Applicability of CSR under Companies Act, 2013

In today’s rapidly evolving business landscape, Corporate Social Responsibility CSR under Companies Act, 2013 has gained immense importance as a key driver of sustainable and ethical business practices. CSR refers to a company’s voluntary commitment to integrating social and environmental concerns into its operations and interactions with stakeholders. Beyond simple profit-making, CSR emphasizes a company’s responsibility towards society, the environment, and its impact on various stakeholders.

The significance of CSR lies in its ability to create a positive impact on multiple fronts. Firstly, it enables businesses to contribute to the welfare and development of the communities in which they operate. By engaging in socially responsible initiatives, companies address pressing societal issues such as poverty, education, healthcare, and environmental sustainability.

Understanding CSR under the Companies Act 2013

Under the Companies Act 2013, Corporate Social Responsibility (CSR) is a statutory requirement for certain companies operating in India. The Act defines CSR as the obligation of companies to undertake socially beneficial activities and contribute towards sustainable development. It mandates qualifying companies to spend a specified percentage of their average net profits on CSR initiatives. The Act outlines the objectives, applicability thresholds, eligible activities, reporting requirements, and penalties for non-compliance related to CSR. By incorporating CSR provisions, the Companies Act 2013 aims to promote responsible business practices and encourage companies to contribute to the betterment of society and the environment.

Applicability of CSR provisions

Under the Companies Act 2013, the applicability of Corporate Social Responsibility (CSR) provisions is determined based on the following factors:

• Classification of Companies: The Act classifies companies into three categories for determining CSR obligations:
• Companies having a net worth of rupees 500 crores or more.
• Companies having a turnover of rupees 1,000 crores or more.
• Companies having a net profit of rupees 5 crores or more.
• Threshold Limits: CSR provisions are applicable to companies meeting any of the above criteria for the preceding financial year. Once a company meets any of these thresholds, it becomes obligated to comply with CSR requirements.
• CSR Expenditure: Companies falling under the purview of CSR provisions are required to spend at least 2% of their average net profits of the preceding three financial years on CSR activities.
• Eligible CSR Activities: The Act provides a comprehensive list of activities that qualify as CSR initiatives. These activities encompass areas such as education, healthcare, poverty alleviation, environmental sustainability, skill development, rural development, and more. The Schedule VII of the Act specifies the eligible CSR activities in detail.
• Reporting and Compliance: Companies are required to disclose their CSR initiatives and expenditure in their annual reports. They must also establish a CSR committee and formulate a CSR policy that outlines the approach, focus areas, and implementation strategy for CSR activities.
• Penalties for Non-Compliance: Failure to comply with CSR obligations can result in penalties, including fines and potential legal actions. Unspent CSR funds are required to be transferred to a dedicated CSR account, and companies are expected to provide explanations for any unspent amounts.

List of permissible CSR activities specified in Schedule VII of the Act.

The Schedule VII of the Companies Act 2013 provides a list of permissible Corporate Social Responsibility (CSR) activities. These activities include, but are not limited to:

• Eradicating hunger, poverty, and malnutrition.
• Promoting education, including special education and skill development.
• Empowering women and promoting gender equality.
• Reducing child mortality and improving maternal health.
• Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria, and other diseases.
• Ensuring environmental sustainability, including conservation of natural resources and promoting ecological balance.
• Supporting the protection of national heritage, art, and culture.
• Promoting sports, including Olympic sports and Paralympic sports.
• Undertaking rural development projects.
• Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the central or state government for socio-economic development and relief.
• Promotion of technology incubators within academic institutions.
• Rural sanitation and making available safe drinking water.
• Conservation of natural resources, flora, and fauna.
• Protection of national heritage, art, and culture, including restoration of buildings and sites of historical importance.
• Measures to benefit armed forces veterans, war widows, and their dependents.
• Promoting research in science, technology, engineering, and medicine.
• Ensuring the welfare of differently-abled individuals.
• Sustainable livelihood projects for rural communities.

This is not an exhaustive list, and companies have the flexibility to choose from these activities or propose projects that align with the broader objectives of the Companies Act 2013. It is essential for companies to ensure that their chosen CSR activities are within the purview of Schedule VII and contribute to sustainable development and societal well-being.

