Is CSR mandatory for all companies?

Introduction

Corporate Social Responsibility or CSR is a business model which makes the company liable to not only the shareholders but to the environment, society and the other stakeholders as well. It is a tenet of Corporate Governance and is also known as corporate citizenship as it implies duty on the company to act in a responsible manner by ensuring that it does not have a negative impact on the society in any economic, social or environmental aspects.

Applicability of CSR Provisions

India is one of the few countries, which has mandated CSR for various companies which belong to a certain category. Section 135 of the Companies Act, 2013, which was notified on April 1, 2014, makes CSR compulsory for all companies (whether public, private, listed, unlisted or government), if it falls within any of the following criterions-

If the net worth of the company is Rs. 500 Crores or more; or
If the annual turnover of the company is Rs. 1000 Crore or more; or
If the annual net profit of the company is Rs. 5 Crores or more.

It is also applicable to Section 8 companies, as no specific segregation for such companies is provided by the Act.

It is pertinent to note that a subsidiary company or a holding company does not merely become liable under Section 135, unless it itself falls in the category provided in the aforementioned section.

Where the company falls in any of these categories, it has to appoint a CSR Committee which consists three or more directors. It is necessary for one of these directors to be an independent director. Where a company does not have to appoint an independent director as per Section 149(4), it may have two or more directors in the CSR Committee. This provision was inserted by the Companies (Amendment) Act, 2017.

Role of CSR Committee

As per Section 135(3), the role of the CSR Committee includes-

It has to create a policy and inform the board regarding the policy containing CSR activities to be undertaken by the company.
It has to recommend expenditure amount that will be utilized in implementing the policy.
It has to monitor the company policy in CSR regularly.

The Board has to review this policy and approve it. It also has to disclose the contents of the policy to the company and publish the same on the company’s website. It has to make sure that the activities prescribed by the policy are undertaken by the company. The company has the freedom to give preference to conduct such CSR activities in the local areas.

Amount to be utilized

The Board has to ensure that a minimum of 2% of the net profits in the last 3 years has to be utilized for CSR activities. If it fails to do so, it has to inform the reasons for the same in its report. If it exceeds the amount prescribed for CSR activities. The company can utilise the excess to set-off the amount in the successive years for CSR activities. The excess unspent funds have to be transferred to a separate account called ‘Unspent Corporate Social Responsibility Account’. The ‘net profit’ under Section 135 of the Companies Act, 2013 is the net profit before tax as given under Section 198 of the Companies Act, 2013.

In case of non-compliance

In case the company does not comply with the provisions, it has to transfer twice the amount to be utilized for CSR activities in the ‘Unspent Corporate Social Responsibility Account’ or Rs. 1 Crore, whichever is less. The directors responsible are also penalised and have to transfer 1/10th of the amount to the aforementioned account under Section 135 for the contravention of this section.

The Companies (Amendment) Act, 2019 has however made changes to the non-compliance provisions. According to the new amendment, any company, on which Section 135 is applicable, fails to comply with the section requirements would now be fined with a penalty of at least Rs. 50,000 extending to Rs. 25 lacs. In addition to this, the officers involved would be imprisoned for up to three years or will be fined a minimum of Rs. 50,000 and a maximum of Rs. 5 lacs, or both. If the offence continues, separate penalty has been provided for the same. This amendment is an attempt to ensure greater compliance of CSR provisions.

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Areas where CSR funds can be utilized

Schedule VII of the Companies Act, 2013 provides a list of activities where the CSR funds can be utilized. The activities are quite broad in nature but also exhaustive. Companies cannot term other expenditures as being utilized under activities unless they can be related to the items notified under Schedule VII. This was clarified by the Ministry of Corporate Affairs vide General Circular No. 21/2014 dated June18, 2014. Some of the activities included in Schedule VII are

to eradicate hunger, poverty, malnutrition;
to promote preventive healthcare and healthcare in general;
to promote sanitation, disaster management;
to promote education;
to promote gender equality, setting up of orphanages, and measures to reduce the inequalities faced by economically and socially backward groups;
to protect the environment;
to protect national heritage, public libraries, to develop arts and handicrafts;
measures which will benefit the armed forces veterans and their dependants;
Contribution to PM CARES Fund, etc.

Additionally, the following activities do not qualify as CSR Expenditure-

Activities benefitting employees and employees’ family;
Activities meant to comply with any provisions or legislations;
Funds utilization for one-off events;
Contribution to political parties;
Activities in pursuance of the normal course of business, etc.

