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Author - Associate Kantika Mukherjee

India is the very first nation in the world to make Corporate Social Responsibility (CSR) compulsory, following an amendment to the Companies Act, 2013 in April 2014. The corporations could now invest their profits in sectors such as education, poverty, gender equality, and hunger as a part of their any CSR compliance.

The amendment made in the Companies Act 2013 directs the corporations with a net worth of Rs. 500 Crores or above, or an annual turnover of Rs. 1000 Crores or above, or net profit of Rs. 5 Crores or above, to spend 2% of their average net profits of 3 years on CSR.

Earlier to that, the corporate social responsibility clause has been voluntary for corporations, although it was mandatory to disclose their CSR spending towards shareholders. CSR comprises and goes beyond the following:

• Projects relating to activities stated in the Companies Act, or
• Projects relating to activities taken by the company board as recommended through the CSR Committee provided those actions cover items listed in the Companies Act

The companies should consider that the expenditures towards CSR are not qualified for deduction in the computation of taxable income. The government, though, is considering a re-evaluation of this provision, along with other CSR provisions recently presented under the Companies (Amendment) Act, 2019.

What are the laws governing CSR?

The laws governing corporate social responsibility are specified under the Companies Act, 2013, and became effective on April 1st, 2014. These laws state that corporations with a net worth of Rs. 500 Crores, or with revenue of Rs. 1,000 Crores, or net profit of Rs. 5 Crores all through the immediately previous financial year must spend 2% of their average net profit in the last 3 years on activities relating to social development for example sanitation, education, eradication of hunger, poverty as well as malnutrition, conservation of heritage, art and culture, and vocational training like setting up grooming outlets or training centers for sewing.

The methodology of Corporate Social Responsibility

CSR is the process for assessing an organization’s impact on society and assessing their responsibilities. It commences with an assessment of the following aspects of each company:

• Customers
• Suppliers
• Environment
• Communities and
• Staff

The most effective CSR plans make sure that while companies abide by the legislation, their investments also must respect the development and growth of marginalized communities as well as the environment. CSR must also be sustainable – which involved actions that a company could uphold without negatively affecting their business goals.

The companies in India were much sensible in taking up CSR initiatives and incorporating them into their business procedures.

It was increasingly projected in the Indian Corporate Environment because companies recognized that it is also significant to form responsible and overall supporting relationships with the community.

The companies now have particular departments and teams that grow specific policies, strategies, and aims for their CSR programs and set separate finances to support them. Majority of the times, these programs are based on definite social beliefs or are carefully associated with the businesses’ domain.

How are the changes going to impact the company?

Until now, if a corporation was not capable to fully incur CSR expenses in a given year, it could carry the sum forward and spend that in the next 12 months along with the money for the running year.

The new law recommends a financial penalty as well as imprisonment for non-compliance. The penalty ranges from Rs. 50,000 to Rs. 25 Lakh, while the defaulting officer of the corporation might be legally liable to imprisonment for up to 3 years, or a penalty up to Rs. 5 Lakh, or both, as per the Companies (Amendment) Bill, 2019.

As per the new laws, any unspent sum would have to be deposited into an escrow account within thirty days of the end of that fiscal. This sum was expected to be spent within three years from the date of its transfer.

Failing in spending the sum, the sum shall be put into a fund, which could even be the Prime Minister Relief Fund. The government also intends to comprise a specific penal provision in the Companies Act for non-compliance with CSR.

However, the government is reviewing the rules as the industry objected on the strict provisions, particularly relating to the jail terms for CSR violations, and it is yet to implement on them.

The listed companies are required to disclose their corporate social responsibility activities, the sum spent and framework formed to ensure adherence towards the norms. The companies would have a CSR team that gives a regular progress report as well as updates to the CSR committee of the board. The committee will also provide a report of the actions taken every quarter with targets and their respective causes of variance. All these are required to be submitted to the corporate affairs ministry.

Conclusion

It must be remembered that donating money does not mean a CSR strategy. CSR is an approach towards community engagement that uses business assets, employees, resources, expertise to enhance community while driving business growth.