Corporate Social Responsibility Under Companies Act 2013

INTRODUCTION

This research paper analyses the fist statutory provision relating to Corporate Social
Responsibility in the world. India is the first country to implement CSR through statutory
provisions. The basic idea behind CSR is that the company should also return something to the
society from which it makes its profit. Earlier this was guided by philanthropic views but with
the passage of time, the concept of CSR has evolved and a new meaning is provided to CSR.
Section 135 of the New Companies Act 2013 deals with the CSR. This section gives the
applicability of CSR provision to various companies and also the amount which needs to spent
on CSR. For this purpose, A CSR Committee need be formed which will function to recommend
and provide the Board with the proposals. The paper further deals with the eligibility of the fund
to spend on some specified areas as provided under Schedule VII of the Companies Act 2013.
The main focus of the companies should be on the local areas as well on the places where they
operate their business. The paper then focuses on the problems associated with the provision of
Section 135. The paper then concluded by providing some insights into the problem.
KEYWORDS: COMPANIES ACT, 2013, COMPANIES SOCIAL RESPONSIBILITY, CSR BOARD,
SECTION 135, SCHEDULE VII
WHAT IS CORPORATE SOCIAL RESPONSIBILITY (CSR)?
There exists no universal definition of CSR. But every definition that exists now underpins the
impact that businesses have on society at large and also on individuals. The idea of CSR was
originally based on philanthropic views like charity, donations etc. but with the change of times,
the concept of CSR has evolved and has now broadened to include various aspects of business
that in one way or other is linked to the society. Beyond making profits, companies are
responsible for the totality of their impact on people and the planet. 1 People constitute the
companys stakeholders: its employees, customers, business partners, investors, suppliers and

1 Sir Geoffrey Chandler, Defining Corporate Social Responsibility, ETHICAL PERFORMANCE BEST PRACTICE, FALL
2001.
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vendors, the government, and the community. This is evident in some of the definitions presented
below:
The European Commission12 defines CSR as the responsibility of enterprises for their impacts
on society. To completely meet their social responsibility, enterprises should have in place a
process to integrate social, environmental, ethical human rights and consumer concerns into their
business operations and core strategy in close collaboration with their stakeholders
The World Business Council for Sustainable Development defines CSR as3 the continuing
commitment by business to contribute to economic development while improving the quality of
life of the workforce and their families as well as of the community and society at large.
According to the United Nations Industrial Development Organisation4, Corporate social
responsibility is a management concept whereby companies integrate social and environmental
concerns in their business operations and interactions with their stakeholders. CSR is generally
understood as being the way through which a company achieves a balance of economic,
environmental and social imperatives (Triple-Bottom-Line Approach), while at the same time
addressing the expectations of shareholders and stakeholders. In this sense it is important to draw
a distinction between CSR, which can be a strategic business management concept, and charity,
sponsorships or philanthropy. Even though the latter can also make a valuable contribution to
poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the
concept of CSR clearly goes beyond that.
From the above definitions, it is clear that5:

2Corporate Social Responsibility, EUROPEN UNION COMMISSION,

http://ec.europa.eu/enterprise/policies/sustainablebusiness/corporate-social-responsibility/index_en.htm
3Corporate Social Responsibility, WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT,
http://www.wbcsd.org/work-program/businessrole/previous-work/corporate-social-responsibility.aspx
4 What is Corporate Social Responsibility, UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANISATION
http://www.unido.org/what-we-do/trade/csr/what-is-csr.html#pp1[g1]/0/
5 Handbook on Corporate Social Responsibility in India, CONFEDERATION OF INDIAN INDUSTRY.
2

The CSR approach is holistic and integrated with the core business strategy for
addressing social and environmental impacts of businesses.

CSR needs to address the well-being of all stakeholders and not just the companys
shareholders.

Philanthropic activities are only a part of CSR, which otherwise constitutes a much larger
set of activities entailing strategic business benefits.

CSR IN INDIA
Previously, in India there was no mandatory concept of CSR. Although Corporate Social
Responsibility Voluntary Guidelines 2009 was available to assist the businesses to adopt
responsible governance practices and also focuses on some of the core elements that businesses
need to focus on while conducting their affairs. These guidelines have been prepared after taking
into account the governance challenges faced in our country as well as the expectations of the
society.6
Now, the concept of CSR is governed by the provision of Sec 135 of the Companies Act 2013.
When the President of India gave assent to the Companies Bill, 2013, India became the first
country to mandate spend on CSR activities through a statutory provision. In India, while many
corporate houses have been traditionally engaged in doing CSR activities voluntarily, the new
CSR provisions put formal and greater responsibility on companies to set out clear framework
and process to ensure strict compliance.7
Sec 135 of the Companies Act 2013 provided that
(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.