The Companies (Corporate Social Responsibility Policy) Rules, 2014

The Companies (Corporate Social Responsibility Policy) Rules, 2014 were published vide Notification No. G.S.R. 129(E) on 27th February, 2014 and notified by the Ministry of Corporate Affairs on 1st April, 2014. This Act is applicable to all the companies falling within the purview of Section 135 of the Companies Act, 2013. It provides a comprehensive legislation for the implementation of the CSR mandate as provided by Section 135. There have been several amendments in the rules to accommodate the dynamic circumstances. The most recent amendment was introduced on January, 2021, which provides for many modifications, keeping in mind the COVID-19 Pandemic.

Ways to implement CSR activities

The following points can be adopted for better utilization of CSR policies-

There should be greater awareness amongst directors who work for companies which have to comply with Section 135 regarding CSR activities. This can be done by ensuring that these activities are widely publicised as not just being helpful to society, but also to the company.
Companies can tie-up with NGOs or non-governmental organizations which align with the vision of the company or even otherwise. For example, there are many organizations raising funds through the CSR activities of the companies to help the environment and the underprivileged. In this case, if the company does not wish to utilize manpower to conduct CSR activities, it can just provide funds to such organizations which will put the CSR funds to a good social cause.
Companies should engage in those activities which they are familiar with. For example, a company which is dealing with online education can provide such education packages to underprivileged children for free or give scholarships to underprivileged children. Organizations which are in the business of energy, can install power houses in rural areas where electricity is still not available and so on.
There is a need for active participation from the company to focus on not just immediate results but long term commitment towards social causes.
Companies can also provide grants to research institutions which are working for sustainable development.

What if CSR was mandatory for all companies?

If CSR was mandatory for all companies, it might render the legislation ineffective for various reasons as it would lead to greater non-compliance by the companies. There are already many compliances in place for a low income company, like filing of returns, conducting annual general meetings, etc. Making CSR mandatory for all the companies would increase the burden on low income companies and might run them towards losses, as well as hinder their growth. For example, the funds which could have been utilized for further investments or declaring dividend would then be utilized for the CSR activities.

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This provision if mandated for all companies would lead to a lot of resistance from the business owners as even small companies would be asked to utilize their funds for philanthropic acts. For instance, a company which is earning 10,000 net profit a month cannot survive by utilizing funds which won’t directly benefit the company.

Furthermore, those companies that do report fund utilization for CSR activities might manipulate the numbers and provide a wrongful picture of the expenses of the company. This will further create problems as companies might start to look for loopholes in the legislation to escape tax liabilities.

There is a need to create a balance between earning and utilizing funds for CSR activities. While everyone has a duty to the society at large, if this duty as a blanket cover is imposed on companies, it might lead to their downfall. However, it is pertinent to note that it is not necessary for the companies to only then spend on CSR activities if they fall under the Section 135 category. The corporations can indulge in philanthropy due to the various other advantages and not just to complete the compliance requirement under Section 135.

Advantages of implementing CSR effectively

Implementing CSR by a company provides for the following advantages-

The financial performance of the company improves as there is a better brand image created for the company.
There are more sales and customer loyalty. This is impacted because people prefer to attach themselves to organizations who are also working for the society and not just to gain profit.
It helps the society as a huge sum of money is used to solve social, economic and other issues. Even though the percentage prescribed is 2%, it can lead to a huge sum of money going for charitable causes when large companies contribute to such charities.
It creates greater trust in the company and provides for better brand image of the company.
It also benefits the environment, especially if the corporates target environmental issues, not merely by donating to charities but by imbibing the principles of the recycling, reusing, sustainability, etc. in their day to day operations.
It provides for greater funding for NGOs and research institutions. Since the NGOs and research institutions receive minimal grants from the government in India, CSR provides an opportunity to these institutions to gain funding for charitable causes. This helps in better development and research, thereby lower costs of products in the future.
It provides for better media coverage and marketing of the company, as media houses show a positive light on the company.
It also gives a competitive advantage to the company, due to the cumulative effect of a better marketing impact and better branding of the company.

Conclusion

The CSR provisions as provided by the Companies Act, 2013, only mandates CSR for a certain category of companies and not all the companies. However, it does not differentiate between public, private and listed companies, as is usually the trend with such legislations. It only creates a category on the basis of net profits, turnover or worth. As stated above, if CSR is mandated for all the companies, it might create a havoc and lead to a higher non-compliance of the provisions. Therefore, the current regime pertaining to CSR, while can be improved, should not be imposed as a mandatory obligation on all the companies.