What is CSR? Corporate Social Responsibility (CSR) is the initiatives taken by a company to create social awareness or encourage a positive impact on the environment and stakeholders including customers, consumers, communities, suppliers, employees and investors etc. We have already discussed various FAQs on CSR Policy.
Actually, the concept of Corporate Social Responsibility is governed by the provisions of section 135 of Chapter-IX (Sec. 128-138) and Schedule VII of the Companies Act, 2013 read with CSR Policy Rules 2014. Section 135, Schedule-VII and CSR Policy Rules, 2014 has been effective from the first day of April, 2014 vide Notification No. S.O. 582(E) dated 27th February, 2014.
Scope or Applicability Criteria for CSR Requirements
Which company shall constitute CSR committee? Every company which shall fall under any of the following criteria during any financial year shall constitute Corporate Social Responsibility (CSR) committee as per sec. 135(1) of the Companies Act, 2013:
i) Net profit of ₹ 5 crore or more; or
ii) Net worth of ₹ 500 crore or more; or
iii) Turnover of ₹ 1000 crore or more.
The CSR committee of the Board shall consist minimum three directors and out of which there must be at least one independent director. In compliance with section 135(2), the composition of the CSR Committee shall be disclosed in the Board’s report under sub-section (3) of section 134.
The phrase “any financial year” creates confusion that which financial year should be taken into account while checking the above conditions to constitute CSR committee. In other words, whether a company considers its Turnover/Net Worth/Net Profit during the current year or during previous financial years to determine CSR applicability.
The Ministry of Corporate Affairs (MCA) has now clarified vide General Circular No. 21/2014 date 18/06/2014 that “Any financial year” referred under Sub-Section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’.
Functions of Corporate Social Responsibility Committee [Section 135(3)]
In accordance with the provisions of section 135(3), the CSR committee shall formulate CSR Policy, recommend the expenditures and monitor the same periodically.
Formulation of CSR Policy: The CSR committee shall formulate and recommend CSR Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII.
Recommend Expenses for CSR: The CSR committee shall recommend the amount of expenditure to be incurred on the activities which may be included by companies in their Corporate Social Responsibility Policies.
Monitor CSR Policy: The CSR committee shall monitor the Corporate Social Responsibility Policy of the company from time to time.
Role of Board of Directors regarding CSR [Section 135(4)]
The Board of every company which constitute CSR committee shall have the following responsibility or duty in accordance with section 135(4):
Approval of CSR Policy: After taking into account the recommendations made by the Corporate Social Responsibility Committee, the Board of Directors shall approve the Corporate Social Responsibility Policy for the company.
Disclosure of CSR Policy Contents: The contents of CSR Policy shall be disclosed in the report of the Board of Directors. The CSR Policy contents shall also be placed on the company’s website, if any, in the prescribed manner.
Ensure CSR Activities: The BOD shall ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
Companies to Spend Required Percentage of Net Profit on CSR activities
The Board of every company covered u/s 135(1), shall ensure that the company spends at least 2% of the average net profits during the last 3 financial years in pursuance of its Corporate Social Responsibility Policy.
The average net profit shall be calculated in accordance with the provisions of section 198 which deals with the provisions for Calculation of Profits.
Note 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.
However, if the company fails to spend such amount then the Board shall specify the reasons for the same in its report made under clause (o) of sub-section (3) of section 134.
Disclosure of Expenses made for CSR Activities
The amount of expenditure incurred on corporate social responsibility activities shall be disclosed as additional information by way of notes as required by sub-clause (k) of clause (i) of item number 5 of PART-II (General Instructions for Preparation of Statement of Profit and Loss) of Schedule-III.
For more information relating to Corporate Social Responsibility you should read the Schedule-VII along with the CSR Policy Rule 2014.