NATIONAL LAW UNIVERSITY

JODHPUR

COMPANY LAW II
ASSIGNMENT (CA-II)

CORPORATE SOCIAL RESPONSIBILITY IN COMPANIES ACT 2013

Submitted to:

Submitted by:

Ms. Krati Rajoria

Niharika Choudhary

Faculty of Company Law

1120
Section A
VI Semester

CORPORATE SOCIAL RESPONSIBILITY IN COMPANIES ACT 2013

CORPORATE SOCIAL REPONSIBILITY
While proposing the Corporate Social Responsibility Rules under Section 135 of the
Companies Act, 2013, the Chairman of the CSR Committee mentioned the Guiding Principle
as follows: "CSR is the process by which an organization thinks about and evolves its
relationships with stakeholders for the common good, and demonstrates its commitment in
this regard by adoption of appropriate business processes and strategies. Thus CSR is not
charity or mere donations. CSR is a way of conducting business, by which corporate entities
visibly contribute to the social good. Socially responsible companies do not limit themselves
to using resources to engage in activities that increase only their profits. They use CSR to
integrate economic, environmental and social objectives with the company's operations and
growth. With the enactment of the Companies Act, 2013, India has become the forerunner to
mandate spend on Corporate Social Responsibility (CSR) activities through a statutory
provision. While many corporate houses have been traditionally engaged in doing CSR
activities voluntarily, the new CSR provisions put formal and greater responsibility on
companies in India to set out clear framework and processes to ensure strict compliance.
Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the
Companies Act as well as the provisions of the Companies (Corporate Social
Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April
2014.
SECTION 135 OF COMPANIES ACT, 2013
Applicability
Section 135(1) of Company Act 2013 mandates the CSR expenditure for the following
companies Every company having
a) net worth of Rs.500 crore,
b) turnover of Rs.1000 crore
c) or net profit of Rs.5.00 crore

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Where net profit excludes income from overseas branch & divided distributed by company
on which this section apply.
If any company on which CSR provisions were applicable cease to come in above criteria
for consecutive three years , they are not required to follow the provision of CSR
Enhanced Applicability

holding or subsidiary company;

a foreign company defined under clause (42) of section 2 of the Act having its branch
office or project office in India which fulfill the criteria u/s 135 of the Act.

Mandatory Expenditure

Section 135(5) mandates 2 percent of the Average net profit during the three
immediately preceding financial years.

Administration and Reporting

The Board would appoint a three member CSR committee including one Independent
Director.
The CSR committee would be responsible to formulate CSR policy, recommend CSR
initiatives and monitor CSR expenditure.
The Board would be required to mandatorily report on CSR in the Boards report. In case of
failure to spend the prescribed amount, reasons would have to be disclosed in the Boards
report.
Implementation
CSR committee is to develop CSR policy which shall indicate the activities to be
undertaken by the company as specified in Schedule VII.
The company shall give preference to the local area and areas around it where it operates for
spending.
The committee shall formulate the policy, including activities specified in Schedule VII,
which are as follows:
Eradicating extreme hunger and poverty
Promotion of education
Promoting gender equality and empowering women
Reducing child mortality and improving maternal health

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 Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria

and other diseases
Ensuring environmental sustainability
Employment enhancing vocational skills
Social business projects
Contribution to the Prime Ministers 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 and Tribes, other backward classes, minorities
and women
Such other matters as may be prescribed.
The company can choose the social cause or project it wants to support from the list of
activities specified. The CSR committee will then have to frame a CSR policy in accordance
with the rules and implement it. The company's board of directors will have to play an active
role by participating in the CSR initiative at various stages.
Surplus funds in respect of the CSR projects cannot form a part of the company profits. The
rules specifically exclude contributions or donations made to political parties from CSR
activity.

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CSR REGIME - A MAJOR CHANGE

Law is the first of its kind in Indian history to recognize the scope of utilizing corporate
strengths towards fulfilling countrys social objectives. The CSR regime complements the
efforts of the government and non-government organisations by requiring companies in India
to initiate activities for the economic well-being of the underprivileged and for the
environment. Companies can also join hands to undertake CSR projects.

