee shall comprise of 3 or more directors, out of which one shall be the independent director.

9.2. Composition in case of the Unlisted Public Companies

In the case of unlisted public companies, the CSR committee shall comprise of 3 or more directors, out of which one shall be the independent director.

However, if there is no requirement of appointing an independent director, the committee shall comprise of two directors only.

9.3. Composition in case of Private Companies

In the case of Private Companies, the CSR committee shall comprise of 2 or more directors only, as the requirement of appointing an independent director is not applicable on private companies.

9.4. Composition in case of Foreign Companies

In case of foreign companies the CSR committee shall comprise of at least two persons out of which

(a) One shall be a person resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company {section 380(1) (d)}

(b) Another shall be nominated by the foreign company.

10. Different modes of incurring CSR expenditure

The CSR expenditure can be done in three ways:

Activities Route

Contribution to fund Route

It is a direct mode wherein a company undertakes the CSR projects or programmes as per Schedule VII of the Act, either by itself or by engaging implementing agencies.

It allows the contributions to various funds as specified in Schedule VII of the Act.

It allows contribution to incubators and R&D projects as specified in item (ix)(a) and contribution to institutes/organisations, engaged in research and development activity, as specified under item (ix)(b) of Schedule VII of the Act.

10.1. Activities Route

10.2. Contribution to funds route

Contribution to incubators and R&D Projects

10.3. Contribution to incubators and R&D projects

A company may undertake the CSR activities through any of the following ways:

(a) A Company can implement CSR either itself or

(b) through any of the following entities established by the company, either singly or along with any other company

a Company established under section 8 of the Act

a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 and approved under 80 G of the Income Tax Act, 1961

a registered public trust or a registered societyregistered under section 12A and approved under 80 G of the Income Tax Act, 1961

(c) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government

(d) any entity established under an Act of Parliament or a State legislature

(e) a company established under section 8 of the Act, or a registered public trust or a registered society, exempted under sub-clauses (iv), (v), (vi) or (via) of clause (23C) of section 10 or registered under section 12A and approved under 80 G of the Income Tax Act, 1961, and having an established track record of at least 3 years in undertaking similar activities

It's important to note that if a company chooses to implement CSR activities through agencies listed in point (e), which are not established by the company itself or in collaboration with another company, then the selected agency must have a proven track record of at least 3 years in undertaking similar CSR activities. This requirement ensures that the agency has experience and expertise in carrying out such initiatives.

11.1. MCA widnes the scope of CSR

agencies to include certain registered trusts and societies under Section 10(23C) of IT Act, in its ambit

The exemption to charitable trust and institution is available under the following two regimes under the Income-tax Act subject to the fulfilment of the conditions provided under various sections:

(a) Any fund, institution, trust, university, other educational institution, hospital or other medical institution approved under sub-clauses (iv), (v), (vi) and (via) of Section 10(23C); and

(b) The trusts registered under Section 12A/12AB

The Income-tax Act allows approval under Section 10(23C) as an alternative to registration under Section 12A/12AB. However, for the purpose of Rule 4(1) of the CSR rules (i.e., implementing agencies for CSR), approval under Section 10(23C) alone was not sufficient.

This situation has caused practical difficulties for entities that have obtained approval under Section 10(23C) and Section 80G but are not registered under Section 12A. Therefore, trusts were inclined to opt for registration under Section 12A and surrender their approval under Section 10(23C).

The requirement of mandatory registration under Section 12A for compliance with CSR rules would result in entities that hold approval under Section 10(23C) being deprived of CSR funding.

Considering the above difficulties and in order to facilitate CSR funding, MCA vide notification

G.S.R. 715(E) dated 20-09-2022 has also allowed registered public trusts or registered societies that are approved under Section 10(23C) (iv), (v), (vi), or (via) and Section 80G of the Income-tax Act to act as implementing agencies.

12. Prior registration of implementing agencies with ROC before accepting CSR funding

The implementing agency that intends to undertake any CSR activity, shall register itself with the Central Government by filing the form CSR-1 electronically with the ROC. On the submission of the Form CSR-1 on the portal, a unique CSR Registration Number shall be generated by the system automatically.

It is to be noted that filing of CSR-1 was made mandatory from 01/04/2021 therefore, it will not affect the CSR projects or programs approved prior to the 01st day of April 2021.

implementing

13. Reporting of the CSR

Every Company on which CSR provisions are applicable shall furnish a report on Corporate Social Responsibility to the concerned ROC in Form CSR-2.

The last date of filing form CSR-2 for financial year 2022-23 shall be on or before 31st March, 2024.

The same is to be filed after filing Form No. AOC-4/Form No. AOC-4-NBFC/ Form No. AOC-4 XBRL as the case may be.

