All about CSR Regulations in India

Corporate social responsibility rests on the ideology of give and take i.e. to take scarce resources from the environment for running of business, and in turn to contribute towards economic, social and environmental development.

Organisations often find themselves in a conundrum of maintaining parity between attainment of economic and social goals. However, they should operate in a manner which integrates social or environmental concerns with their business operations and stakeholders’ interactions.

Indubitably, India has emerged as one of the leading nations of the world to mandate CSR journey of businesses. The maiden year of CSR implementation and reporting was 2014-15, effective from 1st April, 2014.

Way back in 2013, the Central Government was under no trepidation about the nation-wide acceptability of corporate social responsibilities being made legal. In fact, since the landmark enactment of Section 135 of the Companies Act, 2013, Schedule VII and the Companies (Corporate Social Responsibility Policy) Rules, 2014, the earmarks of CSR initiatives in the country have been apparently visible.

Not only do CSR regulations aim to legitimately prevent a corporate from indulging in any outrageous consumption of environmental resources, they also enable it to shape responsible and supportable relationships with the community at large, thereby growing its business progressively.

An organisation, in order to become sustainable, must strive to ameliorate social problems, minimize its negative environmental impacts and operate in absolute conformity with societal expectations. A proper implementation of CSR policies can bring a broad range of competitive advantages to companies such as:

  • Greater employee engagement and efficient human resource base
  • Operational cost savings
  • Improved quality and productivity
  • Brand building, improved reputation and better public relations
  • Increased sales and profits
  • Strengthened customer loyalty
  • Better risk management processes
  • Improved decision-making

Companies have no recourse left, but to cite in the Board’s Report u/s 134(3) annexed with annual financial statements, the details pertaining to CSR policy developed and implemented during each financial year. Here is a brief summary of CSR regulations in India:


Section/Rule

Particulars

What it says?

Section 135(1)

Applicability of CSR

Companies having

  • net worth of INR 500 crore or more, or
  • turnover of INR 1,000 crore or more, or
  • net profit of INR 5 crore or more

during the immediately preceding financial year, are mandatorily required to constitute a CSR Committee

Section 135(1)

Composition of CSR Committee

  • The CSR Committee is to consist of 3 or more directors, out of which minimum one director shall be an independent director
  • For companies which are not required to appoint an independent director u/s 149(4), CSR Committee is to consist of 2 or more directors

Section 135(2)

Disclosure of composition

The composition of CSR Committee is to be disclosed in the Board’s Report maintained u/s 134(3)

Section 135(3)

Role of CSR Committee

The CSR Committee shall:

  • formulate and recommend a CSR policy to the Board, indicating the activities ought to be undertaken by the company in areas specified in Schedule VII*
  • prescribe the amount of expenditure to be incurred on CSR activities
  • monitor CSR policy periodically

Section 135(4)

Functions of the Board

The Board of the company shall:

  • approve the CSR policy, after taking into consideration, the recommendations proposed by CSR Committee
  • disclose the contents of CSR policy in the Board’s Report maintained u/s 134(3) and on the company’s website, in the manner prescribed under Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 2014
  • ensure that activities as stipulated in CSR policy, are undertaken by the company

Section 135(5)

Minimum annual outlay on CSR

For every financial year, the Board shall:

  • oversee that the company disburses towards CSR movements, at least 2% of the company’s average net profits derived during immediately preceding 3 financial years
  • on failure to disburse such amount, specify in its Board’s Report maintained u/s 134(3), the reasons for non-compliance

It is further stated that, for spending the funds allocated for CSR activities, preference shall be given to the local vicinity of company’s operations.

Rule 3(1)

Extended CSR applicability

CSR provisions also apply to a holding company, subsidiary company and foreign company defined u/s 2(42) having its branch office in India, provided criteria specified u/s 135(1) is met.

Rule 3(2)

Companies not to abide by CSR

In case the criteria specified u/s 135(1) is not met by a company for 3 consecutive financial years, it shall be refrained from following CSR provisions till the time such criteria is fulfilled.

Rule 4(4)

Execution in India only

CSR projects or programs undertaken in India only shall amount to CSR Expenditure.

Rule 4(5)

Universal benefits

CSR projects or programs that predominantly benefit only the employees of the company and their families shall not be considered.

Rule 6(2)

Any surplus

CSR Policy must specify that the surplus arising out of CSR projects or programs shall not form part of the business profits.

Rule 9

Disclosure

The Board’s Report and company’s website must display CSR details in a predefined layout prescribed as per the particulars specified in Annexure to the Companies (CSR Policy) Rules, 2014.


*Schedule VII of the Companies Act, 2013 prescribes a number of activities which may be included by companies in their Corporate Social Responsibility Policies. Some of these are eradicating hunger, poverty and malnutrition, promoting education, ensuring environmental sustainability and ecological balance, promoting gender equality and empowering women, benefiting the armed forces veterans and war widows, training to promote rural sports, etc.

 

Ruchi Gandhi 
on 01 July 2019
Published in Corporate Law
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