Ministry of Corporate Affairs (MCA), has notified via notification dated 27th February, 2014, Section 135 and Schedule VII of the Companies Act, 2013 shall be applicable form 1st April, 2014 and the rules on corporate social responsibility have also been notified. Let us have a review of the section, schedule and rule made thereunder to have understanding of applicability of Corporate Social Responsibility provisions which are made mandatory for prescribed class of companies under the new act:
-Corporate Social Responsibility:
CSR means the responsibility of the corporate to return the society their gratitude in terms of social service/helping in upgradation of society for utilizing resources of the society. As per the rules it shall include but not be limited to the activities specified in Schedule VII or the activities undertaken as per the CSR programmes or projects in pursuance of the recommendations of CSR committee of the Company.
-Companies on which CSR provisions are applicable:
Every Company:
(i)Having net worth of Rs. 500 crore or more
Or
(ii)Having turnover of Rs. 1000 crore or more
Or
(iii)Net profit of Rs. 5 crore or more
During any financial year shall constitute a CSR committee.
Every company which ceases to be covered under the abovementioned limits for a period of 3 consecutive years shall not be required to constitute CSR committee or comply with the said CSR provisions mentioned u/s 135 (2) to (5).
-Constitution of CSR Committee:
(i)Listed Companies: At least 3 directors out of which 1 shall be an independent director.
(ii)Unlisted Public Companies: At least 3 directors.
(iii)Private Companies: If the company has only 2 directors on board CSR committee shall be constituted by both the directors.
(iv)Foreign Companies: At least two persons shall constitute the CSR committee out of which one person shall be the one person as specified in section 380(1)(d) of the Companies Act, 2013 and another person shall be nominated by the foreign company.
-Amount of mandatory expenditure :
The companies on which CSR provisions are applicable shall spend at least 2% of their average net profit of preceding 3 consecutive financial years calculated in the manner provided in section 198 of the Companies Act, 2013, on CSR activities in pursuance of the CSR policy of the Company. If the Company fails to spend this amount it shall mention the reason for this failure in its board report.
The important points to be noted with regard to calculation of the minimum limit of amount to spend on CSR activities and amount not considered as spent on CSR activities are as follows:
(i)Calculation of 2% of average net profit:
The amount of net profit shall not include:
(a)Any profit arising from any overseas branch or branches of the Company, whether operated as separate company or otherwise; and
(b)Any dividend received by the other companies in india, which are covered and complying with the provisions of section 135 of the Companies Act, 2013.
Important point clarified in the rules is for the companies on which the CSR provisions shall become applicable from 1st April, 2014, they need not to recompute the profit of the preceding financial years, which were prepared as per the provisions of the Companies Act, 1956.
(ii)Expenditures which shall NOT be counted as expenditure on CSR activities:
(i)Any expenditure on an item not in conformity or not in line with the activities which fall within the purview of Schedule VII of the Companies Act, 2013.
(ii)Contribution of any amount to any political party directly or indirectly under section 182 of the Companies Act, 2013.
(iii)Activities which only benefit the employees or families of employees of the Companies.
Amount spent on CSR activities in India only shall be considered under the mandatory CSR provisions.
-CSR Activities:
CSR activities to be undertaken by the Company shall be mentioned in its CSR policy. These CSR activities shall be approved by the CSR committee of the Company and to be undertaken by the trust/society/section 8 Company incorporated or formed for carrying on CSR activities on behalf of the Company. The Company can also outsource its CSR activities to such other trust/society/ company having at least 3 years of experience in CSR activities.
-CSR Policy:
CSR policy of the Company shall include the projects and programmes in the conformity of the provisions of Schedule VII of the Companies Act, 2013 to be carried on as the CSR activities of the Company, but such activities shall not include the activities undertaken in the normal course of the business. The policy shall also include the monitoring process of the programmes and projects. CSR policy shall mention the amount of surplus arising out the CSR activities and shall not form part of the business profits of the Company.
-CSR Reporting:
The companies on which CSR provisions shall be applicable, their Board Report shall mention annual report on CSR in the manner prescribed in the rules. In case of the foreign companies balance sheet filed u/s 381(1) shall contain annexure regarding CSR activities.
-Display of CSR activities on Company’s Website:
The CSR policy of the Company shall be displayed on its website.
-Activities covered under Schedule VII of the Companies Act, 2013:
Activities relating to:—
(i) eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
(ii) promotion of education including social education and employment enhancing vocation skills specially among children, women, elderly and differently abled and livelihood enhancement prjects;
(iii) promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
(iv) ensuring environmental sustainability, ecological balance protection from flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;
(v) Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries, promotion and development of traditional art and handicraft;
(vi) measures for the benefit of armed forces veterans, war widows and their dependents;
(vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports.
(viii) contribution to Prime Minister Relief Fund or any other fund or any other fund set up by the central government for socio-economic development and relief and welfare of the Scheduled Cast, the Scheduled Tribes, other backward classes, minorities and women,
(ix) contributions or funds provided to technology incubators located with academic institutions, which are approved by the Central Government;
(x) rural development projects.
As the closing point of provision I will mention that the rules also says the total amount of expenditure done by the Company on carrying on the CSR activities shall not exceed 5% of the total CSR expenditure of the company in one financial year, so the cost of carrying on the project and employing personnel or appointing agency/trust/society/section 8 company for the same, the expenditure limit shall also be taken into consideration.
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