14. CSR Disclosure requirements

A Company on which CSR provisions are applicable shall disclose the contents of the CSR Policy in the Board’s report.

Further, in case of a foreign company, the balance sheet filed under clause (b) of sub-section (1) of section 381 of the Act, shall contain an annual report on CSR containing such particulars as specified under the CSR rules.

Furthermore, the detail of the composition of the CSR Committee, and CSR Policy and Projects approved by the Board shall also be disclosed on their website, if any, for public access

15. What if Company fails to spend the minimum prescribed amount?

If a company fails to spend the minimum CSR amount then its treatment depends upon whether that unspent amount relates to an ongoing project or not.

Unspent CSR Amount

15.1. The unspent amount doesn’t relates to an ongoing project

In case the unspent amount doesn’t relate to an ongoing project the following steps is to be followed:

Step 1: The Board shall make the disclosure in its Board Report and shall specify the reasons for not spending the prescribed CSR amount.

Step 2: The Company shall within 6 months from the close of the financial year shall transfer the unspent amount to any of the following funds as specified under Schedule VII:

(a) Clean Ganga Fund

(b) Swach Bharat Kosh Fund

(c) Prime Minister’s National Relief Fund

(d) Prime Minister's Central Assistance and Relief in Emergency Situations Fund (PM CARES Fund)

(e) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

15.2. The unspent amount relates to an ongoing project

In case the unspent amount relates to an ongoing project4 the following steps is to be followed:

Step 1: The Board shall make the disclosure in its Board Report and shall specify the reasons for not spending the prescribed CSR amount.

Step 2: The Company shall within 30 days from the closure of the financial year transfer such amount to a special account to be opened by the company in any scheduled bank to be called the “Unspent Corporate Social Responsibility Account”.

Step 3: The Company shall spend such amount on its obligation towards CSR within 3 financial years from the date of transfer to the Unspent CSR account.

Step 4: If the Company fails to spend the Unspent CSR amount within 3 years as specified above, then the Company shall transfer the same to a Fund specified in Schedule VII, within a period of 30 days from the date of completion of the 3rd financial year.

4 “Ongoing Project” means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification.

16. What if Company spends an excess amount?

If a Company has spent an excess amount i.e. in excess of the CSR obligation then in that case such excess amount may be set off against the future CSR obligation up to immediate succeeding 3 financial years provided that a Board resolution has been passed by the Company.

However, it is to be noted that the excess amount available for set-off shall not include the surplus5 arising out of the CSR activities, if any.

16.1. If a company cannot take the benefit of set off of excess amount spent in the previous financial year because of non-applicability of CSR provisions, will

the excess amount

lapse?

Yes, the law states that the excess CSR amount spent can be carried forward up to immediately succeeding 3 financial years, thus, in case any excess amount is left for set off, it will lapse at the end of the said period

For example in FY 2020-21 a company had spent Rs. 2 crores in excess. In FY 2021-22, it sets-off Rs. 50 lakhs from such excess. However, from FY 2022-23, the company is no longer subject to CSR provisions under section 135(1). In such case, the company may continue to retain the remaining excess CSR of Rs. 1.50 crores up to FY 2023-24, and thereafter the same shall lapse.

5 Surplus refers to income generated from the spend on CSR activities, e.g., interest income earned by the implementing agency on funds provided under CSR, revenue received from the CSR projects, disposal/sale of materials used in CSR projects, and other similar income source.

17. Penal provisions in case company fails to transfer the unspent CSR amount

17.1. Penalty on the Company

If a company is in default in complying with the CSR provisions, the company shall be liable to a penalty:

(a) twice the amount required to be transferred by the company to the Fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, as the case may be, or

(b) 1 crore rupees,

whichever is less

17.2. Penalty on the officer in default

Every officer of the company who is in default shall be liable to a penalty:

(a) 1/10th of the amount required to be transferred by the company to such Fund specified in Schedule VII, or the Unspent Corporate Social Responsibility Account, as the case may be, or

(b) 2,00,000 rupees,

whichever is less

Concluding remarks

Corporate Social Responsibility (CSR) is vital for creating positive social impact and sustainable development. It benefits both companies and society, enhancing reputation, attracting talent, and fostering long-term growth. With increasing support from regulators and a growing demand for responsible practices, we must continue working together to champion CSR as a force for good and create a better, more inclusive world.

The Companies Act, 2013 has specific provisions governing CSR. It has outlined the specific companies to which CSR provisions apply. It is essential for these companies to be mindful of various timelines and considerations such as the treatment of unspent or excess CSR funds, the implementation of CSR initiatives, and the constitution of CSR committees.

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