In its literal sense, Corporate Social Responsibility (CSR) is a company’s sense of responsibility towards the society and environment, in which it runs. In other words, CSR activity comprises of three main principles – Sustainability, Accountability and Transparency. The whole concept refers to operating a business in a certain manner which holds it positively accountable for the social and environmental impact created by the business. The ambit of CSR is undoubtedly wide, comprising of many activities including promotion of education, healthcare, gender equality, socially and economically backward groups, eradicating malnutrition, poverty, hunger, and ensuring environmental sustainability and ecological balance, protection of national heritage and culture, contributing to various national relief funds and many more.
Section-135 of the Companies Act, 2013 provides for the CSR policy and states that a company having a net worth of Rs. 500 Crore or more, or turnover of Rs. 1000 Crore or more or a net profit of Rs. 5 Crore or more, needs to expend at least 2% of its average net profit for the preceding three financial years on CSR activities. Further, it must constitute a CSR (Corporate Social Responsibility) committee consisting of 3 or more directors, out of whom one must be an independent director. It has been clearly mentioned in the Companies (Corporate Social Responsibility Policy) Rules, 2014 that the companies which are covered under Section-135 of the Act and are not desired to have an independent director on its board of directors (Section-149) may constitute a CSR Committee without an independent director. In the case of a private company, only two directors can form the CSR.
The activities regarding Corporate Social Responsibility should not be carried in the ordinary course of business and must be concerning any of the activities as mentioned in Schedule VII of the Companies Act, 2013. For the formulation of the net worth, turnover and net profits are required to be computed in terms of Section-198 and as per the statement of profit and loss account prepared by the company in terms of the Section-198 and Section-381(1)(a).
A company can undertake its CSR activities through a registered trust or society, a company established by its holding, subsidiary or associate company but with a certain condition that the company needs to specify the activities to be undertaken, the whole process of utilization of the funds along with the mechanism of reporting and monitoring. If the entity is not established and recognized by the company or its associated company, holding or subsidiary company, then such entity would need to have a track record of last three years undertaking the similar activities in one or the other manner.
When it comes to the activities to be performed under the policy of Corporate Social Responsibility, then it should be noted that any form of contribution to political parties would not be considered. Moreover, the activities should be undertaken in India, only then those activities would be considered for CSR expenditure. The profits from overseas branch of the company would not be included in the calculation of net profits of a company, inclusive of those branches which are run as a separate company. Furthermore, the dividends which will be received from other companies in India, that need to abide by the CSR obligations, would also not be included in the process of computation of net profits.
The need of the hour is not only to implement these policy rules properly, but also to encourage active participation by all the corporate body to perform CSR activities. For that matter, there should not be restrictions over the form of activities to be considered under CSR activities. Allowing only few selected list of activities may not result properly. Further, the policy makers should focus on introducing varying business projects for the promotion of CSR regime. Another recommendation would be inclusion of foreign companies within the ambit of CSR to have a great impact it on such companies.