Provision for carrying forward unspent CSR funds and penalties for non-compliance

Under the Companies Act 2013, companies are required to spend a specified amount on Corporate Social Responsibility (CSR) activities. In case a company fails to spend the entire allocated CSR amount in a given financial year, the unspent funds are carried forward to the next financial year. However, if a company continuously fails to meet its CSR obligations, penalties may be imposed. Non-compliance with CSR provisions can lead to fines ranging from a minimum of Rs. 50,000 to a maximum of Rs. 25 lakhs on the company and potential legal actions against the responsible officers, including imprisonment for a term of up to three years.

CSR Reporting and Disclosure

CSR reporting and disclosure play a crucial role in promoting transparency, accountability, and stakeholder engagement. Under the Companies Act 2013, companies are required to follow certain guidelines for CSR reporting and disclosure. Here are key aspects of CSR reporting and disclosure:

• Annual Report: Companies must include a detailed report on their CSR activities in their annual report. The report should provide information on the CSR policy, initiatives undertaken, funds allocated, and their impact.
• CSR Committee Report: The CSR committee, established by the company, is responsible for overseeing CSR activities. The committee’s report should be included in the annual report, outlining the CSR initiatives, expenditure, and progress made during the financial year.
• Disclosure on Company Website: Companies are encouraged to display their CSR policies, initiatives, and progress on their official websites. This provides stakeholders, including investors, employees, and the public, with easy access to information regarding the company’s CSR efforts.
• Impact Assessment: Companies are encouraged to conduct impact assessments of their CSR activities to evaluate the effectiveness and social impact of their initiatives. This assessment can be included in the CSR report, providing a comprehensive view of the outcomes achieved.
• Reporting Format: While the Companies Act 2013 does not specify a specific reporting format, it is advisable for companies to follow established frameworks like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) guidelines for CSR reporting. These frameworks provide structured reporting formats and performance indicators.
• External Assurance: Some companies opt for external assurance of their CSR reports to enhance credibility and demonstrate adherence to reporting standards. External assurance can be conducted by independent third-party auditors to validate the accuracy and reliability of CSR information.

Benefits and impact of CSR under the Companies Act 2013

The implementation of Corporate Social Responsibility (CSR) under the Companies Act 2013 offers several benefits and has a significant impact on businesses, society, and the environment. Here are some key benefits and impacts of CSR under the Companies Act 2013:

• Enhanced Brand Reputation: Engaging in CSR initiatives helps build a positive brand image and reputation. When companies demonstrate a commitment to social and environmental causes, they are viewed as responsible and trustworthy, leading to increased customer loyalty and positive brand associations.
• Stakeholder Engagement: CSR activities facilitate stronger relationships with stakeholders, including customers, employees, investors, communities, and regulatory bodies. By addressing societal needs and concerns, companies can create a sense of shared value, fostering trust and long-term engagement with stakeholders.
• Competitive Advantage: Implementing CSR under the Companies Act 2013 can provide a competitive edge. Consumers increasingly prefer businesses that prioritize sustainability and social responsibility, leading to increased market share and customer preference.
• Employee Satisfaction and Retention: CSR initiatives contribute to higher employee morale, job satisfaction, and engagement. Employees are more likely to feel proud and motivated to work for socially responsible companies, resulting in improved productivity, lower turnover rates, and better recruitment prospects.
• Community Development: CSR initiatives have a direct positive impact on local communities. Companies can contribute to social development by supporting education, healthcare, infrastructure development, and livelihood programs, improving the quality of life for people in surrounding areas.
• Environmental Sustainability: CSR activities promote environmental conservation and sustainability. Companies can adopt eco-friendly practices, reduce carbon footprint, support renewable energy initiatives, and contribute to biodiversity conservation, contributing to a cleaner and healthier environment.

Conclusion

In conclusion, Corporate Social Responsibility (CSR) under the Companies Act 2013 is a significant and mandatory aspect of conducting business in India. CSR goes beyond profit-making and emphasizes a company’s responsibility towards society, the environment, and stakeholders. By embracing CSR, companies can make a meaningful difference while enjoying various benefits. It is essential for companies to embrace CSR as a responsible and sustainable business practice. By aligning their strategies with CSR objectives, companies can create a positive impact while fostering a better future for themselves, their stakeholders, and the communities they serve. By embracing CSR, businesses can demonstrate their commitment to social and environmental causes and contribute to a more inclusive and sustainable society.