Corporate social responsibility [CSR] is the key aspect of how a business runs. In India, the concept of CSR is regulated by the Companies Act 2013 and more specifically by Schedule 7 of the Act. Schedule 7 of the act lists down the areas in which a company must target their CSR activities. In this article, we will look into Schedule 7 of the Companies Act 2013. Its role in regulating CSR, recent amendments, and the importance of compliance for business.

Schedule 7 of Companies Act & Corporate Social Responsibility

Corporate social responsibility refers to the responsibility of the company to contribute positively to society and the environment. This principle encourages businesses to consider the impact of their actions on the community, environment, and overall well-being of people.

For example, Amazon is one of the largest online shopping platforms in India. . In order to fulfill their CSR obligations, amazon has many initiatives, like;

• Education: The Amazon Future Engineer program teaches computer science to students from diverse backgrounds.

• Health and hygiene: Amazon has set up sanitary napkin production units in cities like Kolkata, Hyderabad, Chennai, and Bangalore. 

• Scholarships: Amazon invites applications from girl students for an Amazon Future Engineer  scholarship and driver associates’ children for a Pratidhi scholarship.

Object of Schedule 7 of the Companies Act 2013?

Schedule 7 of the Companies Act provides a broad list of areas where the companies can use their mandatory corporate social responsibility [CSR] funds. The aim of listing the areas is to ensure that companies take their CSR responsibilities seriously and invest in areas that provide tangible benefits to society. It also provides guidance for CSR activities. Schedule 7 ensures that companies are involved in such social activities that benefit the broder community. This list helps the companies to support social, environmental, and developmental causes.

CSR – A Legal Obligation

It is important to note that CSR is not just a voluntary activity for companies; under Section 135 of the Companies Act 2013, CSR has become a legal obligation for companies that meet the  required financial threshold mentioned in the section. Failing to comply with CSR provisions can lead to penalties and reputational damage. Additionally, companies are required to report their CSR activities in their  annual reports This includes disclosing how much they spent, the specific projects they funded, and the outcomes of these projects. This transparency ensures accountability and helps the public and stakeholders understand how companies are fulfilling their CSR obligations.  

Section 135 of the Companies Act 2013

Section 135 of the Companies Act, 2013, mandates specific companies to engage in corporate social responsibility (CSR) activities. Here’s a simplified breakdown:

• Applicability: Companies with:

  • Net worth of ₹500 crore or more,

  • Turnover of ₹1,000 crore or more,

  • A net profit of ₹5 crore or more in any financial year
    must form a CSR Committee.

• CSR Committee Composition:

  • The CSR Committee must have at least 3 directors, with at least one independent director.

• Roles of the CSR Committee:

  • Formulate and recommend a CSR policy to the Board.

  • Recommend expenditure for CSR activities.

  • Monitor the CSR Policy regularly.

• Board Responsibilities:

  • Approve the CSR Policy and disclose it in the Board’s report and on the company’s website.

  • Ensure CSR activities are implemented as per the approved policy.

• CSR Spending:

  • Companies must spend at least 2% of their average net profits from the previous three years on CSR activities.

  • Preference should be given to local areas near the company's operations.

  • If the company fails to spend the required amount, it must explain the reasons in its Board report.

• Definition of Average Net Profit:

  • The average net profit is calculated as per Section 198 of the Act.

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Activities Included in Corporate Social Responsibility Policies as per Schedule 7 of the Companies Act 2013

This list focuses on avariety of activities aimed at solving social, environmental, and economic issues. Companies can opt from the following activities to fulfill their CSR:

1. Eradicating hunger and poverty:Initiatives aimed at reducing extreme hunger , poverty, malnutrition, etc.

2. Promotion of education; companies are encouraged to make efforts to improve education at all levels, including providing access to education and improving educational infrastructure, etc.

3. Gender equality and empowerment of women; companies are urged to start suh initiatives that work towards reducing gender equality and empower women.

4. Reducing child mortality and improving maternal health; programs focused on improving healthcare facilities for mothers and children maternal support, etc.

5. Combating disease:  efforts  to fight disease and pandemics which affect large populations like  breast cancer, AIDS, HIV etc.

6. Ensuring environmental sustainability; these activities includes waste management,  recycling, afforestation, water conservation, etc.

7. Enhancing vocational skills: providing such platforms that will train and upskill youths  to improve employability.

8. Social business projects: supporting such ventures that have a social impact while also being sustainable business models.

9. Contributions to relief funds: Contributions to the Prime Minister's National Relief Fund or any similar fund established by the Central or State Governments for socio-economic development, welfare of marginalized communities, and disaster relief.

10. Other prescribed matters: any additional activities prescribed by the government from time to time.

Recent Changes in Schedule 7 of Companies Act, 2013

The CSR rule 2021 has introduced some changes and clarifications that affect the implementation of CSR activities under Schedule 7 of the Companies Act 2013. These changes has impacted;

1. CSR rule 2021 has expanded the list of eligible CSR activities by adding flexibilityto undertake activities in areas like research and development, incubators and contributions to technology incubators

2. The 2021 rule provides a more structured framework for CSR reporting and compliance, ensuring transparency
   3. The recent rule insists on the need to assess the impact of their CSR projects.

Practical Examples of CSR 

Following are some real-life examples of how companies have applied Schedule 7 of the Companies Act to their CSR initiatives –

1. Tata Group: Tata has long been a leading example in CSR activities. The group has launched several initiatives, including building schools in rural areas, providing scholarships to deserving students, and promoting renewable energy projects. 

2. Infosys: This leading company has directed its CSR funds towards improving healthcare infrastructure and promoting education. Infosys Foundation has built hospitals, supported medical research, and provided clean drinking water in rural areas.

To Summarize

Schedule 7 of the Companies Act 2013 provides clear guidelines on where companies should focus on their CSR spending, ensuring that businesses contribute meaningfully to the nation’s social and environmental needs. CSR is not just a legal obligation on the companies but rather an opportunity to make a positive difference in society. This not only boosts a company's reputation but also helps build a more equitable and sustainable society.

FAQS

1. What is Schedule 7 of the Companies Act 2013?

Schedule 7 of the Companies Act, 2013 outlines the specific areas where companies must focus their corporate social responsibility (CSR) efforts. It includes activities related to education, healthcare, poverty alleviation, environmental sustainability, and other socio-economic development initiatives.

2. How much CSR expenditure is allowable?

Under Section 135 of the Companies Act, 2013, companies meeting certain financial criteria are required to spend at least 2% of their average net profits from the preceding three financial years on Corporate Social Responsibility (CSR) activities. If a company fails to meet this obligation, it must provide an explanation in its Board report.

     3. What is the purpose of Schedule 7 of the Companies Act, 2013?

  Schedule 7 provides a detailed list of activities that companies must focus on for their Corporate Social Responsibility (CSR) initiatives. These include areas like poverty alleviation, education, healthcare, environmental sustainability, and contributions to government relief funds, ensuring that companies contribute to the broader social and economic development of the country.

      4.  Which companies are required to spend on CSR as per the Companies   Act, 2013?

   Companies with a net worth of₹500 crore or more, a turnover of₹1,000 crore or more, or a net profit of₹5 crore or more during any financial year are required to spend at least 2% of their average net profits from the previous three years on CSR activities.

    5. What happens if a company fails to spend the required amount on CSR?

  If a company fails to spend the required 2% on CSR, it must provide a detailed explanation for not doing so in its Board report. The unspent amount may also need to be transferred to specific government funds or used for CSR activities within a specified time frame, depending on the nature of the unspent funds.