Definition of CSR

The Companies Act, 2013 does not provide a specific definition for Corporate Social Responsibility (CSR). However, Rule 2(c) of the CSR Rules states:

“Corporate Social Responsibility means and includes but is not limited to:

(i) projects or programs relating to activities specified in Schedule VII of the Act; or

(ii) projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per the declared CSR Policy of the company, provided that such a policy will cover the subjects enumerated in Schedule VII of the Act.”

Applicability of CSR Provisions

Section 135 of the Companies Act, 2013, outlines the applicability of CSR provisions to corporates. Sub-section (1) of this section specifies that every company having:

• A net worth of ₹500 crore or more; or
• A turnover of ₹1000 crore or more; or
• A net profit of ₹5 crore or more

during any financial year shall be required to constitute a CSR Committee of the Board consisting of three or more directors, with at least one director being an independent director. Rule 3 of the CSR Rules specifies that any company which ceases to meet the criteria outlined in section 135 for three consecutive financial years shall no longer be required to constitute a CSR Committee or comply with the provisions of section 135 until such time that it meets the specified criteria again. The Ministry of Corporate Affairs (MCA), through Circular No. 21/2014 dated 18.06.2014, clarified that the term ‘any financial year’ referred to in section 135 means any of the three preceding financial years.

Applicability of CSR Provisions

Holding and Subsidiary Companies
CSR provisions apply to every company, including its holding or subsidiary, if the company meets the criteria specified in sub-section (1) of section 135 of the Act. The net worth, turnover, or net profit of a foreign company will be calculated in accordance with the Act’s requirements.

Foreign Companies
A foreign company, as defined under clause (42) of section 2 of the Act, having a branch office or project office in India, must comply with CSR provisions if it meets the criteria specified in sub-section (1) of section 135. The net worth, turnover, or net profit for such a foreign company will be computed based on its Indian business operations, as per the balance sheet and profit and loss account prepared under section 381(1)(a) and section 198 of the Act.

Types of CSR

1. Environmental Responsibility: This involves initiatives aimed at preserving the environment. Companies can reduce pollution and emissions in manufacturing, recycle materials, replenish natural resources like trees, or create environmentally friendly product lines.
2. Ethical Responsibility: This entails fair and ethical treatment of all stakeholders. Examples include treating all customers fairly regardless of age, race, culture, or sexual orientation; providing favorable pay and benefits for employees; using diverse vendors; and maintaining transparency and full disclosures for investors.
3. Philanthropic Responsibility: This requires companies to contribute to societal well-being. Activities may include donating profits to charities, partnering with suppliers or vendors that share the company’s philanthropic values, supporting employee philanthropic activities, or sponsoring fundraising events.
4. Financial Responsibility: This focuses on backing environmental, ethical, and philanthropic initiatives with financial investments. This can include funding programs, making donations, or investing in research and development for sustainable products, creating a diverse workforce, or implementing diversity, equity, and inclusion (DEI), social awareness, or environmental initiatives.

Composition of the CSR Committee

The Companies Act, 2013, specifies that companies meeting certain financial thresholds—net worth of ₹500 crore or more, turnover of ₹1000 crore or more, or a net profit of ₹5 crore or more—must establish a CSR Committee. This committee should comprise at least three directors, with a minimum of one independent director. The inclusion of an independent director is crucial as it ensures unbiased and impartial oversight of the company’s CSR initiatives.

Functions of the CSR Committee

1. Formulation of CSR Policy
   The primary function of the CSR Committee is to formulate and recommend a comprehensive CSR policy to the Board of Directors. This policy outlines the company’s commitment to social responsibility and includes a list of activities that align with Schedule VII of the Companies Act, 2013. The policy must be tailored to address the unique social, environmental, and economic impacts of the company’s operations.
2. Recommendation of CSR Activities
   The CSR Committee is responsible for identifying and recommending specific CSR projects or programs for the company to undertake. These activities must be in alignment with the company’s CSR policy and should address relevant social and environmental issues. The committee ensures that the recommended projects are feasible, impactful, and aligned with the strategic objectives of the company.
3. Implementation and Monitoring
   Effective implementation and monitoring of CSR activities are crucial functions of the CSR Committee. The committee oversees the execution of CSR projects, ensuring they are carried out in accordance with the approved CSR policy. Monitoring involves tracking the progress of projects, evaluating their impact, and making necessary adjustments to ensure objectives are met. This ongoing oversight helps maintain the effectiveness and relevance of CSR initiatives.
4. CSR Budget
   Financial oversight is another key responsibility of the CSR Committee. The committee recommends the amount of expenditure to be incurred on CSR activities, ensuring compliance with the statutory requirement of spending at least 2% of the company’s average net profits of the last three financial years on CSR. This involves careful planning and allocation of resources to maximize the impact of CSR investments.
5. Compliance and Reporting
   Ensuring compliance with the legal provisions of the Companies Act, 2013, is a critical function of the CSR Committee. The committee is responsible for preparing and submitting periodic reports to the Board of Directors, detailing the progress and expenditure of CSR activities. These reports should include comprehensive information on the projects undertaken, the amount spent, and the outcomes achieved. Additionally, the committee ensures that the details of CSR activities and expenditures are disclosed in the company’s annual report, maintaining transparency and accountability.

