UNDERSTANDING CORPORATE SOCIAL RESPONSIBILITY AND LEGAL REQUIREMENTS UNDER THE COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014
Keshav Ram Singhal
Corporate social responsibility (CSR) is a form of corporate self-regulation integrated into a business model. It is also called corporate conscience, corporate citizenship, social performance, sustainable responsible business, or Responsible Business. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. In some models, a firm's implementation of CSR goes beyond compliance and engages in "actions that appear to further some social good, beyond the interests of the firm and that which is required by law." CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere, who may also be considered stakeholders. The term "corporate social responsibility" became popular in the 1960s and has remained a term used indiscriminately by many to cover legal and moral responsibility more narrowly construed.
Corporate social responsibility may be defined as corporate initiative to assess and take responsibility for the organization's effects on the environment and impact on social welfare. The term generally applies to organization efforts that go beyond what may be required by regulators or environmental protection groups. Corporate social responsibility may also be referred to as "corporate citizenship" and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change.
A common understanding is emerging around the world, an organization's long-term financial success goes hand in hand with its record on social responsibility, environmental stewardship and corporate ethics. Georg Kell, executive director, UN Global Compact, suggests five trends that shows 'corporate responsibility is here to stay.' These five trends are: transparency, trust, community participation, assessing new market responsibly, and initiatives to engage organizations.
Dr. Sneh Bhatia (BIS) emphasizes corporate social responsibility as the business contribution to our sustainable development goals. Essentially, it is how business takes into account its economic, social and environmental impacts in the way it operates, maximizing the benefits and minimizing the downsides. Important social responsibility issues she includes are: transparency, fair play, contribution to community (charity giving), ethics and corruption, trust, consumer complaints and redressal, accountability, respecting human rights, respecting privacy, environment, women advancement, advancement of minorities, work place issues, disclosure of information, community outreach, impact on social society, communication and corporate governance.
Having realized the needs of corporate social responsibility in our country, Ministry of Corporate Affairs, Government of India, has framed the Companies (Corporate Social Responsibility Policy) Rules, 2014 in exercise of powers conferred under section 135 and sub-sections 1 and 2 of section 469 of the Companies Act, 2013 and these rules have been published in the Gazette of India date 28 February 2014. Salient features of these rules are as under:
- Every company including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Companies Act having its branch office or project office in India which fulfills the criteria specified in sub-section (1) of section 135 of the Act is required to comply with the provisions of section 135 of the Act and the rules framed under the Companies (Corporate Social Responsibility Policy) Rules, 2014. Accordingly, 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 is required to constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director must be an independent director.
- Net worth, turnover or net profit of a foreign company of the Act is required to be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Act.
- Every company which ceases to be a company covered under sub-section (1) of section 135 of the Act for three consecutive financial years shall not be required to - (a) constitute a CSR Committee; and (b) comply with the provisions contained in sub-section (2) to (5) of the said section, till such time it meets the criteria specified in sub-section (1) of section 135.
- The company is required to undertake CSR activities as per company's stated CSR policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.
- The board of the company may decide to undertake its CSR activities approved by the CSR committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise: Provided that - (i) if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it must have an established track record of three years in undertaking similar programs or projects; (ii) the company has specified the project or programs undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.
- A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
- The CSR projects or programs undertaken in India shall amount to CSR expenditure.
- The projects or programs or activities that benefit only the employees of the company and their families are not to be considered as CSR activities.
- Companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track records of at least three financial years but such expenditure must be limited to five percent of total CSR expenditure of the company in one financial year.
- Any amount contribution given by the company to any political party is not considered as expenditure on CSR activity.
- A company is required to constitute a CSR Committee, for which rules are: (i) an unlisted company or a private company, which does not have independent director, can have its CSR Committee without such independent director, (ii) a private company, having only two directors on its Board, shall constitute its CSR Committee with two such directors, (iii) In case of foreign company in India, the CSR Committee must have at least two persons of which one person must be a person as specified under clause (d) of sub-section (1) of section 380 of the Companies Act and another person is nominated by the foreign company.
- The aim of constituting the CSR Committee is to institute a transparent monitoring mechanism for the implementation of the CSR projects, programs or activities undertaken by the company.
- The company must have the CSR Policy that must (i) include a list of CSR projects or programs which the company plans to undertake, (ii) specify modalities of execution of such projects or programs, (iii) specify implementation schedule for such projects or programs, (iv) specify monitoring process of such projects or programs, and (v) specify that the surplus arising out of the CSR projects or programs must not form part of the business profit of the company.
- It is required to ensure that: (i) the CSR activities does not include the activities undertaken in pursuance of normal course of business of the company, and (ii) the activities included by the company in its CSR Policy are related to the activities included in schedule Vii of the Act.
- All expenditure, including the contribution to corpus, for the projects or programs relating to CSR activities, approved by the Board on recommendations of its CSR Committee, will be CSR expenditure. Any expenditure on an item not in conformity or not in line with activities which fall within purview of schedule VII of the Act will not be the CSR expenditure.
- The Board's Report of a company, covered under the Companies (Corporate Social Responsibility Policy) Rules, 2014, pertaining to a financial year commencing on or after 01 April 2014, must include an annual report on CSR containing particulars specified in the Annexure of the rules. In case of foreign company, the balance sheet filed under sub-section (b) of sub-section (1) of section 381 must contain an annexure regarding report on CSR.
- After taking into account the recommendations of the CSR Committee, the Board of Directors of the company is required to (i) approve the CSR Policy for the company, (ii) disclose contents of such policy in its report, and (iii) the same must be displayed on the company's website, if any, as per the particulars specified in the Annexure.
The Gazette has also provided the annexure mentioning the format for the annual report on CSR activities to be included in the Board's Report.
At the start of this paper, it is stated that Corporate social responsibility (CSR) is a form of corporate self-regulation integrated into a business model, but now in India it has become a legal requirement to follow for 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 specified in sub-section (1) of section 135 of the Act.
- Corporate Social Responsibility, Sneh Bhatia, Standards India (Monthly publication of BIS, New Delhi), April 2006
- The Gazette of India, Extraordinary, 28 February 2014