Corporate Social Responsibility under Companies Act, 2013 - Advantages and Disadvantages

 INTRODUCTION

Corporate Social Responsibility ("CSR") was introduced under Companies Act, 2013 ("Act") to ensure that companies contribute towards the growth of society. CSR is a good moral responsibility of every entity but to be safe the Indian Government decided to mandate it by including it under the Act. The Act discusses necessary requirements, disclosure under CSR, modes for conducting CSR, CSR activities etc. 

CSR is a concept wherein entities decide to contribute their earnings for the growth and development of society other than making profits. CSR includes the following but is not limited to:-

1. Projects or programs specified in Schedule VII in the Act.

2. Projects or programs undertaken by the Board of Directors to ensure the recommendation of CSR Committee of the Board as per CSR Policy of the company with the condition that such policy covers the subjects mentioned in Schedule VII.

ELIGIBILITY UNDER COMPANIES ACT, 2013

Section 135(1) states that every company having:-

1. net worth of Rs. 500 crores or more or 

2. turnover of Rs. 1000 crores or more or

3. net profit of Rs. 5 crores or more 

during any financial year will constitute a CSR Committee of the Board consisting of 3 or more directors out of which at least 1 director should be an independent director.

Section 135(2) states that the Board's report will disclose the composition of CSR Committee.

Section 135(3) states that the CSR Committee will perform the following functions:-

1. formulate and recommend a CSR Policy to the Board which will indicate the activities undertaken by the company in Schedule VII;

2. recommend the expenditure amount incurred on the aforementioned activities;

3. monitor CSR Policy of the company from time to time.

Section 135(4) states that the Board of every company will take into account the following:-

1. after taking into account the recommendations by CSR Committee approve the CSR Policy for the company and disclose the contents of such Policy in its report and also on Company's website.

2. all activities which are included in CSR Policy of the company are undertaken by the company as well.

Section 135(5) states that the Board of every company should ensure that the company spends every year at least 2% of the average net profits made during three immediately preceding financial years or if the company has not completed the period of three financial years since its incorporation then during such immediately preceding financial years provided that the company will give preference to local areas for spending the amount earmarked for CSR Activities. Provided further that if the company fails to spend such amount and unless the unspent amount is related to any ongoing project under sub section 6, transfer such unspent amount to a Fund mentioned in Schedule VII within 6 months of the expiry of financial year. Provided also that if the company spends an amount which is more than the requirements under this subsection, such company may set-off the excess amount against the requirement to spend under this sub section for such number of succeeding financial years in a prescribed manner.

Section 135(6) states that any unspent amount pursuant to an ongoing project undertaken by a company under CSR Policy will be transferred by the company within 30 days from the end of financial year to a special account of the company for that financial year in any scheduled bank which is to be called the Unspent Corporate Social Responsibility Account and such amount will be spent by the company towards CSR Policy within 3 financial years from the date of such transfer failing which the company will transfer the same to a Fund under Schedule VII within 30 days from the date of completion of the 3rd financial year. 

Section 135(9) states that if the amount to be spent by the company under sub section 5 does not exceed Rs. 50 lakhs, the requirement for constitution of CSR Committee will not be applicable and the functions of such Committee will be discharged by the Board of Directors of such company.

PENALTY FOR CONTRAVENTION 

Section 135(7) states that if a company does not follow sub sections 5 and 6 then the company will be liable to a penalty of twice the amount required to be transferred by the company to the Fund under Schedule VII or the Unspent Corporate Social Responsibility Account or Rs. 1 crore whichever is less and every officer of the company who is in default will have to pay one tenth of the amount required to be transferred by the company to such Fund under Schedule VII or the Unspent Corporate Social Responsibility Account as the case may be or Rs. 2 lakhs whichever is less. 

ADVANTAGES OF CSR

CSR is used to explain how to develop the society by the company and below are the reasons as to why CSR is important:-

1. CSR helps companies to be different in a competitive environment when they are involved in any community service and different charities.

2. CSR helps in building a company's positive image in the eyes of the media.

3. CSR helps in the company's brand value by building a socially strong relationship with customers.

4. When a CSR strategy is adopted, a company is set apart from more traditional concerns that only talk about making money.

5. Whether its customer base, workplace or the world, strong CSR efforts will help in making relationships that is beneficial for everyone involved in these efforts.

6. Destroying the environment impacts a business in a negative way so CSR helps in protecting the environment.

7. If a company's brand is being boosted, reputation is being built, public trust is being obtained then this may positively impact the company's bottom line.

DISADVANTAGES OF CSR

Even though there are lots of advantages of CSR, it is not devoid of disadvantages which are as follows:-

1. There are high costs and expenses while investing in CSR such as training employees, launching campaigns and collaboration with external agencies. Companies will have to reorganize their finances to adjust to change in budget. 

2. Clients and investors would want to know how their money is being spent and whether CSR activities are in par with the company's missions and is there any case of conflicts of interest. 

3. Shareholders and clients may experience the financial burden of a company's CSR activities.

4. Public image is one of the most significant disadvantages of CSR. A company involved in CSR activities is subject to scrutiny for everything and criticism over the smallest acts.

5. Once a company invests in CSR, it agrees to be more accountable for their actions. If a company's actions negatively impacts the environment then damage control has to be done. Appropriate assessment measures of a company's business should be done before investment in CSR measures.

6. Sometimes when a company is invested in external activities, focus from core business activities is taken away. Some companies may resort to attracting numbers of people with fake campaigns.

CONCLUSION

Implementing CSR programs helps in promoting a positive brand image for companies and also improves various aspects of society. It boosts morale amongst the employees and in workplace. CSR is a continuous effort that requires monitoring, assessment and improvement. CSR makes a positive impact on society and creates value for their shareholders. CSR is important for modern business operations and it benefits the company in the long run.