CSR: A New Initiative By Companies Act 2013

CA Amandeep Singh

When the President of India has given assent to the Companies Bill, 2013, India became the first country to mandate spend on CSR activities through a statutory provision.

Though In India, many corporate  are traditionally engaged in doing CSR activities voluntarily, the new CSR provisions will  put formal and greater responsibility on companies to set out clear framework and process to ensure strict compliance.

Now the MCA has notified on  27^TH February 2014 the Companies (Corporate Social Responsibility Policy) Rules 2014 and which shall come into force w.e.f  1^st April 2014.

LEGAL PROVISIONS:-

• Section 135 of Companies Act 2013, provides that every specified company shall spend at least 2% of average net profit made during immediate three preceding financial years on CSR on projects and programs specified in Schedule VII of companies act 2013.

• Each qualifying company to form a CSR committee which will formulate the CSR policy of the company and effectively monitor the CSR activities of the company.

• Board of Directors of the companies are responsible to ensure that the company spends the mandatorily required amount on specified CSR activities in accordance with the CSR policy of the company and disclose the CSR policy and CSR activities of the company as specified in the provisions.

ANALYSIS:-

Specified Company:-

Every Company (whether public/private/foreign company) having either of following

• Net Worth of 500 crore or more,
• Turnover of 1000 crore or more,
• Net profit of 5 crore or more,

During any financial year shall be required to follow the CSR provisions.

Though the limits of net worth and turnover are very high but the limit of net profit of only 5 crore or more would substantially cover all the companies under CSR provisions.

Meaning and Appointment of CSR Committee:-

Every specified company shall appoint a CSR committee consisting of at least 3 Directors out of which 1 should be an independent director.

 Clarification  by Companies (Corporate Social Responsibility Policy) Rules 2014,

• an unlisted public company or a private company which is not required to appoint an independent director as per sec 149(4) of the Act, shall have its CSR Committee without independent director.
• a private company having only two directors on its Board shall constitute its CSR Committee with two such directors;
• with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of sub-section (1) of section 380 of the Act and another person shall be nominated by the foreign company.
  

CSR Policy:-

The CSR Policy of the company shall include the following namely :-

• a list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying implementation schedules for the same.
•  monitoring process of such projects or programs:
•  the CSR activities does not include the activities undertaken in pursuance of normal course of business of a company.
• that the Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the activities included in Schedule VII of the Act.
• The CSR Policy of the company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.

 CSR Expenditure:-

CSR expenditure shall include following expenditures:-

• all expenditure including contribution to corpus, or
• on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee

but such expenditure should be as per Schedule VII of the Act. The following activities are included in schedule VII:-

• Setting up homes and hostels for women and orphans
• Setting up old age homes, day care centres for senior citizens
• Measures initiated for the benefit of armed forces veterans, war widows and their dependents
• Promoting preventive health care and sanitation and making available drinking water
• Protection of national heritage, art and culture
• Setting up public libraries
• Promotion and development of traditional arts and handicrafts
• Training to promote rural sports, nationally recognized sports, Paralympics sports and Olympic sports
• Environment sustainability
• Empowering women and promoting gender equality
• Education
• Poverty reduction and eradicating hunger
• Social business projects
• Reducing child mortality & improving maternal health
• Improvement of health
• Imparting of vocational skills
• Contribution towards Central & State Government funds for socio-economic development and relief
• Such other matters as may be prescribed

Following points should be considered while spending amount on CSR:-

• The amount spent for benefit of employees and/or for their relatives shall not be considered as CSR.
• The amount should be spent on projects/programs in India only.
• The companies shall give preference to the local area and area around it where it operates for spending the amounts earmarked for CSR activities.

CSR Activities:-

• The CSR activities of the company shall be as per the stated CSR policy of the company, excluding activities undertaken in pursuance of its normal course of business.
• The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise.
• A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
• Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.

CSR Reporting:-

• The Board’s Report of a company shall include an annual report on CSR containing particulars specified in Annexure given in Companies (Corporate Social Responsibility Policy) Rules 2014.
• In case of a foreign company, the balance sheet filed under sub-clause(b) of sub-section (1) of section 381 shall contain an Annexure regarding report on CSR.

Meaning of Net Profit:-

• “Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely :-

(i). any profit arising from any overseas branch or branches of the company

(ii) any dividend received from other companies in India

• In case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of SEC 381(1)(a) read with section 198 of the Act.

(Author can be reached at aman_2988 @ yahoo.com or on cell 9810935951)

Related Notifications are as follows :-

• Govt. notifies CSR Rules wef 01.04.2014 – Companies to Spend 2% of Profit
• Ministry notifies activities for spending money earmarked for CSR
• CSR Provisions of section 135 & Schedule VII of Companies Act, 2013 Applicable wef 01.04.2014
• Read More about CSR Companies Act 2013