CSR; The Harnessing Fertility for Corporate Sustainability
By CA. Sudhir Kumar Dash
Came the 2013 came the Companies Act 2013 stimulating India Inc the must to think on Sustainable Development. Section 135 of the Companies Act 2013 became a self-contained code to bind corporate with a fasted liability to set Corporate Social Responsibility “CSR” equally important an aspect centre to Corporate Governance.
The CSR framework adopted in Section 135 of the Companies Act, 2013 is premised on the principle that profitmaking enterprises should contribute a prescribed amount to social and environmental causes such as eradicating hunger and poverty, promoting education and gender equality and promoting health care.
This Section states that every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1,000 crore or more or net profit of rupees five crore or more during any financial year, shall constitute a CSR Committee of the Board consisting of three or more Directors, including at least one Independent Director, to recommend activities for discharging corporate social responsibilities in such a manner that the company would spend at least 2 per cent of its average net profits of the previous three years on specified CSR activities. Giving this information in written reply to a question in the Rajya Sabha today, Shri Sachin Pilot, Minister of Corporate Affairs, said that such expenditure will be incurred directly by the companies.
Since 2013; 8 plus years gone, the Governance yet to evolve to catch the legislative objective of Sustainability. There are more questions that clarity as India Inc have never been up for Corporate Goal going beyond profit, paying taxes and ensure compliance. Sustainable Development still a high-sounding and not my prerogative mindset to many corporate leaders with whole concentration being Profit, Taxes, and shareholders value. To give clarity and with an aim to strengthen the CSR ecosystem, by improving disclosures and by simplifying compliances, the MCA issued General Circular No. 14 /2021 providing answer to many questions. The author is amplifying further from his knowledge, experience, many of the confusion prevalent in India Inc ensuring a wholistic compliance to the CSR Law.
|Which companies qualify for CSR under the Companies Act, 2013?
|A company satisfying one or more of the following criteria
(i) net worth of rupees five hundred crore or more, or
(ii) turnover of rupees one thousand crore or more, or
(iii) net profit of rupees five crore or more.
|Whether the holding company satisfying compliance is good enough for the subsidiary company if compliance applicable?
|No, the compliance with CSR requirements is specific to each company. A holding or subsidiary of a company is not required to comply with the CSR provisions unless the holding or subsidiary itself fulfils the eligibility criteria prescribed under section 135(1) stated above.
|Whether provisions of CSR are applicable to a section 8 Company?
|Yes, section 135(1) of the Act commences with the words “Every company……..” and thus applies to section 8 companies as well.
|Whether CSR provisions apply to a company that has not completed the period of three financial years since its incorporation?
|Yes. If the company has not completed three financial years since its incorporation, but it satisfies any of the criteria mentioned in section 135(1), the CSR provisions including spending of at least two per cent of the average net profits made during immediately preceding financial year(s) are applicable.
|Whether provisions of CSR are applicable to a foreign company having business in India Say a Foreign Bank Branch?
|Yes, if the threshold as prescribed is fulfilled
|Who will be the Director in case of the Foreign Company
|The CEO and/or KMP appointed for such operation in India shall be deemed as the Director Ex-Office for all compliance
|What are the functions of the CSR Committee?
|The Corporate Social Responsibility Committee shall — (i) formulate and recommend the CSR policy to the Board; (ii) recommend the amount of expenditure to be incurred on CSR activities; (iii) monitor the CSR policy of the company from time to time; and (iv) formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the items as mentioned in rule 5(2) of the Companies (CSR Policy) Rules, 2014. For companies covered under Section 135(9) of the Act and not required to have CSR Committee, these functions shall be carried out by the Board itself.
|What are the responsibilities of the Board in relation to the CSR provisions?
|CSR is a Board-driven process. The responsibilities of the Board of a CSR-eligible company, inter-alia, include the following — (i) approve the CSR policy; (ii) disclose contents of such policy in its report and also place it on the company’s website, if any; (iii) ensure that the activities included in the CSR policy are undertaken by the company; (iv) ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years; (v) satisfy itself regarding the utilisation of the disbursed CSR funds; and (vi) if the company fails to spend at least two per cent of the average net profits of the company, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount and transfer the unspent CSR amount as per provisions of sections 135(5) and 135(6) of the Act
|What is the role of the Government in the approval and implementation of the CSR programmes/projects of a company?
|Provisions of section 135, read with Schedule VII of the Act and Companies (CSR Policy) Rules, 2014 provide the broad framework within which the eligible companies are required to formulate their CSR policies including activities to be undertaken and implementation of the same. CSR is a board-driven process, and the Board of the company is empowered to plan, approve, execute, and monitor the CSR activities of the company based on the recommendation of its CSR Committee. The Government has no direct role in the approval and implementation of the CSR programmes /projects of a company.
|What are the mechanisms for monitoring the CSR process?