6 Corporate Social Responsibility, LOK SABHA SECRETARIAT PARLIAMENT LIBRARY AND REFERENCE, RESEARCH,
DOCUMENTATION AND INFORMATION SERVICE (LARRDIS) MEMBERS REFERENCE SERVICE, REFERENCE NOTE NO.
11 /RN/REF./2013
7 Ibid at note 5
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(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.

ANALYSIS OF THE SECTION

1. APPLICABILITY
An analysis of this section tells us that this provision is applicable to any company, during any
fiscal year, with (1) a net worth of rupees 500 crore (about U.S. $90 million) or more; (2) a
turnover of rupees 1,000 crore (about U.S. $180 million) or more; or (3) a net profit of rupees 5
crore (about U.S. $900,000) or more. Any company not falling under any of the above three
categories is not mandatorily required to follow the provisions of Section 135.
The CSR Clause will only apply to some of the over 800,000 companies in India, including over
8,000 publicly listed companies and multinational companies. The accounting firm Ernst &
Young estimates that the law would cover over 2,500 companies in India and generate over U.S.
$2 billion of CSR spending in local communities.8 Under the CSR rules, net profit is defined to
mean net profit before tax as per books of accounts and shall not include profits arising from
branches outside India.9

8 The 2% CSR Clause: New Requirements for Companies in India, KORDANT PHILANTHROPY ADVISOR,
http://www.kordant.com/assets/2-Percent-India-CSR-Report.pdf
9 Corporate Social Responsibility, New Companies Act, 2013 Insight Series Volume IV, 13 September 2013,
KPMG FLASH NEWS, KPMG IN INDIA
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2. CSR COMMITTEE
The CSR Clause requires a targeted company to make changes within its board of directors and
to form a Corporate Social Responsibility Committee (CSR committee) within the board of
directors that will devise, recommend, and monitor CSR activities, and the amounts spent on
such activities, to the rest of the Board. 10 The Act lists out a set of activities eligible under CSR.
Companies may implement these activities taking into account the local conditions after seeking
board approval. The indicative activities which can be undertaken by a company under CSR have
been specified under Schedule VII of the Act.11
Every qualifying company needs to constitute a CSR committee of the Board consisting of 3 or
more directors, one of whom must be an independent director as defined under section 149(6) of
the Companies Act 213. However in respect of number of directors in a CSR committee, the
question that crops is with relation to the qualifying private companies (which requires minimum
two directors only) would be required to appoint one more director only to constitute CSR
committee and comply with the CSR provisions.12
The functions of the Board will be threefold:13
10 Id.
11 Ibid at note 5
12 Ibid at note 9
13 Id.
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To formulate and recommend a CSR policy to the Board;

To recommend amount of expenditure to be incurred on CSR activities;
To monitor the CSR policy of the company from time to time.

3. RESPONSIBILITY OF THE BOARD

The Board of every qualifying company is required to hold following responsibilities:14

To approve the CSR policy recommended by the CSR committee and disclose the

contents of such policy in its report and place it on companys website;

To ensure the CSR activities are undertaken by the company;
To ensure 2 percent spending on CSR activities;
To report CSR activities in Boards report and disclose non-compliance (if any) with the

CSR provisions.
The draft CSR rules provide the format in which all qualifying companies shall report
the details of their CSR initiatives in the Directors report and in the companys website.

4. CSR SPENDING
This Act also stipulates where the approved money will be spent. This is clearly provided under
Schedule VII of the Act. The bare wordings of schedule VII are as:
Activities which may be included by companies in their Corporate Social Responsibility Policies
Activities relating to:
(i) eradicating extreme hunger and poverty;

14 Id.
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(ii) promotion of education;

(iii) promoting gender equality and empowering women;
(iv) reducing child mortlity and improving maternal health;
(v) combating human immunodeficiency virus, acquired immune deficiencysyndrome,
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.
It is clear that the companies need to focus on the local areas as well as the areas where they
operate their business. The draft CSR rules further provide following guidelines / manner in
which the company can undertake CSR activities and incur CSR spend:15

The company can set-up a not-for-profit organisation in the form of trust, society or nonprofit company to facilitate implementation of its CSR activities. However, the
contributing company shall specify projects / programs to be undertaken by such an
organisation and the company shall establish a monitoring mechanism to ensure that the

allocation to such organisation is spent for intended purpose only.

A company may also implement its CSR programs through not-for-profit organisations
that are not set up by the company itself.

