Corporate Social Responsibility – Applicability & Rules

Introduction

The Companies Act, 2013 has not only removed the deficiencies in the earlier Act, but also introduced some new concepts. One of those is to make Companies realize their obligations towards the Society of which they are an important part of by spending some prescribed part of their earnings. This has been done by introducing the concept relating to Corporate Social Responsibility (‘CSR’). Corporate Social Responsibility (CSR) should be considered as a creative opportunity to corporate to fundamentally strengthen their businesses while contributing to society at the same time. In the new Act there is no definition for the term CSR though the areas in which the money could be spent have been specified under Schedule VII

On 27 February 2014, the Ministry of Corporate Affairs, Government of India (MCA) notified Section 135 of the Companies Act, 2013 (CA 2013) and with it the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules). The CSR rules will take effect from April 1, 2014 as part of the new Companies Act.

Corporate Social Responsibility (CSR): means and includes but not limited to:-

1. Projects or programs relating to activities specified in Schedule VII to the Act; or

2. Projects or programs relating to activities undertaken by the Board of Directors of a company(Board) in pursuance of recommendations of the SCR Committee of the Board as per declared CSR policy of the Company subject to the condition that such CSR policy will cover subjects enumerated in Schedule VII of the Act.

Applicability

Section 135 of the Companies Act, 2013 provides that it will apply to every company which satisfy any one of the following criteria:

• net worth of Rs. 500 crores or more,
• turnover of Rs. 1000 crores or
• a net profit of Rs. 5 crores or more during any financial year

Companies have to take steps for implementation of CSR activities from financial year 2014-15.

The amount has to be a minimum of 2% of ‘average net profit’ (“average net profit” shall be calculated in accordance with the provisions of Section 198) of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Exemptions

The CSR Rules have clarified the confusion over non-applicability of the norms to companies that subsequently do not satisfy the financial thresholds under Section135. The CSR norms will not apply to any company which does not satisfy these thresholds based on turnover / net profit / net worth for three consecutive financial years.

CSR Committee:

1. The Companies to which CSR is applicable should constitute a committee named as CSR Committee as under-

   1. an unlisted public Company or a private company covered under sub-section (1) of section 135 which is not required to appoint an independent director pursuant to subsection (4) of section 149 of the Act, shall have CSR Committee without such director;

   2. a private Company having only two directors on its Board shall constitute its CSR Committee with two such directors;

   3. with respect to 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 subsection (1) of section 380 of the Act and another person shall be nominated by the foreign Company.

2. The CSR Committee shall institute a transparent monitoring mechanism for the CSR projects or programs or activities undertaken by the Company.

Role of CSR Committee:

1. To formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
2. To specify modalities of execution, recommend the amount of expenditure to be incurred on the activities referred to in clause, implementation schedules and
3. To monitor the Corporate Social Responsibility Policy of the company from time to time.

Boards Obligations:

The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

The Board of Directors of the Company shall after taking into account the recommendations made by the CSR Committee, approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the Company’s website, if any, in such manner as may be prescribed;

The Board of every company falling in the categories specified earlier has to ensure spending of the amount as prescribed and if the Company fails to do so, the Board shall, in its report made under section 134(3)(o) of the new Act specify the reasons for not spending the amount.

Section 134(3)(o) mandates that along with the financial statements to be presented, there shall be a statement showing the details about the policy developed and implemented by the Company on corporate social responsibility and initiatives taken during the year.

The CSR policy of a company should also specify that “surplus arising out of the CSR projects or programmes or activities shall not form part of the business profit of a company.’’

CSR Activity:

A company can carry out CSR activities through

1. a registered trust or society or a company established by the company or its holding or subsidiary company or associate company under Section 8 of the Act.
2. If the trust, society or company as mentioned above is not established by the company, it shall have an established track record of three years in undertaking similar programs.

The company has to specify the projects 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.

The company may also collaborate with other companies for CSR activities, provided the respective companies have to separately report about spending on such projects programmes.

The CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure.

CSR Projects that only benefit of the company’s employees (and their families) will not count as CSR.

Companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track record of at least 3 financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.

Contributions made ‘directly or indirectly’ to any political party have been excluded from CSR ambit.

“The CSR activities shall be undertaken by the company, as per its stated CSR policy, as projects or programmes or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business”, according to the notification by the Corporate Affairs Ministry.

The Company shall give preference to the local area and areas around it where it operates for spending CSR amount. Of course this is re commendatory not mandatory clause.

Conclusion

Being a new concept in the context of companies legislation, there could be varied views regarding CSR. There will be an advantage to the companies contributing towards CSR activities because it will enhance their image as socially responsible entities which understand the need of the day towards the society. A Company can specifically declare its CSR policy each year as Annexure to Directors reports in clear terms which may relate to eradicating hunger and poverty, promotion of education, women empowerment, reduction in child mortality and improving national health, environmental sustainability, enhancement, employment and vocational skills or contributions to Central or State Government set up funds including the Prime Ministers National Relief Fund or in regard to any other area prescribed by the Government from time to time.

While some innovative companies have managed to overcome this challenge through smart partnering which has emerged as one way to create value for both the business and society simultaneously, we are to witness how corporates’ can develop an approach that can truly deliver on the ambitions.

 

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Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.