Social and

economic initiatives, as a responsibility of the companies, are gaining popularity

internationally. The Financial Reporting Council in the United Kingdom is in the process of
introducing guidelines for disclosures regarding environmental, social and governance (ESG)
issues by a company. The intention is for these to replace the existing 'business review'
section of annual reports, and companies would be required to provide complete disclosure
about their business activities, including social efforts.
A more practical and sensible approach to implementing the CSR regime in India is to make
efforts to support a good cause in every move made by a company. The principles of social
responsibility can be incorporated into the business strategy of the company. The company
can make efforts to internally create awareness about ethical business practices and
principles.
Charity events sponsored by companies can promote the cause they support, rather than a
brand. Employees can be made more aware of alternative uses of office resources, and about
saving paper, electricity, water and so on. Employees who believe in contributing to the
society should be encouraged to assist the CSR committee in formulating a socially beneficial
CSR policy.

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IMPLICATIONS IN THE CURRENT SCENARIO

The Policy recognizes that corporate social responsibility is not merely compliance; it is a
commitment to support initiatives that measurably improve the lives of underprivileged by
one or more of the following focus areas as notified under Section 135 of the Companies Act
2013 and Companies (Corporate Social Responsibility Policy) Rules 2014. This rule tends to
create the following implications:

Tax Treatment of CSR Spending: Presently the Income Tax Law provides for
deduction under section 80G for donations to certain funds and institutions with
maximum limit of 10% of the total income. Deduction for CSR spending should
preferably be over and above deduction under section 80G to give a direct motivation
to companies to spend for CSR activities. Alternatively CSR may be declared as a
business expense and deduction may be allowed under the Income Tax Law. Apart
from this capital and revenue expenditure on CSR activities require separate tax
treatment to avoid future litigations. The Income Tax Law has to address these and
various other issues which we hope that government would be covering in the next

Budget of 2014.
CSR bill also recommends that local area action and collaboration are preferred thus,
paving way for wide cluster level actions. So, for example, automotive clusters might
see bigger OEMs pooling their resources to bring real impact for the residing
communities like educational/vocational institutes, comprehensive environment up
gradation programs, healthcare facilities etc. This also suggests that projects/schemes
designed exclusively for employees will not qualify under this act as it wants to

encourage outward actions.

Significantly, there is no penalty for defaulting on CSR norms. Only an explanation is
to be given by the board in its report for such non-compliance. So, it seems there is no
real coercive factor.

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CONCLUSION- THE WAY AHEAD

There have been mixed reactions to the introduction of the spend or explain approach taken
by the MCA with respect to CSR. It may take a while before all of Corporate India imbibes
CSR as a culture. Activities specified in the Schedule are not elaborate or detailed enough to
indicate the kind of projects that could be undertaken, for example, environment
sustainability or social business projects could encompass a wide range of activities.
Lack of clarity and Existing Ambiguity in the Section and the Rules
Exclusions: One of the exclusions provides that the profits of a branch of an Indian company
located outside India cannot be merged into the profits of the parent company for the purpose
of computing the two per cent contribution. This exclusion goes against the very mandate of
Section

135

and

is,

to

that

extent,

ultra

vires.

Definition of CSR: There appears to be a major contradiction in the rules in respect of the
meaning of the words 'corporate social responsibility'. The Companies Act, 2013, defines
CSR activities to mean an identified set of activities set out in the separate schedule to the
Act. However, a reading of the definition in the rules indicates that the list of CSR activities
provided in the rules (which also includes the schedule activities) is only illustrative and not
exhaustive. At the same time, an overall reading of the rules strongly suggests that the
scheduled activities alone will be considered for the purpose of CSR. Whether or not social
activities falling outside the purview of the schedule form a part of CSR activities still
remains doubtful.
Local Area Preference: The Act provides that a company should give preference to the local
area in which it operates for CSR spending. But its silent for situations where company has
more than one operational office in the same city and also it fails to address the location of a
factory, as opposed to the corporate office, the target of preference.
Contributions from political Parties: The CSR rules have rightly excluded contributions
directly or indirectly made to a political party from the scope of CSR activity. But, the act is
unclear on contributions made to institutions affiliated with one or more politicians or those
located in a constituency represented by a politician who has some form of regulatory
supervision or leverage over that company and also about activities/institutions being run
under the trusteeship or office of a politician.
Thus while the new rules are well-meaning, there is definitely room for further clarity and
certainty.

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