Companyís act 2013 is in many ways a ground up redesign of the existing legislation governing corporate activities in India. While some provisions of the new act are simple tweaks of the outgoing act, others effectively rethink the current provisions and implement new procedures that bring radical changes to the governance paradigm in the country. One of the more actively discussed provisions was the introduction of norms on mandatory spending on Corporate Social Responsibility (CSR), the new rules come into force from the 1st of April 2014. In this post we have detailed the provisions of the regulations and have offered our thoughts on the same.
Companies Act 2013 : Corporate Social Responsibility (CSR), Now the Norm
It is not secret that India is a developing nation-state, it has been the experience that the government machinery has often been unable to reach all those who require its assistance. Further, there are limitations on the activities that the government can indulge in. The private sector is viewed by many circles, sadly, as lacking in its participation in activities that go beyond its balance sheets. With a view to increase private spending on socially responsible projects, the government introduced section 135 to the companies act 2013 which necessitates all companies above who meet a certain threshold to spend at least 2% of their average profits of the preceding three years on corporate social responsibility projects.
all companies above who meet a certain threshold to spend at least 2% of their average profits of the preceding three years on corporate social responsibility projects
To qualify under such provisions the company must satisfy any of the following conditions, being :
- Net worth in excess of Rs 500 Crores
- Turnover in excess of Rs 1000 Crores
- Net profit in excess of Rs 5 crores
These figures are to be derived on basis of the financial statements for the relevant year as prepared by the company in accordance with the companies act. Companies are allowed to deduct profit from overseas branches, subsidiaries etc and dividend income, if any, while computing such figures. Interestingly while the act makes no mention of foreign companies, the CSR rules include specific mentions to foreign companies and specify that such companies are to compute the threshold figures in line with the statements prepared in accordance with Section 381(1)(a) of the act.
Should the company satisfy the conditions it has to appoint a CSR committee comprising of a minimum of three directors, of which one director has to be a director of independent nature. Unlisted companies who have no independent directors have been exempted from appointing independent directors. Private companies who have only two directors are required to have only the two directors on the CSR committee. Foreign companies are required to appoint a two person committee of which one person is to be a person as specified in section 381 (1)(d) of the act, and the other person shall be a nominee of the company. The chief roles of the CSR committee are to :
- Formulate a CSR policy
- Record Expenditure as per the CSR policy
- Monitory the implementation of the CSR policy
The CSR committee is also required to institute transparent mechanisms for reporting and implementation of CSR projects as mandated by the CSR policy.
What qualifies as CSR?
The CSR activities as per the CSR policy may be designed to fulfill any of the objectives as specified in Schedule VII of the companies act 2013, the various objectives as envisioned in the schedule as amended on the 27th of February 2014 are :
- Eradicating hunger, Poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water
- Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects
- Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
- Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water
- 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 arts and handicrafts
- Measures for the benefit of armed forces veterans, war widows and their dependents
- Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic Sports
- Contribution to the Prime Ministerís National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
- Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government
- Rural development projects
Any activity performed by the company in the normal course of its business shall not be considered eligible expenditure under the CSR rules. The rules also provide that any schemes instituted for the benefit of the employees of the company or for the benefit of their families shall not be included in the total eligible spend. Further, any expenses undertaken by the company to build the CSR capabilities either in its own staff or staff engaged by a third party, must be capped at 5% of the total CSR spend for a single year. The CSR policy therefore is ideally a list of projects that the company wants to undertake to fulfill its obligations under these rules and lays down the parameters for the monitoring of such projects. The rules also specify that donations/contributions to political parties shall not be
Any activity performed by the company in the normal course of its business shall not be considered eligible expenditure under the CSR rules.
The CSR committee is to then submit the CSR policy to the Board of directors of the company for its approval, the board should consider the policy and approve it upon satisfying itself of its merits. The board may then place the policy on its website and disclose relevant sections in its report to the shareholders. It is the responsibility of the board to ensure the activities are undertaken and that the company spends the required amount, being 2% of its average net profits over the previous three years, on the CSR initiatives as mandated by the CSR committee of the company. In case the company fails to spend such amount the board needs to specify reasons for such failure in its report to the shareholders.
For the execution of the projects, the company may engage its subsidiaries or any other organization for the purpose. These form of these organizations has been left to the discretion of the company. This means the company can engage a Trust, Society, Section 8 (formerly 25) company or a normal company to carry out its CSR activities. As a caveat, any organization engaged by the company to carry out its CSR activities and not explicitly established for this purpose must have been in existence for a minimum period of three years before the date of such appointment.
Comparison between different organizational forms
If a third party (including subsidiaries) is engaged by the company to carry out its CSR obligations, the company has to specify the projects and program to be executed by such organization along with modalities for the utilization and release of funds. As stated earlier, a robust monitoring and reporting mechanism is required to be instituted for the project to be successful and to provide ready access to such information to all relevant stakeholders.
Under the provision, more than one company can collectively collaborate on CSR projects, as long as they have the proper mechanisms in place to allow their respective CSR committees to report on the projects as required.