Following historic amendments to the Companies Act, 2013, India became the first country in the world to mandate Corporate Social Responsibility (CSR). In India, like many other countries, ‘giving back to the society’ has traditionally been seen as a philanthropic activity.
Big industrial and business groups have always donated, done charity, contributed to society and supported communities with humanitarian works. However, this was to their whim and fancy till ‘philanthropy’ was made mandatory to specified companies.
In 2013, with the introduction of Section 135 in the Companies Act, 2013, India became the first country to have statutorily mandated CSR for specified companies. The Companies Act, 2013 requires companies with a net worth of INR 500 crore or more, or turnover of INR 1,000 crore or more, or a net profit of INR five crore or more during the immediately preceding financial year, to spend two per cent of the average net profits of the immediately preceding three years on CSR activities.
The Companies Act also enumerates the various activities and initiatives that can be undertaken and the manner in which the companies can undertake social and humanitarian projects and programmes to legally qualify as corporate social responsibility.
On 29 August 2013, the Companies Act 2013 replaced the Companies Act of 1956 and with it, other than the introduction of Section 135, far-reaching changes were introduced in the way the company is formed, governed, administered, incorporated, etc.
The Ministry of Corporate Affairs, Government of India notified the Section 135 of the Companies Act, 2013 along with Companies (Corporate Social Responsibility Policy) Rules, 2014.
Defining CSR
Corporate Social Responsibility (CSR) is a means through which a company incorporates into its planning, actions and activities, environmental, social and human development concerns, to ensure that the operations it runs and its activities are ethical and benefit the society.
As commonly misunderstood, CSR is not just charity or donations but it is a way of conducting business by a company as a result of which there is visible and substantive contribution towards social good and uplift.
The objective of corporate social responsibility is to share the burden of the State, primarily the government and its agencies, in serving the public at large. The ‘burden’ to provide social services to be shared by specified companies as laid down in the law.
Another important explanation around CSR is the allowance of the expenditure as business expenditure or not. If CSR expenditure is put under the business expenditure bracket, then this expenditure will have to be subsidised by one-third of the amount, thereby defeating the purpose of the Act in the first place.
So, an explanation was inserted in the Act specifying that ‘any expenditure incurred by an assesse on activities relating to CSR shall not be deemed as expenditure incurred by the assesse for the purpose of business and profession’.
CSR expenditure made by a company are philanthropic in nature and not ‘wholly and exclusively’ business expenditure. So, the CSR expenses made by a company are not eligible for deductions under the Income Tax Act, as per the legislation.
At the time of proposing the Corporate Social Responsibility Rules under Section 135 of the Companies Act 2013, the Chairman of the CSR Committee explained the Guiding Principle as well:
‘Corporate Social Responsibility is the process by which an organisation thinks about and evolves its relationships with stakeholders for the common good and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies’.
The evolving law
The mandatory CSR provisions were made effective from 1 April 2014 for specified companies that exhibited a certain profit, turn-over or valuation. The Act also defined the constitution and the functions of the CSR Committee.
As per the Act: The CSR Committee of the Board shall consist of three or more directors, out of which at least one shall be an independent director. Foreign companies shall constitute CSR Committee with at least two persons in which one must be a resident person, authorised to accept notices / documents served on the foreign company and the other as nominated by the foreign company. Unlisted public company (UPC) or a private company, which otherwise does not require an independent director on its board, shall not need an independent director for the purposes of this committee. Any private company which only has two directors on its board shall have the said two directors in the CSR committee.
The Corporate Social Responsibility Committee shall —
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII in areas or subject, specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
Most recently, the Ministry of Corporate Affairs notified the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2022 (2022 Amendment Rules) to the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules) on 20 September 2022. The 2022 Amendment Rules will operate prospectively and not retrospectively.
Ensuring accountability
The Act also lays down the penalty in case of violation of the provisions of the law: If a company contravenes the provisions shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.
In January 2021, the government introduced significant changes to the rules in an attempt to make companies more accountable and transparent and to offer flexibility in CSR spending. The government notified sections of the Companies Act prescribing a monetary penalty for contravention of corporate social responsibility obligations of companies.
The penalty, amounting to at least INR one crore for the defaulting company and at least INR two lakh for each defaulting officer, was introduced in 2020, and came into effect in January 2021, to replace the imprisonment provision (maximum three years) for defaulting officers that was brought in earlier.
It was after protests from many corporate entities that the government decided to remove the imprisonment clause from the Act. The changes introduced also mandated companies to register their entities conducting CSR, conduct impact assessment of large projects and offered more leeway in the utilisation of CSR funds in the spirit of ‘ease-of-doing business’.
As a result of this, today, companies that are qualified for CSR spending are allowed to spend more than the mandated two per cent of their net profits on CSR in any year and the excess amount spent can be set off against the CSR spending obligation in future years, with certain conditions and riders.