“The care of human life and happiness and not their destruction is the first step towards good governance.”
– Thomas Jefferson
Corporate Governance can be understood as a set of procedures, norms, practices, and standards practiced or followed or abided by the organization of a Company to ensure its relationship with its Stakeholders or Directors in a transparent and organized manner.
Whereas, Corporate Social Responsibility (hereinafter referred to as “CSR”) focuses on the relationship of a Company with the Social Norms. The company focuses on regulating its own behavior in accordance with Societal Practices.
Companies Bill, 2012 saw the first provision regarding one of the foremost goals of good governance by the introduction of CSR and lately we saw that Parliament of India amended the Companies Law 2013, for vitalizing the concept of corporate and good governance by introducing the Penal Provisions on the violation of Section 135 of Companies Act.
Applicability of CSR Provisions
The provisions of the Corporate Social Responsibility will be applicable to every Company including its holding or subsidiary having:
(a) Net worth of ₹500 Crore (Rupees Five hundred crore only) or more, or
(b) Turnover of ₹1000 crore or more, or
(c) Net Profit of ₹5 crore (Rupees Five crore only) , or
More during the immediately preceding financial year.
How much to spend on CSR
The Board of every company shall ensure that the company spends, in every financial year, at least 2 (two) percent of the average net profits of the company made during the three immediately preceding financial years [or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years], in pursuance of its Corporate Social Responsibility Policy.
Corporate Social Responsibility Committee
A company 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.
Functions of the Board
The functions of the board include:-
(a) To formulate and recommend Corporate Social Responsibility Policy Activities which shall be undertaken by the company as specified in Schedule VII;
(b) To recommend the amount of expenditure to be incurred on the CSR activities; and
(c) To monitor the CSR Policy of the company from time to time.
Corporate Social Responsibility Policies Activities
Activities which may be included by companies in their Corporate Social Responsibility Policies as per Schedule VII are as follows:-
Activities relating to:—
(a) Eradicating extreme hunger and poverty;
(b) Promotion of education;
(c) Promoting gender equality and empowering women;
(d) Reducing child mortality and improving maternal health;
(e) Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria, and other diseases;
(f) Ensuring environmental sustainability;
(g) Employment enhancing vocational skills;
(h) Social business projects;
(i) Contribution to the Prime Minister's 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, the Scheduled Tribes, other backward classes, minorities and women; and
(j) Such other matters as may be prescribed.
Failure to spend the CSR Amount
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.
Sec 135 as per 2019 Amendment
(a) Any amount remaining unspent pursuant to any of the ongoing project shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account, and
(b) such amount shall be spent by the company in pursuance of its obligation towards the Corporate Social Responsibility Policy within a period of three financial years from the date of such transfer,
(c) Failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.
Punishment in Violation of the Provision
(a) If a company contravenes the provisions shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and
(b) every officer of such company who is in default shall be 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,
(c) Or with both.
Role of Central Government
The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of provisions of this section and such company or class of companies shall comply with such directions.
Benefits of the CSR
There are many reasons why a company should make efforts to abide by this provision. Some of the benefits are as follows:-
(a) Enhanced Public Image: - Charity works, volunteering works, etc. has a great influence on a buyer in the purchase of a product or avail any service from a particular seller. Such activities show that the company is in very committed not only in the business aspects but also knows its responsibility towards society.
(b) Increased Customer Loyalty: - A company which takes care of the needs of society is also appreciated by the consumers. Customers connect with these companies and prefer to be loyal to these companies, as they think every purchase by them contributes to society.
(c) An edge over competitors: - By embracing CSR, a company stand’s out from competitors of the industry. If a Company is committed to ethical practices, it will spread out to the public at large and the company will have an edge over the competitors about its engagement with the society.