Corporate Social Responsibility and recent rules changes

  • CSR implies a concept, whereby companies decide voluntarily to contribute to a better society and a cleaner environment – a concept, whereby the companies integrate social and other useful concerns in their business operations for the betterment of its stakeholders and society in general in a voluntary way.
  • India`s new Companies Act 2013 (Companies Act) has introduced the provision for Corporate Social Responsibility (CSR). The concept of CSR rests on the ideology of give and take. 
  • Companies take resources in the form of raw materials, human resources etc from the society. By performing the task of CSR activities, the companies are giving something back to society. 
  • The Ministry of Corporate Affairs has notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014 and certain amendments in May 2016. 
  • Every qualifying company requires spending of at least 2% of its average net profit (Profit before taxes) for the immediately preceding 3 financial years on CSR activities in India. 

Applicability

  • The provisions of CSR applies to
  1. every company
  2. its holding company
  3. its subsidiary company
  4. foreign company
  • Having in the preceding financial year
  1. Net Worth > 500 Crore
  2. Turnover > 1000 Crore
  3. Net Profit > 5 Crore
  • Importance of Corporate Social Responsibility
  1. Corporate Social Responsibility (CSR) is an immense term which is used to explain the efforts of a company in order to improve society in any other way.
  2. CSR improves the public image by publicizing the efforts towards a better society and increasing their chance of becoming favorable in the eyes of consumers.
  3. CSR increases media coverage as media visibility throws a positive light on the organization.
  4. CSR enhances the company’s brand value by building a socially strong relationship with customers.
  5. CSR helps companies to stand out from the competition when companies are involved in any kind of community.
  • Fines and Penalties for Non-Compliance
  • In case a company fails to comply with the provisions relating to CSR spending, transferring and utilising the unspent amount, the company will be punishable with a minimum fine of Rs 50,000 which may increase to Rs 25 lakh. Further, every officer of such company who defaults in the compliance will be liable for a punishment which is imprisonment for a term which may extend to three years or with a minimum fine of Rs 50,000 which may increase to Rs 5 lakh , or with both.
  • Reason For Introduction of CSR for Companies
  • We live a dynamic life in a world that is growing more and more complex. Global scale environment, social, cultural and economic issues have now become part of our everyday life. Boosting profits is no longer the sole business performance indicator for the corporate and they have to play the role of responsible corporate citizens as they owe a duty towards the society.
  • The concept of Corporate Social Responsibility (CSR), introduced through Companies Act, 2013 puts a greater responsibility on companies in India to set out a clear CSR framework.
  • Many corporate houses like TATA and Birla have been engaged in doing CSR voluntarily. The Act introduces the culture of corporate social responsibility (CSR) in Indian corporate requiring companies to formulate a CSR policy and spend on social upliftment activities. CSR is all about corporate giving back to society. 
  • Recent changes:
  • The Corporate Affairs Ministry has amended the rules for Corporate Social Responsibility (CSR) expenditure by India Inc to allow companies to undertake multi-year projects, and also require that all CSR implementing agencies be registered with the government. We look at some of the key changes.
  • How do the new rules enable corporations to undertake multi-year CSR projects?
  • The amended CSR rules allow companies to set off CSR expenditure above the required 2 per cent expenditure in any fiscal year against required expenditure for up to three financial years. 
  • What are the changes required for implementing agencies?
  • A large number of companies conduct CSR expenditure through implementing agencies, but the new amendment restricts companies from authorising either a Section 8 company or a registered public charitable trust to conduct CSR projects on their behalf. A Section 8 company is a company registered with the purpose of promoting charitable causes, applies profits to promoting its objectives and is prohibited from distributing dividends to shareholders. Further, all such entities will have to be registered with the government by April 1.
  • Experts note that the change would impact CSR programmes of a number of large Indian companies that conduct projects through private trusts.
  • What are other key changes?
  • The amended rules require that any corporation with a CSR obligation of Rs 10 crore or more for the three preceding financial years would be required to hire an independent agency to conduct impact assessment of all of their projects with outlays of Rs 1 crore or more. Companies will be allowed to count 5 percent of the CSR expenditure for the year up to Rs 50 lakh on impact assessment towards CSR expenditure.