Legal Framework governing Corporate Social Responsibility (CSR) in India

LogoIn an unprecedented move, India became one of the first countries in the world to legally mandate CSR expenditure for companies satisfying a certain criteria in August, 2013.

Before an attempt is made to explore this concept of CSR both in a legal and a managerial context, it is important to get well versed with the policy guidelines pertaining to it so far. Here’s taking a look at the background of CSR in India along with the concerned statutory provisions and rules which supplements its understanding in the Indian context at large.

CSR VOLUNTARY GUIDELINES, 2009 

(http://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf)

The Corporate Social Responsibility Voluntary Guidelines were released by the Ministry of Corporate Affairs, Government of India as early as December, 2009. The guidelines recognized that post the global financial crisis, the corporate sector had found itself standing in the midst of a sustainability crisis that posed a threat to the very existence of the business. The need for an inclusive growth was, thus, very much evident. However, this required all stakeholders to assume and discharge their responsibilities. 

The guidelines identified the gap between India and Bharat and the role of corporates in bridging it through social responsible business practices, ensuring the distribution of wealth and well-being of the communities in which the business operates. It was accepted that this would complement what the Government was already doing by undertaking extensive developmental initiatives through a series of sectoral programmes.

Indian business sector practices have been traditionally known to incorporate various methods of discharging social responsibility. However, inspite of a lot of human and economic energy available for utilization in the area, a mechanism to channelize this energy was found to be largely lacking. Thus, the need of the hour was for the Government, corporate sector and the communities to partner together.

With CSR evolving from simple philanthropic activities to integrating the interest of the business with that of communities in which it operates, the state and non-state actors could effectively partner to find and implement innovative solutions to problems poverty, illiteracy, malnutrition etc which has resulted in a large section of the population remaining as “un-included” from the mainstream. Against this background, the Ministry bought out the set of voluntary guidelines in order to enable companies to add value to their operations and contribute towards the long term sustainability of the business. Moreover, the guidelines were prepared with the help of valuable suggestions received from trade and industry chambers, experts and other stakeholders along with the internationally prevalent and practiced guidelines, norms and standards in the area of CSR.

What needs to be noted here, however, is that these guidelines explicitly and unambiguously recognized CSR as something purely voluntary- something that the company would like to do beyond any statutory requirement or obligation. The intent of the Voluntary Guidelines was solely to provide companies with guidance in dealing with the expectation, while working closely within the framework of national aspirations and policies. Furthermore, the guidelines clearly mentioned that they were not intended for regulatory or contractual use though it was expected that “India Inc” would make sincere efforts to consider compliance with them.

The main points of these guidelines are summarized as follows:

  • The guidelines emanated from the fundamental principle that each business entity should formulate a CSR policy to guide its strategic planning and provide a road-map for its CSR initiatives, which should be an integral part of its overall business policy and aligned with its business goals. The policy should be framed with the participation of various level executives and should be approved by Board.
  • The CSR Policy should cover the core elements of – Care for Stakeholders, Ethical Functioning, Respect for Worker’s right and welfare, Respect for Human Rights, Respect for Environment, and Activities for Social and Inclusive Development.

In brief, companies should be responsive towards all stakeholders and create value for them. They should develop mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them when they occur. The corporate governance systems should, further, be underpinned by Ethics, Transparency and Accountability with the companies refraining from engaging in business practices that are abusive, unfair, corrupt or anti-corruptive.

Moreover, companies should provide a safe, hygienic and humane workplace environment for the workers, upholding the dignity of the employees. They should provide all employees with access to training and development of necessary skills for career advancement, on an equal and non-discriminatory basis. Also, freedom of association should be upheld along with the effective recognition of the right to collective bargaining of labor. An effective grievance redressal system, prohibition on child or forced labor, and equal opportunities should further be ensured and the Companies should respect human rights for all and avoid complicity with human right abuses by them or by third party.

Furthermore, environment should form an integral part of a company’s sustainability goals and companies should react, respond and take suitable measures accordingly. Depending upon the core competency and business interest, companies should also undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations. These could include: education, skill-building for livelihood of people, health, cultural and social welfare etc., particularly targeted at disadvantaged sections of society.

The implementation guidelines were separately put out and consist of the following points:

  • The CSR policy of the business entity should provide for the implementation strategy which could include identification of projects/activities, setting measurable physical targets with time-frame, organizational mechanism and responsibilities, time schedules and monitoring. Companies can partner with local authorities, business associations and civil society /NGOs. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development. They may evolve a system of need assessment and impact assessment while undertaking CSR activities in particular areas. Independent evaluation can also be undertaken for selected projects/activities from time to time.
  • Companies should allocate specific amount in their budgets for CSR activities. This amount may be related to profits after tax, cost of unplanned CSR activities or any other suitable parameter.
  • The company should engage with well established and recognized programmes/platforms which encourage responsible business practices and CSR activities to share experiences and network with other organizations. This would help the companies in improving on their own CSR strategies and effectively projecting the image of being socially responsible.
  • The companies should, further, disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their websites, annual reports, and other communications media.

