Corporate Social Responsibility (CSR) under the Companies Act, 2013, has emerged as a key pillar for corporate governance. Section 135 of the Companies Act, 2013 mandates certain companies to spend some portion of its profits on activities that provide benefits to society.
However, there are two question that arise regarding CSR provisions in respect of Holding or Subsidiary and Foreign company as follows:
1. Whether CSR applicability to be checked on standalone basis or consolidated basis.
2. Whether CSR provision apply on Holding or Subsidiary of Company which fulfils the criteria under section 135(1) has to comply with the provision of section 135, even if such holding or subsidiary itself does not satisfy the criteria.
Let’s understand with an example:
B Ltd. is a subsidiary of A Ltd. A Ltd. satisfies the criteria of CSR mentioned under section 135 (1). Thus, the question is that, whether B Ltd. has to comply with the CSR provision even though it does not fulfil the criteria.
According to Section 135(1) of the Companies Act, 2013, Every Company which satisfy any of the following conditions mentioned below during the immediately preceding financial year, shall have to constitute CSR Committee:
1. Net worth of Rs. 500 Crore or more;
2. Turnover of Rs. 1000 Crore or more;
3. Net profit of Rs. 5 Crore or more;
Further, as per Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014:
Every company, including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfils the criteria specified in sub-section (1) of section 135 of the Act, shall comply with the provisions of section 135 of the Act and these rules:
Provided that net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Act.
According to the interpretation of the above provisions, it is clarified that compliance with CSR requirements is specific to each Company. Every Company has to fulfill the criteria on individual level to attract CSR provision. A Holding or Subsidiary of a Company and foreign company is not required to comply with CSR provisions unless the Holding or Subsidiary and Foreign company itself fulfils the eligibility criteria prescribed under section 135(1) stated above.
Answer to the above questions:
1. Every company shall check criteria mentioned in section 135(1) as per standalone financial statement of the Company during the immediately preceding financial year, not consolidated financial statement.
Further, in case of foreign company, Turnover, Net worth or Net profit shall be computed in accordance with the balance sheet and profit and loss account of such foreign company prepared in accordance with section 381(1)(a) and section 198 of the Act.
2. A holding or subsidiary company is not required to comply with CSR provision unless it satisfy the conditions specified in under section 135(1) i.e. Net worth Rs. 500 crores, or Turnover Rs. 1000 crores or Net profit Rs. 5 crores.
Let’s understand with the above example:
Where B Ltd. is a subsidiary of A Ltd. And A Ltd. which satisfies the criteria of CSR mentioned under section 135 (1). Now if B Ltd. satisfy any of the criteria mentioned in section 135(1), then only it has to comply with Corporate Social Responsibility obligation, otherwise not.
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