|CSR is a Board-driven process, and the Board of the company is empowered to plan, decide, execute, and monitor the CSR activities of the company based on the recommendation of its CSR Committee. The CSR architecture is disclosure-based and CSR-mandated companies are required to file details of CSR activities annually in MCA21 registry. Companies are required to make necessary disclosures in the financial statements regarding CSR including non-compliance. The existing legal provisions such as mandatory disclosures, accountability of the CSR Committee and the Board, and provisions for audit of accounts of the company provide sufficient mechanisms for monitoring.
|What is the role of the Government in monitoring compliance of CSR provisions by companies?
|The Government monitors the compliance of CSR provisions through the disclosures made by the companies in the MCA 21 portal. For any violation of CSR provisions, action can be initiated by the Government against such non-compliant companies as per provisions of the Companies Act, 2013 after due examination of records, and following due process of law. Noncompliance of CSR provisions has been notified as a civil wrong w.e.f. 22nd January, 2021.
|How is average net profit calculated for the purpose of section 135 of the Act? Whether ‘profit before tax’ or ‘profit after tax’ is used for such computation?
|Profit Before Tax (PBT) is used for computation of net profit under section 135 of the Act.
|What is the meaning of the term ‘administrative overheads? What is the maximum permissible limit for administrative overheads?
|Administrative overheads generally comprise of items such as employee costs, utilities, office supplies, legal expenses, etc. However, expenses which are attributed to the project implementation shall be included in project cost only
The maximum permissible limit for administrative overheads is five per cent of the total CSR expenditure of the company for the financial year.
|Whether contribution to the corpus of an entity is an admissible CSR expenditure?
|No, the provision relating to contribution to corpus as admissible CSR expenditure has been amended and the contribution to corpus of any entity is not an admissible CSR expenditure w.e.f. 22nd January, 2021
|Whether it is mandatory for companies to carry out CSR in their local areas?
|The first proviso to section 135(5) of the Act provides that the company shall give preference to local areas and the areas around where it operates. Some activities in Schedule VII such as welfare activities for war widows, art and culture, and other similar activities, transcend geographical boundaries and are applicable across the country. With the advent of Information & Communication Technology (ICT) and emergence of new age businesses like e-commerce companies, process-outsourcing companies, and aggregator companies, it is becoming increasingly difficult to determine the local area of various activities. The spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals (SDGs). Thus, the preference to local area in the Act is only directory and not mandatory in nature and companies need to balance local area preference with national priorities.
|Whether CSR expenditure of a company can be claimed as a business expenditure?
|No, the amount spent by a company towards CSR cannot be claimed as business expenditure. Explanation 2 to section 37(1) of the Income Tax Act, 1961
|What are the different modes of incurring CSR expenditure?
|CSR expenditure can be incurred in multiple modes: (i) ‘Activities route’, which is a direct mode wherein a company undertakes the CSR projects or programmes as per Schedule VII of the Act, either by itself or by engaging implementing agencies as prescribed in Companies (CSR Policy) Rules, 2014. (ii) ‘Contribution to funds route’, which allows the contributions to various funds as specified in Schedule VII of the Act. (iii) Contribution to incubators and R&D projects, as specified in item (ix)(a) and contribution to institutes/organisations, engaged in research and development activity, as specified under item (ix)(b) of Schedule VII of the Act.
|Which are the funds specified in Schedule VII of the Act for the purpose of CSR contribution?
|Contributions to the following funds shall be admissible as CSR expenditure: (i) Swachh Bharat Kosh (ii) Clean Ganga Fund (iii) Prime Minister’s National Relief Fund (PMNRF) (iv) Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM CARES Fund) (v) Any other fund set up by the Central Government and notified by the Ministry of Corporate Affairs, for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.
|Will contribution to any other fund set up for carrying out the activities mentioned in Schedule VII of the Act, be an admissible CSR expenditure?
|No, the Act does not recognise any contribution to any other fund, which is not specifically mentioned in Schedule VII, as an admissible CSR expenditure.
|Can CSR funds be utilised to fund Government schemes?
|The objective of CSR provisions is to involve the corporates as partners in the social development process. Use of corporate innovations and management skills in the delivery of ‘public goods’ is at the core of CSR implementation by the companies. Therefore, CSR should not be interpreted as a source of financing the resource gaps in Government Schemes. However, the Board of the eligible company may undertake similar activities independently subject to fulfilment of Companies (CSR Policy) Rules, 2014.
|Whether involvement of employees of a company in their CSR projects can be monetized and accounted for under the head of ’CSR expenditure’?
|No, involvement of employees in CSR projects of a company cannot be monetized. Contribution and involvement of employees in CSR activities of the company will no doubt generate interest/pride in CSR work and promote transformation from Corporate Social Responsibility (CSR) as an obligation to Socially Responsible Corporate (SRC) in all aspects of their functioning. Companies, therefore, should be encouraged to involve their employees in CSR activities
|How can companies with small CSR funds take up CSR activities in a project mode?
