Corporate Social Responsibility (CSR) refers to the voluntary contribution made by companies towards improving society and the environment. This involves integrating social and other relevant concerns into their business operations for the betterment of stakeholders and society as a whole. CSR can include projects or programs related to activities listed in Schedule VII of The Act, or those recommended by the CSR Committee of the Board in line with the company’s CSR Policy, which should cover subjects specified in Schedule VII of the Act.
The CSR regulations apply to all companies, including holding and subsidiary companies, as well as foreign companies, if they meet the following criteria in the previous financial year:
Net worth exceeding Rs. 500 crore
Turnover exceeding Rs. 1000 crore, and
Net profit exceeding Rs. 5 crores.
BENEFITS of Corporate Social Responsibility (CSR)
– CSR can improve a company’s public image by showcasing their efforts towards creating a better society, which can increase their favorability among consumers. This improves the goodwill of the company which is a valuable intangible asset.
– CSR can increase media coverage and portray the organization in a positive light. This ensures better public perception and thus it indirectly improves sales.
– CSR can enhance a company’s brand value by building a strong relationship with customers who value socially responsible companies. The customers take pride in being associated with such companies and thus they are more loyal to the products/services of the company.
– CSR can help companies stand out from competitors, especially when they are involved in community-based initiatives.
All companies that need to comply with CSR regulations are required to allocate 2% of their average net profits from the past three years towards implementing the CSR policy.
There are several types of profits that cannot be included when calculating net profits. These include profits from the sale of forfeited shares, profits of a capital nature, and profits from the sale of fixed assets or immovable property. Additionally, any changes in the carrying amount of an asset or liability recognized in equity reserves, as well as any notional or unrealized gains or revaluation of assets, cannot be considered when computing net profits.
Similarly, there are certain expenses that should be deducted when computing net profits. These include usual working charges, directors’ remuneration, bonuses or commissions paid to staff, taxes on abnormal or excess profits, and interest on various types of loans. Additionally, expenses for repairs, contributions made under section 181, depreciation, damages or compensation for legal liabilities, and bad debts adjusted or written off during the year should also be deducted.
There are some types of sums that cannot be deducted when computing net profits. These include income-tax and super-tax payable by the company under the Income-tax Act, 1961, damages or compensation paid voluntarily, and losses of a capital nature, such as those from the sale of an undertaking or part thereof. Additionally, any changes in the carrying amount of an asset or liability recognized in equity reserves, as well as any surplus in profit and loss accounts for the measurement of assets or liabilities at fair value, cannot be deducted.
CSR Committee Applicability
Corporate Social Responsibility (CSR) Committee must be established by every company that is subject to CSR criteria. The CSR Committee should be composed of at least three directors, one of whom must be an independent director. However, if an independent director is not required, an unlisted public company or a private company may have its CSR Committee without any independent director.
A private company with only two directors on its board must establish its CSR Committee with those two directors. For foreign companies, the CSR Committee must consist of at least two persons, one of whom must be a resident of India authorized to accept notices and documents on behalf of the foreign company, while the other person is nominated by the foreign company. Additionally, any company with an Unspent Corporate Social Responsibility Account must establish a CSR Committee and comply with the CSR provisions.