Corporate Social Responsibility and The Companies Act 2013
14 Mar 2014
Corporate Social Responsibility (CSR)
In recent years, increasing attention has been given to the concept of Corporate Social Responsibility (CSR), defined as a Company’s sense of responsibility towards the Community and the environment (both ecological & social) in which it operates. It is the responsiveness to the stakeholder’s legal, ethical, social and environmental expectations. CSR is understood to be the way firms integrates social, environmental and economic concerns into their values,culture, decision-making, strategy and operations in a transparent and accountable manner and thereby establish better practices within the firm,creates wealth and improves the society. The CSR approach is holistic and integrated with the core business strategy for addressing social and environmental impacts of business.
Within the broader concept of corporate social responsibility, the concept of Triple Bottom Line (TBL) is gaining significance and becoming popular amongst corporate.The concept of TBL is that the business entities have more to do than make just profits for the owners. TBL is made up of “Social, Economical and Environmental”aspects and indicated by the phrase “People, Planet, Profit”.
It is important to draw a distinction between CSR which is a strategic management concept and Philanthropy. Philanthropy means the act of donating money, goods,time, or efforts to support a charitable cause in regard to a defined objective. Corporate Social Responsibility on the other hand is about how a company aligns their values to social causes by collaborating with the investors, suppliers, employees, regulators and the society as a whole.
A properly implemented CSR concept into the business framework can bring a wide variety of advantages: such as favorable public image, brand equity of products of the company, efficient & dedicated human resource base, enhanced customer loyalty, better sales and increased profits, better decision-making,enhanced government support, access to global markets & capital etc.
The Ministry of Corporate affairs has notified the Section 135 and schedule VII of the Companies Act, 2013 as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 to come into effect from 1st April 2014. The Companies Act, 2013 has introduced the idea of CSR to the fore front and its promoting greater transparency and disclosure.
Every company (Private limited or Public limited) which has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities. The CSR activities must be with respect to the activities mentioned in Schedule VII of the new Companies Act.
The activities that can be undertaken as per Schedule VII of the Companies Act 2013 to fulfill its CSR obligations include eradication of extreme hunger and poverty, promotion of education, gender equality & women empowerment, combating HIV-AIDS, malaria & other diseases, reducing child morality & improving maternal health, ensuring environmental sustainability, contribution to Prime Ministers Fund & other such state and central funds for socio-economic development or for the welfare of the scheduled castes, the scheduled tribes, OBCs, minorities & women, promoting employment enhancing vocational skills, other matter as prescribed.
The CSR Rules, 2013 has clarifies that the surplus arising out of CSR activities would have to be reinvested into CSR initiatives and this will be over and above the 2% figure. Only activities in India would be considered for computing CSR expenditure. Activities which are not exclusively for the benefit of employees of the company or their family members shall be included in CSR activities.
Other important point related point relating to CSR is that the company may collaborate or pool resources with other companies to undertake CSR activities and any expenditure incurred on such collaborative efforts would qualify for computing CSR expenditure, provided that each of the companies are able to individually report on such projects. The Company shall also give preference to the local areas and the areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility.
To formulate, recommend & monitor the CSR policy of a company from time to time, a CSR Committee of the Board needs to be constituted. The CSR Committee shall consist of at least three directors,including an independent director as per Section-135 of the new Companies act,2013. This composition of the Committee would be disclosed in Board’s report as per sub-section 3 of section 134.The CSR Committee shall prepare a transparent monitoring mechanism for ensuring implementation of the projects/ programmes / activities proposed to be undertaken by the company.
Board’s Report would also need to include are port on the CSR activities of the company in the prescribed format as given in the CSR Rules 2013. Where a company has a website, company’s CSR policy needs to be disclosed on its website. If company fails to spend the minimum required amount on CSR activities, shall specify the reasons for not doing so in the Board Report prepared at the end of each year.
Companies Act, 2013 has introduced the concept of CSR in the act itself and the act advocates it strongly. However in case a company is unable to spend the required amount then it has to give an explanation for the same. This shows that the 2 percent spending on CSR activities is not mandatory.
Corporate Governance Minister Sachin Pilot recently said that neither the Central nor State government can tell the corporate on how to spend money on social welfare activities. He added that the ultimate decision would be with the Board of Directors of the company. Nevertheless the importance of Corporate Social Responsibility (CSR) cannot be undermined.
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Indrani Dutta
HPACS Consulting
www.hpacs.com