The reason why it is good to look into these guidelines despite it being released 3 years prior to the enactment of CSR into law is that it does offer critical reference points for the implementation of the mandate by the companies now.

COMPANIES BILL, 2011

The possibility of a mandatory CSR expenditure for companies first became apparent in the Companies Bill 2011 wherein an explicit statutory provision in the form of Clause 135 was included. The then government had expressed their intention to take into confidence the MPs and other stakeholders, like NGOs for this evolving idea. Moreover, CSR spending was positioned as a responsibility of companies like their tax liabilities.

The clause has been adopted verbatim under Section 135 on the enactment of the Bill except for the addition of a proviso and an explanation.

LEGAL MANDATE- COMPANIES ACT, 2013

Section 135 of the Companies Act, 2013 that governs corporate social responsibility is read as follows:

135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

 (2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

 (3) The Corporate Social Responsibility Committee shall, — (a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII; (b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and (c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,— (a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and (b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.”

Section 166 of the Act provides that the directors must “act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

Section 134(3)(o) provides for the company’s obligation to submit details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year as a part of the report by the Board of Directors, attached to the financial statements laid before a company in a general meeting.

As evident, the provision has been approached through a “comply or explain” framework. However, while there is no penalty for failing to spend on CSR under section 135, there are penalties for failing to report on CSR activities conducted or failing to explain why CSR spending was not carried out under section 134(8). Failure to explain is punishable by a fine on the company of not less than 50,000 rupees (approx. $900) and up to 25 lakh rupees (approx. $46,000). Furthermore, officers who default on the reporting provision could be subject to up to three years in prison and/or fines of not less than 50,000 rupees (approx. $900) and as high as 5 lakh rupees (approx. $9,200).

The original Schedule VII of the Act provided for the activities which may be included by the companies in their Corporate Social Responsibility Policies and consisted of activities relating to:-

(i) Eradicating extreme hunger and poverty;

(ii) Promotion of education;

(iii) Promoting gender equality and empowering women;

(iv) Reducing child mortility and improving mental health;

(v) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

(vi) Ensuring environmental sustainability;

(vii) Employment enhancing vocational skills;

(viii) Social business projects;

(ix) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

(x) Such other matters as may be prescribed.

On the 1st day of April, 2014, the provision of Section 135 along with the Schedule VII of the Companies Act, 2013 came into force.

COMPANY (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014:

( http://www.mca.gov.in/Ministry/pdf/CompaniesActNotification2_2014.pdf )

The rules came into force on 1st April, 2014 along with the provisions of the Companies Act, 2013. A significant inclusion was the expansion of the coverage of the Act’s CSR requirements to foreign companies with branches or project offices in India making foreign companies with Indian businesses subject to the mandatory CSR provisions. Some of the other important rules are as follows:

DEFINITION: Rule 2(c) of the Corporate Social Responsibility Policy) Rules, 2014 defines CSR to mean and include but not limited to:

  1. Projects or programs relating to activities specified in Schedule VII to the Act; or
  2. Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR committee of the Board as per the declared CSR policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.

CSR COMMITTEES (Rule 5): The companies mentioned in the definition above are required to constitute CSR Committees as under:

  1. An unlisted public company or a private company, covered under section 135, which is not required to appoint an independent director pursuant to section 149(2) should have its CSR Committee without such director;
  2. A private company having only two directors on its Board should constitute its CSR Committee with two such directors;
  3. For a foreign company covered by section 135, the committee should comprise of atleast two persons of which person shall be as specified under section 380(1)(d) of the Act and another person shall be nominated by the foreign company.
  4. Moreover, the CSR committee should institute a transparent monitoring mechanism for the implementation of the CSR projects or programs or activities undertaken by the company.

CSR POLICY (Rule 6):  The CSR policy of the company should include a list of CSR projects or programs which a company plans to undertake falling within the purview of Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and monitoring process of such projects or programs. Such activities should, however, not include the activities undertaken in pursuance of normal course of business of a company. Also, the Board of Directors should ensure that the activities included by a company in its policy are related to the activities included in Schedule VII of the Act. The policy should, further, specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.

CSR ACTIVITIES (Rule 4) : The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise provided that:

  • if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it should have an established track record of three years in undertaking similar programs or projects;
  • the company has specified the projects or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

The company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules. Subject to the provisions governing the formation of CSR Committees, the CSR projects or programs or activities undertaken in India only will amount to CSR ExpenditureThe CSR projects or programs or activities that benefit only the employees of the company and their families will not be considered as CSR activities under the Act. Moreover, contribution of any amount directly or indirectly to any political party will also not be considered as CSR activity.

Companies can build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure should not exceed 5 percent of the total CSR expenditure of the company in one financial year. 

DISPLAY OF CSR ACTIVITIES (Rule 9): The content of the CSR policy, recommended by the CSR committee and approved by the Board of Directors of the company, should be disclosed in the Board Report and on the company websites.

