India’s New Norms on Corporate Social Responsibility

Introduction

The concept of Corporate Social Responsibility (CSR) found its position in India for the first time under the revised Companies Act, 2013. Prior to the new Companies Bill of 2012, the provision of CSR was loosely available to companies to spend their monies in a limited way on CSR activities by contributing to Trusts/charitable organizations which run for the good of society. This provision was also available under Section 293(1) (e) of the Old Companies Act, 1956 so far for making contributions for charitable activities.

However, it was only recently that the provisions of Corporate Social Responsibility (CSR) were made legal and binding. On April 1^st, 2014, India became the first country to legally mandate corporate social responsibility. The rules in Section 135 of India’s Companies Act make it mandatory for companies of a certain turnover and profitability to spend 2% of their average net profit for the past three years on CSR.

It is essential to understand the substance of Corporate Social Responsibility in the context of the Indian legal framework. The principles of CSR rest on the ideology of corporate houses and businesses giving back to society as they grow and thrive. Companies take resources in the form of raw materials, human resources etc. from society and by performing CSR activities, companies are giving something back. CSR does not mean mere donations and charities, but takes a step further by guiding the companies in conducting their businesses by which they visibly contribute to the social good.

The Law

The means in which the Indian Government regulate this area are Section 135 of the Companies Act, 2013 along with Companies (Corporate Social Responsibility Policy) Rules, 2014. Under the aforesaid Section and Rule, it is mandatory for private or public companies of a certain turnover and profitability to spend 2% of their average net profit for the past three years on CSR if they meet the criteria laid down under Section 135. The companies (either private or public) need to meet any of the following criteria:

(1) Net worth of Rs.500 crore or more, or

(2) Turnover of  Rs.1000 crore or more or

(3) Net profit of  Rs.5 crore or more during any financial year.

Under the Companies Act, 2013, the companies are required to set up a CSR Committee which lays down the principles and guidelines of CSR Rules. The CSR Committee should comprise of a Board having at least 3 directors out of which 1 can be an independent director. Foreign companies can constitute the 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.

The New Form

As per the new norm the companies are obliged to comply with the CSR Rules or they are liable for penalties under the changes introduced by the Companies (Amendment) Act, 2019, and the Companies (Amendment) Act, 2020. Penal consequences for companies and their officers for non-compliance have been introduced by the notification of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021.

Some of the other amendments are as follows:

A new definition of CSR has been introduced whereby a negative list provides for activities that do not constitute CSR. The rules provide for various modes through which the Companies can implement CSR either by itself or through charitable companies, trust or societies incorporated for the general benefit and charities as prescribed under the Rules. The CSR Committee is required to formulate a detailed annual action plan that will include: (a) a list of CSR projects or programs that are approved to be undertaken in prescribed areas or subjects under the act; (b) the manner of execution of such projects or programs; (c) implementation schedules; (d) reporting mechanisms; and (e) impact assessment. Companies are not allowed to own capital assets created or acquired through the amount spent on CSR.

A cap has also been laid down for administrative overheads for CSR activities at 5% of the total CSR expenditure of the company for the financial year. Furthermore, companies are required to transfer the unspent CSR amounts related to ongoing projects to an escrow account known as the Unspent CSR Account and utilize in a timely manner.

The latest amendment of the Companies (Accounts) Amendment Rules, 2022, have also introduced the e-form CSR-2, which requires disclosure of company details, its CSR committee, ongoing projects, transfer of unspent CSR amounts, etc. It is key to note that the act already mandates CSR reporting in the board’s report.

Conclusion

Upon the coming into force of these new rules, companies now have a clearer picture in complying with CSR policies. With a little resentment of the mandatory CSR amount to be spent, many big companies are voluntarily complying with the policies in order to set a precedent for smaller companies. It is expected that the new obligatory laws passed for the first time by the Indian government will play a vital role in changing the lives of many people in the country.