Enhancing Corporate Social Responsibility: Key Amendments in The Companies Act And Csr Rules

November 18, 2024
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INTRODUCTION

Corporate governance stands as the backbone of organisational integrity and accountability. The contemporary world, completely revolutionised by globalisation and extensive societal awareness; corporate governance has become more significant. The modern framework has modified the conventional approach that focuses on holding interest and elevating profit of the shareholders. It seeks to draw attention of the companies towards greater social responsibilities, extending towards the society as well as the environment. These significant modifications have been encapsulated in a concept known as “Corporate Social Responsibility”.

CSR is a virtuous framework that not only strives for profit making motives but also strives to promote a more sustainable approach for the business operations. This trait of CSR has also been underscored in the landmark case of Tata Iron and Steel Co. Ltd. vs. State of Bihar [AIR 1958 SC 452], It tries to contemplate the concept that a business success is not only limited to financial metrics but also extends to the impact that a business positively creates on the society and environment where it obtains the resources from.

WHAT IS CORPORATE GOVERNANCE

Corporate Governance is a web which establishes a relationship among company’s management, its board, shareholders and other stakeholders. It puts forth a framework to set objectives for a company’s operations, methods to achieve objectives and measures to evaluate company’s performance. It further aims to build a trustworthy, transparent and accountable work environment to uphold and promote long term investment, financial stability and business integrity.

WHAT IS CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility (CSR) is a management principle adopted by companies to amalgamate social and environmental concerns into their business operations. It refers to the company’s endeavour to create a balance among its economic objectives, commitment to the interests of shareholders and stakeholders and social and environmental responsibility. This effort to create balance is also known as “Triple-bottom line approach”.

Additionally, the principle of CSR puts forth efforts to address the concerns of environmental management, responsible sourcing, eco-efficiency, stakeholders’ engagement, labor standards and working conditions, social justice, gender equality, good governance, human rights and anti-corruption measures.

The Companies Act of 2013 lays down a provision which states that profit making companies must contribute at least 2% of their three-hear annual average net earnings to CSR initiatives.

Furthermore, in India, there are many types of CSR activities that the qualifying companies under the Act can contribute to. These activities include fostering health care, protection of national heritage, art and culture, encouraging traditional arts and handicrafts, conservation of natural resources, ensuring ecological balance, establishing public infrastructures like public libraries, orphanage, day care centres etc. and contributing to PM CARES FUND. Additionally, Section 135 of Companies Act states that those activities which focus to benefit only the employees of the company or their families will not come under the ambit of CSR.

COMPANIES (CSR POLICY) AMENDMENT RULES, 2022

Certain business classes are required by the Companies Act of 2013 to invest at least 2% of their average net profit from the preceding three fiscal years in corporate social responsibility (CSR) activities during a particular fiscal year. If businesses have any money left over from unused CSR accounts, they are also urged to establish a CSR committee. For the accomplishment of this goal, the government has made modifications in the laws regulating corporate social responsibility, according to a formal declaration from the Ministry of Corporate Affairs.

MAJOR INDUCED AMENDMENTS

INSERTION OF THE SECOND PROVISO TO RULE 3(1)

This clause underscores the importance of keeping an eye on CSR activities. It declares that until there is no money remaining in the unspent CSR account, the CSR Committee cannot be disbanded and must continue.

OMITTING RULE 3 (2)

Before the change, businesses were required to abide by the CSR regulations even if they did not fit the requirements for Corporate Social Responsibility under Section 135(1) of the Companies Act of 2013. This condition was eliminated from Rule 3(2). It has been emphasized that this rule lost its significance following the Companies (Amendment) Act of 2017, which modified the obligation to verify eligibility from any prior fiscal year to only the year prior.

CSR ACTIVITIES BY THE COMPANY OR THROUGH RULE 4(1)

A business has the option of creating and assigning the job to an implementation agency or implementing CSR projects alone. Through this amendment, the MCA has introduced a new kind of agency that can act as an implementing agency. At the moment, a corporation can engage in CSR activities through a company formed under Section 8 of the Act, a registered public trust or a registered society that is exempt under specific provisions of Section 10(c) of the Income Tax Act (for hospitals, educational institutions, charitable purposes, or religious trusts), or a company registered under Section 12A and authorized under Section 80G of the Income Tax Act. Furthermore, the firm or trust must have been established by the company alone, in collaboration with other businesses, or have at least three years of experience performing comparable tasks.

BOOK EXPENDITURE TOWARDS IMPACT ASSESSMENT RULE 8(3)

The previous limit that was 5% of the total CSR expenditure for that financial year or fifty lakh rupees whichsoever is less, has been abated to 2% of the total CSR expenditure for that financial year or fifty lakh rupees whichever is higher.

MODIFICATION IN THE FORMAT OF ANNUAL REPORT ON CSR

As per the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, the template for the annual report on CSR has become more detail oriented. However, companies are no longer obliged to provide detailed explanations of each project.

CONCLUSION

In conclusion, the amendments to the CSR have strived to foster the core concept of CSR. These modifications have outlined CSR spending, implementation, and reporting. Additionally, modifications aimed at removing redundant rules, introducing a new body of implementing agencies and altering CSR expenditure limits for impact assessment. Furthermore, an enhanced template for the annual CSR Report simplifies the process. These modifications encourage companies to focus on significant societal contributions through CSR initiatives, aiming to create a more impactful CSR environment for companies in India, streamlining business motives and operations with social, governance and environmental objectives.

Author: Tanushka Gupta, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD.