ACS Anjali Singh

♣ Governing Provisions:

Section 135 of Companies Act, 2013 read with Companies (Corporate Social Responsibility Policy) Rules, 2014

♣ Enactments/Reenactments so far by Ministry of corporate Affairs:

1. General Circular No. 21/2014 dated 18/06/2014

2. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2014 dated 12/09/2014.

3. General Circular No. 36/2014 dated 17th September, 2014

4. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015 dated 19/01/2015

5. General Circular No. 01/2015 dated 3rd February, 2015

6. FAQs issued by MCA dated 12 January, 2016

7. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016 dated 23/05/2016.

♣ Applicability of the provisions of CSR on Companies:

Every company which fulfills any of the undermentioned criteria (3 criteria are suggested u/s 135 of Companies Act, 2013 to check applicability of CSR) during any financial year (any of the 3 preceding Financial Years), the board of directors shall constitute a CSR Committee and carry out CSR activities:

(i)   Having Net worth    greater than or Equal to       Rs. 500 Crore

(ii) Having Turnover      greater than or Equal to       Rs. 1000 Crore or

(iii)Have Net Profit        greater than or  Equal to      Rs. 5 Crore

The Board of every company shall ensure that the company spends, in every financial year, atleast 2% of the average net profits (Profit Before Tax) made during the three immediately preceding financial years.

However the profit calculated shall not include:

1. Any profit arising from any overseas branch(es) of the company whether operated as separate company or otherwise. And

2. Any Dividend received from other Companies in India which are covered u/s 135 of Companies Act, 2013.

Provided that Net Profit of a Foreign Company shall mean as Net Profit of the Company calculated in compliance of Section 381(1)(a) and Section 198 of Companies Act, 2013.

♣ The word company covers:

(i) A company incorporated under Companies Act, 2013 or under any previous Companies Act.

(ii) Holding Company of a company

(iii) Subsidiary Company of a company

(iv) Foreign Company having its Branch Office or Project Office in India if fulfils any of the 3 Criteria of section 135 of Companies Act, 2013 shall constitute CSR Committee and comply with the provisions of CSR

♣ When a company is relaxed from CSR Provisions:

If a company doesn’t fall in any of the 3 criteria for a consecutive term of 3 years shall not be required to form CSR Committee and carry CSR activity till the company fall within the ambit of any of the3 criteria of section 135 again.

♣ How to carry out CSR

(i) Through Registered Trust,

(ii) Through Registered Society formed,or

(iii) Through a Non Profit Company incorporated under section 8 of Companies Act, 2013 by the Company, its holding company,its subsidiary or associate company.

And if

The company wants to carry out CSR activity through outside agency (Society/Trust/Section 8 Company) then such agency shall have record of 3 years in undertaking such activities.

A company can carry out CSR in collaboration with other company(ies) in such a manner that CSR Committee is able to report on CSR activity carried on by their respective organization.

♣ Composition of CSR Committee:

(i) The committee shall be formed of Board members

(ii) There shall be 3 Directors in the committee

(iii) Out of the 3 Directors one director shall be Independent Director.

♣ CSR Committee

There are cases where provision of section 135 regarding CSR Committee cannot be complied with such as private company where only 2 directors are there or case where No independent director is there because independent director are required to be appointed by Listed Companies. Following is the composition for CSR Committee in prescribed cases:

1.An unlisted or a private company which has no Independent Director then in such cases CSR Committee will be formed without Independent Director.

2. A private company that has only two directors in such case CSR Committee can be formed with 2 Directors.

3. A foreign company CSR Committee shall comprise of two Directors.

♣ Role and Responsibilities of CSR Committee:

(i)   Form CSR Policy that shall provide only those activities to be carried by a company which are suggested under Schedule VII of Companies Act, 2013

(ii)    Recommend the CSR Policy to the board

(iii)   Monitor the CSR Policy timely.

Activities carried out in India only will amount to CSR.

  • Activities undertaken for the benefits of the employees will not be considered as CSR
  • Once the company falls under any of the prescribed 3 criteria u/s 135 of Companies Act, 2013 it shall form a Committee of Board of Directors called “Corporate Social Responsibility Committee” having 3 directors one of whom shall be an independent director.
  • The Committee shall form and recommend policies prescribing only those activities enlisted in Schedule VII of Companies Act, 2013
  • Board shall consider and approve the recommended CSR Policy and place it on the website of the company(if any).
  • Ensure CSR Budget is spent on CSR activities mentioned in its CSR Policy and company shall give preference to the areas where it operates to carry out the activities earmarked for CSR. And
  • If the company fails to spend the prescribed amount then it shall mention in its Director Report the reason for such failure.

