Corporate Social Responsibility and the Law
A. SECTION 135: Corporate Social Responsibility
(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.
B. Companies (Corporate Social Responsibility Policy) Rules, 2014
These Rules are in force since April 2014. Released vide Notification dated February 27, 2014
C. Clarifications issued by the Ministry of Corporate Affairs on CSR (18 June 2014)
D. FAQ released by the Ministry of Corporate Affairs
Released by the Ministry of Corporate Affairs vide Notification dated January 12, 2016, covering the following issues is provided in the link below:
- Financial Year
- CSR expenditure as Business expenditure
- CSR beyond Schedule VII
- Tax benefits under CSR
- What is not CSR?
- Whether Subsidiary company required to do CSR?
- Can contribution of money to section 8 Company/NGO/Trust be treated as CSR?
- Display of CSR Policy on the website
- Annual report on CSR
- Contribution to Disaster Relief
- Carry Forward Rule
- Engagement of Third Party for CSR Impact Assessment
- CSR Fund for funding government schemes
E. Schedule VII of the Companies Act, 2013
F. Foreign Company and CSR
The CSR Rules prescribe that in the case of a foreign company that has its branch or a project office in India, CSR provision will be applicable to such offices. CSR Rules provides that the balance sheet and profit and loss account of a foreign company will be prepared in accordance with Section 381(1)(a) and net profit to be computed as per Section 198 of the Companies Act. It is not clear as to how the computation of net worth or turnover would be arrived at in case of a branch or project office of a foreign company.
G. Penalty for breach in CSR Expenditure and Reporting
Section 134(8): Penalties for not discharging the duty as mentioned above are:
- Fine, not less than fifty thousand rupees may extend to twenty-five lakh rupees; and
- Every officer of the company in default shall be:
The punishable with imprisonment for a term which may extend to three years; or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
General penalties for disregard to the rules and repeat offenses-
- Fine under section 450 of the Companies Act, 2013 may extend to ten thousand rupees (Rs. 10,000/-), and where the contravention is continuing one, a further fine of one thousand rupees (Rs. 1,000/-) for every day after the first during which contravention continues.
- As per Section 451 of the Companies Act, 2013, the defaulter is punished either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.
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