CSR EXPENDITURE (Rule 7): CSR Expenditure should include contribution to corpus for projects or programs relating to CSR activities approved by the Board on the recommendations of its CSR Committee. It, however, should not not include any expenditure on an item not in any conformity or not in line with activities which fall within the purview of Schedule VII of the Act.

CSR REPORTING (Rule 8): The Annexure to the Company (Corporate Social Responsibility Policy) Rules provides for the format of the annual report on CSR activities to be included in the Board’s report. In case of a foreign company, the balance sheet filed under section 381(1) (b) should consist of an Annexure regarding the report on CSR.

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AMENDMENTS:

Schedule VII of the Companies Act, 2013 has been amended several times ever since its conception and these amendments are as follows:

On 27th February, 2014, the Ministry of Corporate Affairs made amendments to Schedule VII of the Companies Act for substituting the following items and entries for items (i) to (x) in the Schedule which came into force on 1st April, 2014:

(i) Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

(ii) Promoting education, including special education and employment enhancing vocation skills specially among children, women, elderly, and differently-abled and livelihood enhancement projects;

(iii) Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

(iv) Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water;

(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

(vi) Measures for the benefit of armed forces veterans, wars widows and their dependants;

(vii) Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;

(viii) Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;

(ix) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

(x) Rural development projects.

As evident, what appears is a closed list of CSR activities that can be implemented under Section 135, running contrary to wider scope of activities as contemplated by the Voluntary Guidelines of 2009.

On 31st March, 2014, “promoting preventive health care” was amended to read “promoting health care including preventive health care” through a notification.

On August 6th, 2014, amendments were made to Schedule VII whereby the item ‘slum area development’ was inserted.

On September 12, 2014, the rule 4, sub-rule (6) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 was amended to insert the words and comma “including expenditure on administrative overheads” after the words “but such expenditure.”

 On October 24th, 2014, in item (i), after the words “and sanitation”, the words “including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation” were inserted. Also, in item (iv), after the words “and water”, the words “including contribution to the Clear Ganga Fund set-up by the Central Government for rejuvenation of river Ganga” were inserted.

On 19th January, 2015, the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015 made the following amendments in rule 4, in sub-rule (2) of the Companies (Corporate Social Responsibility Policy) Rules:

  1. For the words “established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise”, the words “ established under section 8 of the Act by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, or otherwise” were substituted;
  2. In the proviso, in clause (i), for the words “not established by the company or its holding or subsidiary or associate company, it”, the words “not established under section 8 of the Act by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, or otherwise” were substituted.

CLARIFICATIONS

18th June, 2014: A general circular on the clarifications with regard to the provision of CSR under section 135 of the Companies Act, 2015 was issued by the Ministry of Corporate Affairs on 18th June, 2014, addressing the concerns of the stakeholders at length. The intention of the statutory provision in tandem with the CSR rules, 2014 was reiterated to not only be to ensure that the activities undertaken in pursuance of the CSR policy were relatable to the Schedule VII of the Companies Act, 2013 but also that the entries in the said Schedule VII are interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Scheduled VII of the Act were clarified to be broad-based and intended to cover a wide-range of activities, illustratively mentioned in the Annexure to the circular which can be accessed at- http://www.mca.gov.in/Ministry/pdf/General_Circular_21_2014.pdf

The circular, further, clarified that CSR activities were required to be undertaken by companies in the project/programme mode and one-off events such as marathons/awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. would not qualify as part of CSR expenditure. Also, expenses incurred by companies for the fulfillment of any Act/Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) will not count as CSR expenditure under the Companies Act.  Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of Indian subsidiary only if the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do as per section 135 of the Act.

‘Registered Trust’ (as referred in Ruler 4(2) of the Company CSR Rules, 2014) was explained to include Trusts registered under Income Tax Act 1956, for those States where the registration of Trust is not mandatory. Contributions to Corpus of a Trust/society/section 8 companies etc. were clarified as CSR expenditure as long as (a) the Trust/society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule Vll of the Act.

3rd February, 2015: A general circular was again released on 3rd February, 2015 informing about the constitution of a High Level Committee to suggest measures for improved monitoring of the implementation of Corporate Social Responsibility policies by the companies under Section 135 of the Companies Act, 2013. The composition for this committee includes all stakeholders including government, academic, corporate and industrial representatives. The terms of reference for the committee are as follows,-

  1. Suitable methodologies for monitoring compliance of Section 135
  2. Measures for adoption by the companies for systematic monitoring and evaluation of their own CSR initiatives
  3. Strategies for monitoring and evaluation of CSR initiatives through expert agencies and institutions to facilitate adequate feedback to the Government with regard to the efficacy of CSR expenditure and quality of compliance by the companies.
  4. Different monitoring mechanism if warranted for Government Companies undertaking CSR and
  5. Any other matter incidental to the above or connected thereto.

The report is expected by July-August of this year.

Clearly, the CSR policy in India is still evolving and we can expect considerable changes before its effective implementation is ensured.

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