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CSR Amendments- MCA enhanced Clarification

Corporate Social Responsibility is an idea that has been a concern to mankind for many years. However, over the last two decades it has become an increasing concern to the business world. With the introduction of Section 135 in the Companies Act, 2013, India is striving to implement CSR in the Corporates in latter and spirit.

CS Shikha Rai

Corporate Social Responsibility is an idea that has been a concern to mankind for many years. However, over the last two decades it has become an increasing concern to the business world. With the introduction of Section 135 in the Companies Act, 2013, India is striving to implement CSR in the Corporates in latter and spirit.

But there were certain ambiguities in the aforesaid section. To make it more translucent, Ministry of Corporate Affairs has notified Section 37 of Companies (Amendment) Act, 2017.

Summary of the amendments brought in vide the notification dated 19th of September , 2018:

1. The meaning of the word during any financial year used in section 135(1) was not clear. In the absence of such clarification different views were possible as to whether a company should consider networth/ turnover/net profit for immediately preceding financial year or the current financial year.  In order to resolve ambiguity, the words any financial year has been replaced with the words immediately preceding financial year.  

2. In case of companies where Independent Directors are not required to be appointed as per Rule 5(1), it was not clear as to how many minimum directors are required in CSR Committee.

With the amendment, it is clarified that in case of such companies, the CSR Committee may be formed with two or more Directors. Amendment to Section 135 of the Act allows composition of CSR committee with two or more directors in case the company is not required to appoint Independent Director under section 149(4).

3. The amendment related to Sub-section (3) of Section 135 is again clarificatory change. Initially the subsection refers to areas or subjects as provided in Schedule VII within which CSR activities could be taken up by an eligible company. Schedule VII indicates the broad areas of activities for spending as CSR.

Accordingly, to bring more clarity, instead of providing that CSR policy has toindicate the activities to be undertaken by the company as specified in Schedule VII, it should indicate the activities to be undertaken in areas or subjects specified in Schedule VII. To bring harmony the Companies (Corporate Social Responsibility Policy) Rules has also been amended accordingly.

4. CSR Rules define the term, net profit. However, explanation to Section 135(5) provides that for the purpose of this provision, the average net profit shall be calculated in accordance with Section 198.

Accordingly, there was disharmony in the Act and the Rules.  For better clarity in Section 135(5) the words Average Profit is replaced with the words net profit, to bring harmony.

(Author is partner with Mamta Binani and Associates and can be reached at Contact No: 8420508582 and Email id: csshikharai@gmail.com)

Categories: Company Law
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