LexCognito

Date: 29 October 2018

India's Corporate Social Responsibility Norms - What's Next?

The Ministry of Corporate Affairs ("MCA"), vide its Notification dated 11 October 2018, has reconstituted the High Level Committee on Corporate Social Responsibility. The Scope of the said committee is to review existing framework under the Companies Act, 2013 ("Act") regarding CSR, recommend guidelines for enforcement of CSR provisions, suggest measures for adequate monitoring and evaluation of CSR by companies and examine and recommend audit (financial, performance, social) for CSR, as well as analyse outcomes of CSR activities/programmes/projects.

Present Corporate Social Responsibility Norms in India

Applicability: As per Section 135 of the Act and rules issued thereunder, CSR norms are applicable on companies which has (a) net worth of Rs 500 Crore or more; (b) turnover of Rs 1000 Crore or more; or (c) net profit of Rs 5 Crore or more.

Compliance: The companies, crossing the prescribed threshold, are required to spend at least 2% of their average net profit for the immediately preceding 3 financial years on CSR activities. Such expenditure incurred on the CSR activities cannot be taken as an expenditure incurred by the company being an assessee for the purposes of the business or profession. Further, no specific tax exemptions have been extended to CSR expenditure per se.

Other key requirements includes constitution of a committee of the Board of Directors consisting of 3 or more directors, formulation of the Corporate Social Responsibility Policy by the Board of Directors on the recommendation of the CSR Committee, undertaking the CSR activities and spending the prescribed amount of expenditure on CSR activities as per CSR Policy and recommendations of CSR Committee and monitoring effective implementation of CSR Policy.

Board's Responsibility: The Board of Directors are required to disclose in their report the composition of the CSR Committee and other compliance undertaken by the company and place it on company’s website. If the company fails to spend the prescribed amount on CSR activities, the Board is also required to specify the reasons for not spending the amount in their report.

Penal provisions: At present, there is no penal provision for non-compliance under CSR norms. However, penalties can be levied of the Act for not making the required disclosures in Board's report on an annual basis besides prosecution of the officers of the company in default.

Frequently Asked Questions

Whether a company can undertake the CSR activities along with any other company?

- A company may collaborate with other companies for undertaking the CSR activities provided such companies are in a position to report separately on such activities. A company, which has chosen to trust route, may also undertake CSR activities through trust along with any other company.

Can the CSR expenditure be spent on the activities beyond Schedule VII?

- The entries in the Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities.

Which activities would not qualify as CSR Expenditure?

- The CSR projects or programs or activities that benefit only the employees of the company and their families, activities undertaken by the company in pursuance of its normal course of business, one-off events such as marothons/awards/charitable contribution/advertisement/sponsorship of TV Programmes, etc. shall not be considered as CSR activities.

Whether it is mandatory for foreign Company also to give reporting of CSR activity as there is no need to prepare director’s report for a foreign company?

- In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (1) of Section 381 is required to contain an Annexure regarding report on CSR.

Can the expenditure incurred towards personnel exclusively appointed by the companies for implementing the CSR activities of the company, be included in the expenditure earmarked for CSR activities?

- Salary paid by the companies to regular CSR staff as well as employees, who render their services for CSR will be part of Administrative overheads and should not exceed 5% of the total CSR expenditure as per Rule 4(6) of the CSR Rules.

CRI Comment

In reality, companies are generally not transparent on the CSR activities undertaken by them. They usually window dress their accounts to show that they meet the mandatory CSR spending. Furthermore, many companies engage in selective CSR tasks which ultimately benefit their brand value and help them grow rather than activities that genuinely serve society at large. Hence, the CSR norms in its present form is suffering from serious infirmities due to which it has failed to serve its purpose. Further, due to lack of coercive enforcement mechanism, the law has also failed in widespread compliance and real effectiveness. Hence, the Government is taking steps to amend the existing law and make it more stringent.

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This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.