In exercise of the powers conferred under section 135 and section 469 [sub-sections (1) and (2)] of the Companies Act, 2013 (“Act”), the Central Government, on February 27th (2014), has notified Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”). The Rules, which provides for the implementation for Corporate Social Responsibility ("CSR") obligations, will come into force on 1st April, 2014.
Section 135 of the Act mandates a company, falling under the provided criteria, to constitute a CSR Committee. The function of the CSR Committee is to formulate and recommend CSR Policy.The provision also provides that the CSR committee should consist of two or more director, out of which one shall be an ‘independent director’. So far as section 469 of the Act is concerned, it empowers the Central Government to make rules for carrying out the provisions of the Act.
The CSR Rules, as notified by the Ministry of Corporate Affairs (“MCA”), consist of 9 rules. Among the important ones, it contains the descriptive rules for CSR Activities, CSR Committees, CSR Policy, CSR Reporting etc. In this blog post, I intend to explain and summarise the CSR Rules in brief.
Important Definitions:
1. Definition of ‘Corporate Social Responsibility’: One of the most important features of the CSR Rules is that it defines the term ‘Corporate Social Responsibility’; according to Rule 2(c), CSR means and includes but is not limited to:
(i) Projects or programs relating to activities specified in Schedule VII to the Act; or
(ii) Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act
From both the above clauses, it becomes apparent that a company has to focus on the subjects specified under Schedule VII of the Act. Schedule VII of the Act contains a list of activities which a company may purse for discharging its CSR obligations. Among other things, the list contains subjects such as ‘promotion of education’, ‘eradicating extreme hunger and poverty’, ‘social business projects’ etc.
2. ‘Net Profit’: 'Net Profit' is one of the factors in determining whether a company needs to discharge CSR obligation under section 135 of the Act. That is, a company, having a ‘net profit’ of rupees five crore or more during any financial year, is required to undertake CSR activites.
Rule 2(f) of CSR Rules defines ‘Net Profit’ as the net profit of a company as per its financial statement; however, it does not include overseas profit and dividend received from other companies in India. In case of a foreign company, ‘net profit’ would be determined in accordance with the accounts prepared under section 381(1)(a) read with section 198 of the Act.
Who needs to comply with CSR Obligations?
As per Rule 3 of CSR Rules, every company [including its holding or subsidiary] and a foreign company, which falls under section 135 of the Act, needs to discharge CSR obligations. However, a company, which ceases to fall under section 135 of the Act for three consecutive years, will not be required to discharge CSR obligations.
What are CSR Activities?
As per Rule 4 of the CSR Rules, a company shall undertake CSR activities as projects or programs or activities. However, these should not include those activities which a company undertakes in pursuance of its normal course of business. Following are other important points concerning CSR activities:
(i) CSR activities can be undertaken through any of the following entities:
(a) A registered trust; or
(b) A registered society; or
(c) A company established by the company; or
(d) Its holding or subsidiary or associate company under section 8 of the Act.
Though CSR activities can be undertaken through any of the above entities, there are certain limitations. A company cannot discharge CSR obligations through an entity which is not established by it and does not have an established track record of ‘three years’ in undertaking ‘similar programs or projects’.
(ii) For undertaking CSR activities, a company can collaborate with other company provided CSR Committees of each of the collaborating companies can report CSR Activities separately.
(iii) Only CSR activities undertaken in India would amount to ‘CSR Expenditure’.
(iv) Activities, which only benefit the employees of the companies and their families, would not be considered as the stipulated CSR Activities.
(v) In a single financial year, a company should not spend more than five percent of CSR Expenditure in building CSR capacities of its own personnel and implementing agencies.
(vi) Contribution to any political party would not be considered as CSR Activity.
Constitution of CSR Committees
Rule 5 of the CSR Rules obliges the CSR Committee to institute a transparent mechanism to monitor CSR Activities. As provided in the rules, the constitution and composition of the CSR Committee(s) can be explained as follows:
(i) An unlisted public company or a private company, which is not required to appoint an independent director, shall have its CSR Committee without such director. Further, a private company, having only two directors, shall constitute its CSR Committee with those two directors.
(ii) So far as foreign company is concerned, the CSR Committee shall comprise of at least two persons with, (i) one person (resident in India) who is authorised to accept on behalf of the company service of process and any notices etc. [Section 380(1)(d) of the Act], and (ii) one person nominated by the concerned foreign company.
What should ‘CSR Policy’ of a Company include?
According to Rule 6 of the CSR Rules, CSR Policy of company should include, (i) a list of CSR projects or programs to be undertaken, and (ii) monitoring process of such projects or programs. In addition, it should be specified in the CSR Policy that surplus, arising out of CSR activities, should not form part of the business profit of a company.
What is CSR Expenditure?: According to Rule 7 of the CSR Rules, CSR Expenditure would include all the expenditure incurred towards CSR activities. However, it would not include the expenditure which is incurred towards an activity not covered under Schedule VII of the Act.
CSR Reporting: As per Rule 8 of the CSR Rules, the Board’s report pertaining to financial year would also include an annual report on CSR obligations. In case of a foreign company, such information should be included as a part of the balance sheet [Section 381(1)(b) of the Act].
According to Rule 9 of the CSR Rules, the Board of Directors should disclose the contents of CSR Policy in the report and should also display the same on company’s website.
Its so nice how CSR activities has been made mandatory, its a very good step on part of the Government. I was looking for a few articles on CSR activities in India and I came across yours inspiring read.
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