The Companies Act, 2013 (“Act”) has introduced several provisions which would change the way Indian corporate do business and one such provision is introducing Corporate Social responsibility (“CSR”) activities.
Section 135(5) of the Act, the first of its kind, requires both public and private companies in India which have (1) net worth of Rs. 500 crore or more; or (2) turnover of Rs. 1000 crore or more; or (3) net profit of Rs. 5 crore or more; in any of the previous 3 financial years to contribute to CSR initiatives. The board of the company should ensure that the company contributes 2% of its average net profit during the 3 preceding financial years to CSR activities. “Average net profit” shall be calculated in accordance with the provisions of section 198 of the 2013 Act which states for calculation of profits of a company in any financial year. Proviso to the Rule 3(1) of the CSR Rules provide that the 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 Companies Act, 2013. MCA through its circular no. 21 dated 18th June, 2014, has clarified that companies that have met the financial thresholds specified in section 135 of the Act in any of the three financial years prior to FY2014-15 will be liable to comply. The circular mentions that companies developing programs as part of their CSR efforts can interpret Schedule VII of the Companies Act 2013 liberally.
A CSR committee is to be constituted comprising at least 3 directors including one independent director. The CSR committee has to formulate and recommend to the board of directors, a CSR Policy. No time frame has been prescribed for constitution of the CSR committee pursuant to section 135 read with Schedule VII of the Act. The committee constituted should be disclosed in the board’s annual report under section 134(3). Rule 3 of Rules clarifies the constitution of the CSR committees by companies unable to fulfill the requirements of section 135(1) on the number of directors. It is clarified that an unlisted public company or a private company may constitute a committee without an independent director pursuant to sub-section (4) of section 149 of the Act. A private company having only two directors on its Board shall constitute its CSR Committee with these two directors. In a foreign company the CSR Committee shall comprise of at least two persons of which one person shall be a resident person authorized to accept service or notice on behalf of the foreign company in India (section 380(1) (d) of the Act) and another person shall be nominated by the foreign company.
Approved CSR Activities in schedule VII to the 2013 Act are eradicating hunger and poverty, education, environment protection, etc. CSR spends can be by contribution to corpus or projects or programs approved by the board on the recommendation of the CSR committee. One time events such as marathons, awards, charitable contributions and advertisements or sponsorships of TV programs do not qualify. Contributions in India alone qualify. Spending solely on employees of the company is not considered a CSR spend. However salaries to regular CSR staff and volunteers based on time spent can be factored into CSR project cost. Expenses under labour legislation do not qualify. CSR activities can be undertaken by contributing to a registered trust, society or under section 8 nonprofit companies. These bodies should have a three year track record in similar programs or projects. Preference to be given to the local area and areas around the company operates for CSR spending.
Excludes activities undertaken in ordinary course of business.
The circular mentions that companies developing programs as part of their CSR efforts can interpret Schedule VII of the Companies Act 2013 liberally; while some activities being undertaken or currently being planned may not exactly match with the wording of Schedule VII, these could be taken up if they capture the essence of the subjects mentioned. MCA has explicitly mentioned that Programs around road safety, creating consumer awareness, support to technology incubators not located within academic institutions (provided they are approved by the Department of Science & Technology) can be considered as CSR programs.
The CSR Policy subject to rule 6 of CSR Rules should state the activities to be undertaken by the company as specified in Schedule VII, recommend the amount of expenditure to be incurred on the activities and monitor the Corporate Social Responsibility Policy of the company from time to time. Subject to the provisions of rule 5(2) of the CSR Rules, the CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company. Every Indian company and foreign company having a branch office or project office in India and satisfying the aforesaid thresholds are required to comply with the CSR requirements. Both holding and subsidiary companies have to fulfill section 135 meeting the thresholds.
The Companies (Corporate Social Responsibility) Rules, 2014 clarify that every company including its holding or subsidiary, and a foreign company defined under of section 2(42) of the Act having its branch office or project office in India which meets the threshold requirement criteria specified in section 135(1) of the Act shall comply with the provisions of section 135 of the Act and these rules.
However, every company which ceases to be a company covered under of section 135(1) of the Act for 3 consecutive financial years is not required to constitute a CSR Committee and to comply with the provisions contained in section 135(2) to (5) till such time it meets the criteria specified in sub- section 135(1). A foreign holding company’s spend on CSR activities in India can be counted as CSR spending of their Indian subsidiary. The circular however, does not lay down any deadline for creation and posting of CSR policies by companies.
Mandatory reporting of CSR policies developed and implemented as part of the Director’s report is also provided for under Sub-section 3(o) of Section 134 of the Companies Act 2013. If a company is unable to spend the contribution amount in a year it should specify the reasons for not spending that amount in its Board of Director’s annual report. There is no penal provision regarding non-compliance of the said provisions in means of spending or in reporting part. However, there are clear penal consequences if a company fails to even set up the CSR committee or fails to create a policy etc. If a company fails to spend the money, it only has to report this along with reasons. Section 134(8) of the Act provides for such penal provision stating in case the company does not disclose the reasons in the Board‘s report, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.
The new law does no specify punishment for failure to spend CSR expenditure. However such cases are covered under section 450 read with section 451 which provides for residual provisions for the same. Fine under section 450 may extend to ten thousand rupees, and where the contravention is continuing one, a further fine to one thousand rupees for every day after the first during which contravention continues is imposed.
“Excellence should be a Habit”, but not in the case of offences or defaults in the 2013 Act. “Default should not be a habit” says the new law. As per Section 451 of the 2013, the defaulter is punished either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.
Where a company has a website, the CSR policy of the company would need to be disclosed on such website pursuant to rule 9 of the CSR Rules. To conclude, the 2013 Act, provides an excellent framework and a point of departure for corporate social responsibility. But details and nuances have to be worked out. Every company has a huge task on hand. It is as if a sprawling minefield of possibilities has been laid open. The coming times will tell what the companies can make out of it.
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