Enactment/Reenactments are reproduced hereunder for reference:

1. General Circular No. 21/2014 dated 18/06/2014

Under Section 135 of the Companies Act, 2013 and the Companies (Corporate Social Responsibility Policy) Rules, 2014, as well as activities to be undertaken as per Schedule VII of the Companies Act, 2013. Clarifications with respect to representations received in the Ministry on Corporate Social Responsibility (herein after referred as (‘CSR’) are as under:

(i) The statutory provision and provisions of CSR Rules, 2014, is to ensure that while activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act 2013, the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broadbased and are intended to cover a wide range of activities.

(ii) It is further clarified that CSR activities should be undertaken by the companies in project/ programme mode [as referred in Rule 4 (1) of Companies CSR Rules, 2014]. One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.

(iii) Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act.

(iv) Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.

(v) “Any financial year” referred under Sub-Section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three preceding financial years’.

(vi) Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.

(vii) ‘Registered Trust’ (as referred in Rule 4(2) of the Companies CSR Rules, 2014) would include Trusts registered under Income Tax Act 1956, for those States where registration of Trust is not mandatory.

(viii) Contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.

2. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2014:

Rule 4 sub rule (6) of Companies (Corporate Social Responsibility Policy) Rules, 2014 states

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.

Rule 4 Sub Rule (6) amended by Companies (Corporate Social Responsibility Policy) Amendment Rules, 2014 dated 12/09/2014 provides the following amendment:

After words “but such expenditure” the words and comma “including expenditure on administrative overheads,” and

Rule 4 sub rule 6 of Companies (Corporate Social Responsibility Policy) Rules, 2014 shall be construed as:

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 including expenditure on administrative overheads, shall not exceed five percent of total CSR expenditure of the company in one financial year.

3. General Circular No. 36/2014 dated 17th September, 2014

Rule 4(6) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 as notified on 27.02.2014 has been amended by notification dated 12.09.2014; and Consequently, clarification (iv) in General Circular No. 21 of 2014 dated 18.06.2014, stands omitted.

4. Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015

Rule 4 sub Rule 2 of Companies (Corporate Social Responsibility Policy) Rules, 2014 states:

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:

Provided that-

(i) if such trust, society or company is not established by the company or its holding or subsidiary or the associate company, it shall have an established track record of three years in undertaking similar programs or projects;

(ii) The company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

Rule 4 Sub Rule 2 amended by Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015 provides following amendments:

(i) For the words “established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise”, the words “established under section 8 of the Act by the company, either singly or along with its holding or subsidiary or associate company, or along with any other company or holding or subsidiary or associate company of such other company, or otherwise” shall be substituted;

(iii) in the proviso, in clause (i), for the words “not established by the company or its holding or subsidiary or associate company, it”, the words “not established by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company” shall be substituted.

After providing effect to the amendment suggested by Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015 Rule 4 Sub Rule 2 shall be construed as:

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 under section 8 of the Act by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, or otherwise:

After providing effect to the amendment suggested by Companies (Corporate Social Responsibility Policy) Amendment Rules, 2015, in the Proviso in clause (i) of Rule 4 Sub Rule 2 shall be construed as:

If such trust, society or company is not established by the company, either singly or alongwith its holding or subsidiary or associate company, or alongwith any other company or holding or subsidiary or associate company of such other company, it shall have an established track record of three years in undertaking similar programs or projects;

5. General Circular No. 01/2015 dated 3rd February, 2015

A High Level Committee to suggest measures for improved monitoring of the implementation of Corporate Social Responsibility policies by the companies under Section 135 of the Companies Act, 2013 has been constituted.

Points Covered under FAQs issued by MCA :

S.NO Question Answer
1. Whether CSR Provisions are applicable to all companies.

 

Applicable to Every company which fulfills any of the undermentioned criteria (3 criteria are suggested u/s 135 of Companies Act, 2013) during any financial year, the board of directors shall carry out CSR activities:

(i)Having Net worth greater than or Equal to Rs. 500 Cr

(ii)Having Turnover greater than or Equal to Rs. 1000 Cr or

(iii)Have Net Profit greater than or Equal to Rs. 5 Cr.

2.  

What is meaning of any Financial Year mentioned u/s 135 of Companies Act, 2013.

 

It implies any of the three preceding financial years,

General Circular No. 21/2014 dated 18/06/2014

3. Whether CSR Expenditure can be claimed as business expenditure No
4. Whether the ‘Average Net Profit criteria’ for section 135(5) is Net Profit before tax or Net Profit after Tax Average Net profit implies PROFIT BEFORE TAX calculated as per section 198 of Companies Act, 2013.
5 Can CSR Expenditure be spent on the activities beyond schedule VII

 

General Circular No. 21/2014 dated 18/06/2014

Activities taken up for CSR activity must be relatable to activities mentioned under Schedule VII and entries should be interpreted liberally and in such a manner that it gives effect to the entries mentioned in Schedule VII.

The general circular also provides an enumerated list of activities that can be covered under CSR. In a similar way many more can be covered

6 What Tax benefit can be availed under CSR

 

No specific tax exemption has been granted neither CSR expenditure shall form part of Business Expenditure.

