India holds the distinction across the world to be the first country to have legislated for Corporate Social Responsibility and Companies Act 2013 (Companies Act) has introduced several new provisions, whereby it has mandated that companies provide a part of their net profits for charitable causes and with a view to tackle social issues. The said piece of legislation is enacted with a view that Companies should also work for the benefit of society and its genesis is based upon the concept of giving back to society in lieu of the natural resources including of raw materials, human resources etc., consumed by the company.

The Government of India has suitably amended Section 135 and Schedule VII of the Companies Act and also notified the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules) which came into effect from 1 April 2014.

As per the provisions of Section 135 of Companies Act 2013, every specified company shall spend at least 2% of average net profit made during immediate three preceding financial years on CSR on projects and programs specified in Schedule VII of Companies Act 2013. Each qualifying company to form a CSR committee which will formulate the CSR policy of the company and effectively monitor the CSR activities of the company. Board of Directors of the companies have been made responsible to ensure that the company spends the mandatorily required amount on specified CSR activities in accordance with the CSR policy of the company and disclose the CSR policy and CSR activities of the company as specified in the provisions. The definition of Specified Company is as follows:-

Every Company (whether public/private/foreign company) having either of following:

• Net Worth of 500 crore or more,
• Turnover of 1000 crore or more,
• Net profit of 5 crore or more. The term “CSR” has been defined under the CSR Rules which includes but is not limited to:
• Projects or programs relating to activities specified in the Schedule; or
• Projects or programs relating to activities undertaken by the Board in pursuance of recommendations of the CSR Committee as per the declared CSR policy subject to the condition that such policy covers subjects enumerated in the Schedule.

This definition of CSR assumes significance as it allows companies to engage in projects or programs relating to activities enlisted under the Schedule. Flexibility has been permitted to the companies by allowing them to choose their preferred CSR engagements that are in conformity with the CSR policy.

The activities that can be done by the company to achieve its CSR obligations include eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, 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 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 such other matters as may be prescribed.

Under the Companies Act, preference should be given to local areas and the areas where the company operates. Company may also choose to associate with 2 or more companies for fulfilling the CSR activities provided that they are able to report individually. The CSR Committee is also required to prepare the CSR Policy in which it includes the projects and programmes which are to be undertaken, prepare a list of projects and programmes which a company plans to undertake during the implementation year and also focus on integrating business models with social and environmental priorities and process in order to create share value.

The company can also make the annual report of CSR activities in which they mention the average net profit for the 3 financial years and also prescribed CSR expenditure but if the company is unable to spend the minimum required expenditure the company has to give the reasons in the Board Report for such noncompliance so that there are no penal provisions are attracted by it.

Since India is the only country in the world which has this unique legislation which is more than an year old now, certain points needed deliberation for its effective implementation such as formulation of CSR policies; issue of compliance and disclosures; capacity constraints and others , thus the government had appointed a high level panel which gave its recommendations in October 2015 and the most significant of the said recommendations was uniform tax treatment for all corporate social responsibility (CSR) activities carried out under the new Companies Act and has also suggested leniency towards noncompliant firms in the first 2-3 years of this law. According to this committee, differential tax treatment for expenditure on various CSR activities would havecreated distortion in allocation of funds across development sectors. Furthermore, the committee in its report had felt that the company’s decision for spending the money under CSR could be guided more by tax savings implications rather than compelling community social needs.

The committee agreed that there should also be encouragement given to companies to identify their expertise and play to their strength or in their relevant field of operations of business– whether be it that of agriculture, technology, healthcare and develop products rather than just throwing money at various charities.

The main aim behind the incorporation of CSR provisions in Companies Act was to boost much required social projects with some professional management of the private sector; Moreover there are several Corporate giants and big Industrial houses such as Reliance, Tata, Airtel, Wipro, GMR who already have set up foundations and partake in philanthropic activities aimed at poverty reduction and tackling of social issues. But whether these philanthropic funding would effectively transform India’s serious social issues remains anybody’s guesswork?