Significance of CSR committee; a walk through.

Introduction:

Over the period, the concept of Corporate Social Responsibility (CSR) has gained great importance in the corporate life. Initially CSR was a voluntary compliance, but eventually it became a mandatory one – as a result, both companies and regulators started taking this compliance very seriously. Companies established detailed systems to plan, execute and monitor the CSR activities. At the bottom of these systems, lies – A board committee called Corporate Social Responsibility Committee (CSR committee).

CSR committee is a board committee constituted under mandate of law and is responsible for assisting the board in effectively conducting the CSR activities. In this article, we are deliberating upon the composition of the CSR committee, its roles and responsibilities and other critical matters.

Legal provisions:

As mentioned above, CSR committee is constituted pursuant to section 135(1) of the Companies Act, 2013 (the Act). It mandates constitution of CSR committee for companies whose paid up capital exceeds 500 crores or turnover exceeds 1000 crores or net profit exceeds 5 crores in preceding financial year. The companies exceeding the said limits are required to constitute CSR committee irrespective of the status – so it may be a private or a foreign company.  In fact, CSR committee is the only committee under the Act which has to be constituted by private companies or foreign companies if they exceed the prescribed limits. In case of all other committees, the private companies are not covered under applicability criteria.

The section 135 of the Act read with Rule 5 of CSR Rules prescribes – the composition of the committee and its roles and responsibilities as well. The section also provides that the CSR committee should consist of minimum three(3) directors out of which minimum one should be Independent Director.

It is important to note that not all companies are required to appoint Independent Directors to their boards. The Act provides exemptions for such companies, stating that the companies which are not obligated to appoint independent directors can constitute a committee without them. In such cases, the minimum number of directors required in the committee can be two (2). Even in the case of private companies with only two (2) directors, the committee can be formed with those two (2) directors.

Roles and responsibilities: Since the CSR committee is constituted by law, its roles and responsibilities are also stipulated within the same legal framework. Section 135 (5) provides the functions to be performed by CSR committee which broadly includes the following:

• Recommending to the board, CSR policy and the activities to be included therein.
• Determining the amount to be spent on CSR activities. And
• Monitoring the implementation of CSR policy.

In addition to this, the CSR Committee is required to formulate and recommend to the board an annual action plan on in pursuance of the CSR Policy which includes the following:

• the list of CSR projects or programmes to be undertaken
• the manner of execution
• the modalities of utilisation of funds and implementation schedules
• monitoring and reporting mechanism and
• details of need and impact assessment, if any, for the projects undertaken by the company.

Moreover, Section 135(3) in read with Rule 5 of CSR rules implies that the board is required to consider the recommendations put forth by the CSR committee. Specifically, if the board intends to modify the CSR policy, annual action plan, or categorize a CSR project as ongoing, it is advisable for the board to solicit recommendations from the CSR committee before implementing any such alterations.

Importance of CSR committee:

Even though the powers of CSR committee are recommendatory in nature, it has an immense importance. Since the constitution of CSR committee is mandated by law – its duty is to give recommendation to the board and the committee’s recommendations are to be considered.  Also, it is to be noted that in the event of the board altering a plan submitted by the CSR Committee, the alteration is required to be accompanied by reasonable justification.

Non-constitution or improper constitution of CSR committee is now an adjudicatable offence and Registrar of Companies has been imposing penalties on companies in this regard. The requirement of having an independent director further underscores the importance of the CSR committee.

Moreover, with many responsibilities on the board of directors, it becomes difficult for them to invest adequate time and possess sufficient knowledge about all aspects of CSR. In such a situation, formation of committee ensures investment of adequate time and knowledge in the activity. Additionally, it becomes convenient to oversee the effective implementation and monitoring of CSR policies.

Conclusion:

Although the Act mandates compliance with CSR provisions, it has alleviated the burden on the board of directors by establishing a CSR committee. Furthermore, by requiring recommendations from the CSR committee for any CSR-related decisions, the Act ensures that the board receives expert support in fulfilling its CSR duties. This mechanism also serves as a safeguard against misuse of CSR funds by providing oversight on board decisions regarding CSR expenditure.

The article is published in the Taxguru; The same as can accessed on the following link:

https://taxguru.in/company-law/significance-csr-committee-walk.html