However there are few expenditures which qualify for deduction if taken up for CSR:

Prime Minister’s Relief Fund, Scientific research etc which already are mentioned in schedule VII qualify for Tax Exemption under Income Tax Act, 1961

7 Which activities would not qualify for CSR

 

· Projects/Programmes for the benefits only the employees or their families

· One Off Events such as Marathons, charitable contributions,awards etc.

· Expenses incurred by the company for the fulfilment of any other applicable statue.

· Direct or indirect contribution to a political party.

·  Activities undertaken by the company in pursuance of its normal course of business.

· The project, programs or activities undertaken outside India.

8 Whether a holding or a Subsidiary of a company which fulfils the critera u/s 135(1) has to comply with section 135 even if the holding and subsidiary itself doesn’t satisfy the criteria. No, unless the holding or subsidiary itself satisfies the criteria.
9 Whether provision of CSR are applicable on Section 8 company,if it fulfils the critera of section 135 of Companies Act,2013 Yes
10 Can contribution of money to a trust/society/section 8 companies by a company be treated as CSR Expenditure of the Company.

 

General Circular No. 21/2014 dated 18/06/2014

Yes,if the following conditions are satisfied:

The trust/society/section 8 company is established to carry only CSR activities or

Where the corpus is created exclusively for the purpose directly relatable to subject covered in Schedule VII.

11 Whether display of CSR policy on website is mandatory or not The CSR policy shall be updated on website of the company,If any.
12 Whether reporting of CSR is mandatory  in Board Report. Once CSR becomes applicable on a company,an Annual report on CSR containing particulars specifies in annexure to  Rule 9 of CSR policy Rules,2014 shall form part of Directors Report.
13 Whether it is madatory for  foreign company to give report on CSR. The Balance sheet filled u/s 381(1)  shall contain an annexure regarding report on CSR.
14 Whether contribution towards disaster relief qualifies as CSR or not. Refer General Circular dated 18.06.2014
15 Whether contribution in kind can be monetized to be shown as CSR Expenditure. No.The company has to SPEND the amount.
16 If a company spends in excess of 2% of its average net profit of three preceding on CSR in a particular year,can the excess amount spent be carried forward to the next year and be offset against the required 2% CSR Expenditure of the next year. No
17 Can the unspent amount from out of the minimum required CSR expenditure be carried forward for the next year. The board is free to decide whether any unspent amount from out of minimum required amount for CSR is to be carried forward for the next year.

However the carried amount should be over and above next years  allocation equivalent to atleast 2% of the average net profit of the company of the immediately preceding 3 years.

18 What is the role of Govt. in monitoring implementation of CSR by companies under Companies Act,2013. The existing mandatory reportingsetc are to safeguard the interest otherwise govt. has no role in monitoring implementation of CSR.
19 Whether govt. is proposing to establish any mechanism for third parties to monitor the quality and efficacy of CSR Expenditure as well as to have an impact assessment of CSR by companies. No.

However Board/CSR Committee of the company is fully competent to appoint third parties for free to appoint a third party to have an impact assessment.

20 Can CSR fund be utilised to fund govt. scheme. The objective is to serve the society not to fill the resource gap of Govt.

However under CSR provision and rules the board is competent to contribute to Govt. schemes however the scheme should also allow corporate to make a contribution and provisions of Section 135 and rules are complied with.

21 Who is the approporiate authority for approving and implementation of the CSR programmes/Projects of a company?What is Govt.’s role in this regard? Govt. has no role in this regard.

Section 135 of the Act read with CSR Policy Rules, 2014 provides when and how CSR Committee should be formed and carry out CSR.

22 How can companies with small CSR funds take up CSR activites in a programme/Project mode? With small amount CSR activity can be carried out.

However Rule 4 of CSR Policy Rules, 2014 provides that a company can carry out CSR in collaboration with other companies also.

23 Whether involvement of Employees of the company in CSR project/programmes of a company can be monetized and accounted for under the head of CSR expenditure. No

5. Rule 4 sub Rule 2 of Companies (Corporate Social Responsibility Policy) Rules, 2014 states:

(2) 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:

Provided that-

(i) if such trust, society or company is not established by the company or its holding or subsidiary or the associate company, it shall have an established track record of three years in undertaking similar programs or projects;

(ii) The company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.

After giving effect to the amendment provided under Companies (Corporate Social Responsibility Policy) Amendment Rules, 2016. Provisions of rule 4 sub-rule (2), the provision shall be substitute and construed as:

(2)  The Board of a company may decide to undertake its CSR activities approved by the CSR Committee, through

(a) a company established under section 8 of the Act or a registered trust or a registered society,established by the company, either singly or alongwith any other company, or

(b) a company established under section 8 of the Act or a registered trust or a registered society,established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature:

Provided that-

If, the Board of a company decides to undertake its CSR activities through a company established under section 8 of the Act or a registered trust or a registered society, other than those specified in this sub-rule, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilization of funds of such projects and programs and the monitoring and reporting mechanism”.

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