|A well-designed CSR project can be managed with small CSR funds as well. Further, there is a provision in the Companies (CSR Policy) Rules, 2014 that enables such companies to collaborate with other companies for undertaking CSR activities by way of pooling their CSR resources. (Refer rule 4(4) in Companies (CSR Policy) Rules, 2014)
|What are the responsibilities of the Board in case ongoing projects are undertaken by the company?
|In case of ongoing projects, the major responsibilities of the Board, inter-alia, include: (i) identification of the ongoing projects; (ii) year-wise allocation of funds; (iii) transferring the unspent money to a separate bank account as prescribed under sub-section (6) of section 135; (iv) monitoring the implementation of the projects with reference to the approved timelines and year-wise allocation; and (v) making modifications, if any, for smooth implementation of the projects within the overall permissible time period.
|Can ongoing projects be implemented through implementing agencies?
|Yes, once the Board approves a project as an ongoing project, then it can choose to implement the project either itself, or through any of the implementing agencies as mentioned in rule 4(1) of the Companies (CSR Policy) Rules, 2014.
|Does the Board have the power to abandon or modify an ongoing project within the permissible period of three years?
|As per provisions of the CSR Rules, the Board may abandon or modify an ongoing project, partially or wholly, under exceptional circumstances, during the prescribed project period as per the recommendation of its CSR Committee, and by providing reasonable justification to that effect. It is important to keep in mind that the maximum permissible period for an ongoing project is three years excluding the year of its commencement.
|Can funds earmarked for one project be used for another project?
|Yes, the budget outlay dedicated for one project can be used against another project. In such a case, the Board and CSR Committee should appropriately record the alteration in the target spending and modify the same in accordance with the actuals.
|Is it mandatory for foreign companies to give reports on CSR activities?
|Yes, as per rule 8(2) of the Companies (CSR Policy) Rules, 2014, in case of a CSR-eligible foreign company, the balance sheet filed under clause (b) of sub-section (1) of section 381 of the Act, shall include an annual report on CSR containing particulars specified in Annexure I or Annexure II of the said rules, as applicable.
|What are the disclosure requirements on the website of the company?
|As per rule 9, the Board of Directors of the company shall mandatorily disclose the following on their website, if any, for public access: (i) Composition of the CSR Committee; (ii) CSR Policy; and (iii) Projects approved by the Board.
|Whether every CSR project irrespective of outlay and percentage to the total CSR expenditure of the company needs to be disclosed on the website of the respective company in terms of rule 9 of the Companies (CSR Policy) Rules, 2014?
|Yes, as per rule 9 of the Companies (CSR Policy) Rules, 2014, all CSR projects approved by the Board are required to be disclosed on the website of the company, if any, for public access.
|Whether Donation to NGO qualifies CSR
|Donation to NGO may fit under charity and/or sympathy expenditure but not CSR unless it is within the purview, purpose and parameters set out under section 135 of the Companies Act 2013
|Whether the Defaults under the CSR is compoundable?
|The CSR failure considers to be civic disobedience and financial penal provisions are explicitly provided under the law. However, for continued offence one must forget the criminal liability cased under section 2(60) and other respective provision on Directors and Key man person and other officer in default.
|What benefits the company gets by donating to prescribed funds?
|The Contribution to eligible funds may entitle benefits under section 80G if such funds are as such registered.
|What value proposition a company gets by doing CSR.
|CSR spending is strategically aimed for sustainable Development Goal of India Inc. The CSR Programme is an enabling platform for corporate community engagement adding extra ordinary Social Capital to Company. Not to forget the Brand Value, PR, GOTO advantage with regulators and implementing agencies.
|Can a company hire a private company as implementing agencies?
|No, an implementing agencies for the purpose of CSR has to be an NGO registered as Trust, Society or unless it is a Section 25 company.
About the Author
CA. Sudhir Kumar Dash, an awardee from the House of Commons, British Parliament and recipient of Odisha Gaurav Award from H.E. the Governor of Odisha is a Fellow CA, Qualified Lawyer, Philanthropist and Environmentalist holding key positions in different organisations/forums. A social entrepreneur, industrial consultant, a good face as a tax litigator he is well reckoned with. CA. Sudhir is the President of CRESPAI (Confederation of Renewable Energy Service Professionals and Industries), a Confederation of Industries and Professional for promotion of Renewable Energy and Clean Environment. An Independent Director in Guenstiger.de, a German MNC. CMD in PPG International, an Inbound Investment advisory company, Chairman of HighFive Global and also in ROOTS OF ODISHA FOUNDATION. Mr. Dash looks is a strong advocate, and value creation advisor for compliance, governance towards CSR Portfolio to several domestic and multinational companies.