Corporate Social Responsibility

Context:

Experts are calling on the government to ease CSR (Corporate Social Responsibility) regulations to allow corporate expenditure on vaccinations for employees and treatment of employees suffering from Covid to be covered under spending for CSR.

Under current CSR norms, companies are not permitted to count expenditure incurred exclusively for the welfare of employees as part of their mandatory CSR expenditure.

What is Corporate Social Responsibility (CSR)?

It is the integration of socially beneficial programs and practices into a corporation’s business model and culture.

How is it regulated in India?

India is one of the first countries in the world to make CSR mandatory for companies following an amendment to the Companies Act, 2013 (Companies Act) in 2014.

Under the Companies Act, businesses can invest their profits in areas such as promoting rural development in terms of healthcare, sanitation, education including skill development, environmental sustainability, etc.

Section 135(1) of the Act prescribes thresholds to identify companies which are required to constitute a CSR Committee – those, in the immediately preceding financial year of which:

1. net worth is Rs 500 Crore or more; or.
2. turnover is Rs 1000 Crore or more; or.
3. net profit amounts to Rs 5 Crore or more.

As per the Companies (Amendment) Act, 2019, CSR is applicable to companies before completion of 3 financial years.

CSR Activities:

The indicative activities, which can be undertaken by a company under CSR, have been specified under Schedule VII of the Act. The activities include:

• Eradicating extreme hunger and poverty,
• Promotion of education, gender equality and empowering women,
• Combating Human Immunodeficiency Virus, Acquired Immune Deficiency Syndrome and other diseases,
• Ensuring environmental sustainability;
• Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women etc.

Amount to be spent:

1. Companies are required to spend, in every financial year, at least 2% of their average net profits generated during the 3 immediately preceding financial years.
2. For companies that have not completed 3 financial years, average net profits generated in the preceding financial years shall be factored in.

Treatment of unspent amounts:

1. Amounts to be utilised towards a CSR activity, but unspent must be parked in a special account as prescribed under the provision within 30 days of the end of the relevant financial year.
2. The unspent amount must be utilised by the company for the particular CSR activity within a period of 3 financial years from the date of such transfer, failing which, it must be transferred to any fund provided for in schedule VII of the Companies Act namely inter alia the Clean Ganga Fund, Swachh Baharat Kosh, Prime Minister’s National Relief Fund.
3. Any unspent amount which does not relate to an ongoing CSR activity must be transferred to a fund provided for in Schedule VII within a span of 6 months of the end of the relevant financial year.

Fines and Imprisonment:

Provision for penalty in the form of fine on the company and officers in default, between Rs 50,000 – Rs 25,00,000, has been inserted in case of failure in compliance with Section 135. Additionally, every officer in default may also be imprisoned for a term of up to 3 years.

Social responsibility has a strategic importance for two reasons:

1. A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a company to produce only goods and services which strengthen the health of society
2. If the company wants to succeed in the long term it needs to have the acceptance—or licence to operate—from social actors affected by the company’s’ operations.

Injeti Srinivas Committee:

• A High Level Committee on CSR was formed in 2018 under the Chairmanship of Injeti Srinivas.
  • The main recommendations included making CSR expenditure tax deductible, allowing the carry-forward of unspent balance for a period of 3-5 years, and aligning Schedule VII of the Companies Act with the United Nations Sustainable Development Goals.

Recent Development:

• In 2020, the Ministry of Corporate Affairs allowed companies to spend CSR funds on Covid-19 relief, including preventive healthcare and sanitation and on research and development of Covid drugs, vaccines and medical devices.
  • The ambit was expanded further this year to include awareness or public outreach programmes on Covid-19 vaccination and setting up of makeshift hospitals and temporary Covid care facilities.

Benefits of Further Easing CSR Norms:

• Role in Vaccination Drive: Approximately, Rs. 10,000 crore is available with listed companies annually for spending on CSR activities. If the eligible unlisted companies are taken into account, the available sum may be larger. This can be handy in supplementing the expenditure of the Centre and States on vaccination.
• Rural Population can be reachable: Many of these companies have a presence in rural areas.This will ensure that the drive goes beyond the large cities and reach the rural population too.
• Benefit of Allowing Corporate Expenditure on Vaccinations for Employees under CSR: This will boost vaccinations for unorganised labour in the manufacturing sector and will benefit the overburdened healthcare system.