15 Ibid at Note 9.
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Such spends may be included as part of companys prescribed CSR spend only if such
organisations have an established track record of at least 3 years in carrying on activities

in related areas.
Companies may also collaborate or pool resources with other companies to undertake

CSR activities.
Only CSR activities undertaken in India would be considered as eligible CSR activities.
CSR activities may generally be conducted as projects or programmes (either new or
ongoing), however, excluding activities undertaken in pursuance of the normal course of

business of a company.
CSR projects / programs may also focus on integrating business models with social and

environmental priorities and processes in order to create shared value.

CSR activities shall not include activities exclusively for the benefit of employees and
their family members.

There are many issues that still need to be resolved with regards to Schedule VII of the Act.
Such as:16

The concepts of business process integration and shared value are not defined in the

Act / draft CSR rules.

While the draft CSR rules specify that CSR activities shall not be exclusively for the
benefit of employees / their families, it does not provide any objective criteria of certain
benefits (not exclusive) given to employees / their families that could be regarded as CSR

activities.
Whether the list of activities specified under Schedule VII of the Act is exhaustive?
While the draft CSR rules suggest that tax treatment of CSR spend will be in accordance
with the Income-tax Act, 1961 as may be notified by Central Board of Direct Taxes
(CBDT), one will have to wait and watch for notification from CBDT and whether the
same provides adequate certainty on tax treatment of CSR spend .

All these areas require more clarification.

16 Ibid at Note 9.
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5. FAILURE TO COMPLY
While a company is not subject to liability for failing to spend on CSR, a company and its
officers are subject to liability for not explaining such a failure in the annual report of the board
of directors. There is currently no guidance as to what constitutes a sufficient or statutorily valid
explanation for failure to spend in the board report. In addition, a company and its directors are
liable even if they fail to report on CSR activities that actually were conducted.
Failure to explain is punishable by a fine on the company of not less than 50,000 rupees (about
U.S. $900) and up to 25 lakh rupees (about U.S. $46,000). Further, 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 (about U.S. $900) and as high as 5 lakh rupees (about U.S. $9,200).17
6. SOME CLARIFICATION BY DRAFT RULES.
The draft rules (as of September 2013) provide a number of clarifications and while these are
awaiting public comment before notification, some the highlights are as follows:18

17 Ibid at Note 9
18 Id.
10

Surplus arising out of CSR activities will have to be reinvested into CSR initiatives, and

this will be over and above the 2% figure

The company can implement its CSR activities through the following methods:
-- Directly on its own
-- Through its own non-profit foundation set- up so as to facilitate this initiative.
-- Through independently registered non-profit organisations that have a record of at least
three years in similar such related activities
-- Collaborating or pooling their resources with other companies

Only CSR activities undertaken in India will be taken into consideration

Activities meant exclusively for employees and their families will not qualify
A format for the board report on CSR has been provided which includes amongst others,
activity-wise , reasons for spends under 2% of the average net profits of the previous
three years and a responsibility statement that the CSR policy, implementation and
monitoring process is in compliance with the CSR objectives, in letter and in spirit. This
has to be signed by either the CEO, or the MD or a director of the company

CONCLUSION
Amid various practical difficulties which may have to be encountered at least in the initial phases
of implementation of the new CSR provisions, the initiative of the government is no doubt
appreciable. The new provisions may be viewed as the result of the changing corporate
philosophy in India and worldwide which entrusts the responsibilities on giant corporates
towards social welfare of the population which comprise of their present or prospective
employees, customers or other stakeholders in varied roles. In order to ensure meeting the true
spirits of the new CSR law, a well organized, professionally capable and independent team needs
to be formed. It is possible only when companies come forward and join together for this
common good goal. Building an expert and trained team of professionals is needed for managing
funds earmarked for CSR purposes is required. One step forward has been put forward by Indian
Institute of Corporate Affairs (IICA) in this regard. The Institute is planning to initiate a
certificate programme on Corporate Social Responsibilities activities for working executives. As
the thousands of giant corporates may be involved with funds amounting to thousands of crores
of rupees, it will a better idea for the government that rather than fixing responsibility of
spending by individual companies, the government should encourage making a common corpus
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to be managed collectively by experienced professionals to be nominated by the participating

corporates. The funds of the corpus may be invested in risk free securities and the income from
such investments may be used for gigantic social welfare projects which are capable of covering
a large number of populations by raising their income and standards of living who in turn would
become the part of growth story of varied industries in India. The new CSR law, being a Rule
Ruled by Rules (called so because section 135on CSR spending require detailed and
comprehensive guidelines towards implementation of new CSR law), since the rules are under
finalisation, once the rules are in place, we hope to have a better picture of the various aspects of
new CSR provisions.

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