The Companies Act, 2013 (India)

Objectives

The Companies Act, 2013, aims to:

1. Enhance Corporate Governance: Strengthen the governance structure of companies to ensure greater transparency and accountability.
2. Protect Interests of Shareholders: Safeguard the rights and interests of shareholders and other stakeholders, ensuring fair treatment.
3. Facilitate Business: Simplify regulations to make it easier to do business in India, promoting growth and development.
4. Strengthen Regulatory Framework: Provide a robust legal framework for the incorporation, functioning, and regulation of companies.
5. Ensure Compliance: Ensure companies comply with various statutory requirements, including financial reporting and audit requirements.
6. Promote Corporate Social Responsibility: Encourage companies to contribute to societal welfare through CSR activities.

Scope

The Companies Act, 2013, covers a wide range of areas:

1. Incorporation of Companies: Rules and procedures for forming a company, including types of companies, registration process, and legal formalities.
2. Corporate Governance: Guidelines on the responsibilities, duties, and conduct of directors, board meetings, and shareholder meetings.
3. Share Capital and Debentures: Regulations concerning the issuance, transfer, and redemption of shares and debentures.
4. Financial Statements and Audit: Requirements for maintaining financial records, preparing financial statements, and conducting audits.
5. Mergers, Amalgamations, and Acquisitions: Provisions related to corporate restructuring, mergers, and acquisitions.
6. Corporate Social Responsibility (CSR): Mandates for certain companies to engage in CSR activities, including the formation of a CSR committee, formulation of CSR policy, and disclosure of CSR expenditures.

Advantages of CSR

1. Enhanced Brand Image and Reputation: Engaging in CSR can improve a company’s public image and reputation, fostering greater customer loyalty.
2. Customer Loyalty and Trust: Consumers are more likely to support and trust businesses that are socially responsible.
3. Employee Satisfaction and Retention: CSR initiatives can boost employee morale and lead to higher productivity and lower turnover rates.
4. Operational Cost Savings: Sustainable practices can lead to reduced waste and improved efficiency, resulting in cost savings.
5. Attracting Investors: Investors increasingly consider CSR as a criterion for investment, as it reflects a company’s long-term sustainability.
6. Risk Management: CSR can help mitigate risks related to environmental, social, and governance (ESG) factors.
7. Innovation and Improvement: CSR can drive innovation as companies seek new solutions to social and environmental challenges.

CSR under the Companies Act, 2013

Section 135 of the Companies Act, 2013, mandates CSR activities for companies meeting specific criteria:

1. Applicability: Companies with a net worth of ₹500 crore or more, turnover of ₹1000 crore or more, or a net profit of ₹5 crore or more during any financial year.
2. CSR Committee: Companies meeting the criteria must form a CSR Committee to oversee and recommend CSR activities.
3. CSR Policy: The CSR Committee must formulate and recommend a CSR Policy to the Board of Directors.
4. Expenditure: Companies are required to spend at least 2% of their average net profits of the last three financial years on CSR activities.
5. Disclosure: Companies must disclose CSR activities and expenditure in their annual reports.

Example of a Company Initiated Under the Companies Act, 2013

A prominent example of a company that has structured its operations and CSR activities as per the provisions of the Companies Act, 2013, is Reliance Industries Limited. As one of the largest conglomerates in India, Reliance Industries has committed to various CSR initiatives, including education, healthcare, rural development, and environmental sustainability, in compliance with the Act’s requirements.

Case Laws

1. Tata Consultancy Services Limited v. Union of India: This case addressed the applicability of CSR provisions under the Companies Act, 2013. The court emphasized that CSR is a mandatory obligation for eligible companies, not merely a voluntary act.
2. Surya Roshni Ltd. v. Employees State Insurance Corporation: This case highlighted the interpretation of CSR activities and their inclusion in statutory compliance. The judgment reinforced that CSR expenditures must be in line with the activities specified under the Act.
3. J.K. Lakshmi Cement Ltd. v. UOI: This case underscored the importance of transparency and accountability in the implementation of CSR activities. The court mandated that companies must adhere to the reporting and disclosure requirements of their CSR initiatives.

These case laws demonstrate the judicial approach towards enforcing and interpreting CSR obligations under the Companies Act, 2013. They highlight the importance of compliance, transparency, and accountability in corporate social responsibility activities.

Conclusion:

In conclusion, a well-defined Corporate Social Responsibility (CSR) policy is crucial for integrating social and environmental concerns into a company’s business strategy. It ensures compliance with legal requirements, enhances stakeholder relations, and contributes to sustainable development. The CSR policy, supported by the CSR Committee, plays a vital role in planning, implementing, and monitoring CSR activities, fostering a positive impact on society while strengthening the company’s reputation and long-term sustainability.