Companies Act, 2013 Tracker II CNK & Associates
Corporate Social Responsibility (CSR) Provisions As per Companies Act, 2013, CSR has become mandatory in India. The Ministry of Corporate Affairs (MCA) in exercise of its powers conferred by Section 1(3) of the Companies Act, 2013 (the Act) and vide notification dated 27 th February 2014, notified 1 st April 2014 as the date on which the provisions of Section 135 and Schedule VII of the Act shall come into force. Section 135 read with Companies (CSR Policy) Rules, 2014 Applicability Section 135 is applicable to every Company (including its holding or subsidiary, and a foreign Company having branches/project office in India) which meets any of the following criteria during any financial year- Net worth of Rs. 500 Crore or more Turnover of Rs. 1,000 Crore or more Net Profit of Rs. 5 Crore or more. Every Company which does not meet the above mentioned criteria for 3 consecutive financial years is not required to Constitute a CSR Committee; and Comply with provisions of the Section 135 of the Act till such time it meets the criteria mentioned above. Definition of Net Profit For an Indian Company Net profit as per the Financial Statements prepared under the Act or Companies Act, 1956 and it shall not include the following- Any profit arising from any overseas branch or branches of the Company, whether operated as a separated company or otherwise; and Any dividend received from other Companies in India which are covered under and complying with the provisions of Section 135 of the Act. For Foreign Company Net profit as per the Profit and Loss Account prepared in terms of Section 381(1) (a) read with Section 198 of the Act. CNK & Associates 1
CNK Analysis As per the Act, applicability criteria are to be considered during any financial year whereas as per the Rules, it is 3 consecutive financial years to be considered for CSR applicability. It seems that a reasonable view would be to determine the applicability as per the Rules. Example of applicability as per the Rules (Rs. in crores) Financial Years Turnover Net worth Net Profit Eligibility Status 2011-12 1100 500 4 Yes 2012-13 900 550 4.5 Yes 2013-14 800 475 3.5 No In the above case, CSR is not applicable for the FY 2014-15 since in one of the 3 consecutive financial years applicability criteria is below the threshold limit. Contribution Every applicable Company should spend in every financial year- At least 2% of the average net profits of the Company, made during 3 immediately preceding financial years. Average net profit shall be calculated in accordance with the provisions of Section 198 (sec 198 relates to calculation of net profits for the purpose of determining the limits for managerial remuneration) If the Company fails to spend such amounts towards CSR activities, the Board is required to provide reasons for not spending the amount in its report laid before the Company in the Annual General Meeting. CNK Analysis Calculation of Net Profit for applicability of CSR is as per Section 135 of the Act whereas Average Net Profit for deriving the CSR contribution is as per Section 198 of the Act. Thus, calculation criteria of Net Profit for Applicability of CSR and Average Net Profit for Contribution of CSR is different. Example: (Rs. in crores) Particulars Holding Subsidiary Net Profit from the business 100 50 Dividend from subsidiary (to whom CSR is applicable) 10 NA Net Profit (before tax) 110 50 Tax 25 11 Net Profit (after tax) 85 39 Dividend to holding company NA 10 For Applicability Test : Net Profit is Rs. 75 crores (Net Profit of Rs. 85 crores less dividend from subsidiary Rs.10 crores) For calculating Contribution of CSR spending : Net Profit is Rs. 110 crores As can be seen from the above, Rs. 10 crores shall be considered twice for CSR spending by holding company as well as by subsidiary individually. CNK & Associates 2
CSR Committee of Board CSR Committee of Board should consist of 3 or more Directors, out of which at least 1 director shall be Independent Director subject to the following criteria- An unlisted Public Company or a Private Company shall have its CSR Committee without an Independent Director A Private Company which has only 2 directors on its Board shall constitute its CSR Committee with 2 such directors. A Foreign Company will have at least 2 persons on its CSR Committee out of which one person shall be specified under Section 380(1)(d) of the Act and the other person will be nominated by the Foreign Company. The Directors Responsibility Statement shall disclose the composition of the CSR Committee. Role of CSR Committee CSR Committee shall- Formulate and recommend to the Board, a CSR Policy which shall indicate the activities to be undertaken by the Company as specified in Schedule VII. Recommend the amount of expenditure to be incurred on the activities mentioned above. Monitor the CSR Policy of the Company from time to time. Role of Board of Directors (BoD) in respect to CSR Approve the CSR Policy for the Company after taking into account the recommendations made by the CSR Committee and disclose the contents of the CSR Policy in the Directors Report and also place it on the Company s website. Ensure that the activities which are included in the CSR Policy of the Company are undertaken by the Company. The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR activities. Schedule VII of the Act MCA in exercise of its power conferred by Section 467(1) of the Act and vide notification dated 27 February, 2013 has amended Schedule VII of the Act. Schedule VII mentions activities which may be included by Companies in their CSR policies. The same has been presented below- Sr. Activities as per amended Schedule VII No. 1 Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water. 2 Promotion education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects. CNK & Associates 3
3 Promoting gender equality and 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 4 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. 5 Contribution to the Prime Minister s National Relief Fund or any other fund set up by the Central Government or the State Government for social economic development and relief welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women. 6 Following activities have been added- 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 recognised sports, Paralympic sports and Olympic sports. Contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government. Rural development projects. CNK Analysis Medical activities are not covered under Schedule VII Activities set out in Schedule-VII seem very general and vague in nature Example: eradicating extreme hunger and poverty. Determination of what is a social cause which fits into Schedule VII can be ambiguous. Since the list in Schedule VII mentions activities included, further clarity on which other items may qualify would be needed. Salient Features of Companies (CSR Policy) Rules, 2014 MCA, in exercise of its power conferred under Section 135 and subsections (1) and (2) of Section 469 of the Act and vide notification dated 27 February, 2013 has notified Companies (CSR Policy) Rules, 2014.(the Rules). These Rules will be effective from 1 st April, 2014. CSR CSR means and includes but is not limited to - Projects or programs relating to CSR activities indicated in Schedule VII of the Act ; or Projects or programs relating to activities undertaken the Board in accordance with the recommendations of the CSR Committee as per the CSR policy of the Company. The CSR CNK & Associates 4
policy shall cover activities specified in Schedule VII of the Act but excludes activities undertaken in the normal course of business of the Company. CSR Activities CSR activities undertaken by the Company should be as per its CSR Policy and can be in the form of projects or programs or activities but should not include activities undertaken in its normal course of business. CSR activities may be undertaken through a registered trust or a registered society or a Company established by the Company or its Holding or Subsidiary or Associate Company under Section 8 of the Act subject to the following conditions- If the trust, society or Company is not established by the Company then it shall have an established track record of 3 years in undertaking similar projects or programs; and The Company has specified the project or programs to be undertaken through these entities, the modalities of utilisation of funds on such projects programs and the monitoring and reporting mechanism. A Company may also collaborate with other Companies for undertaking CSR Activities in such a manner that CSR Committees of respective Companies are in a position to report separately on such activities. CSR activities undertaken in India only shall amount to CSR Expenditure. CSR activities which benefit only the employees of the Company and their families shall not be considered as CSR activities. Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of 3 financial years but such expenditure shall not exceed 5% of total CSR expenditure of the Company in 1 financial year. Contribution to any political party whether directly or indirectly is not considered as CSR activity. CSR Policy CSR activities included in CSR Policy should be related to the activities included in Schedule VII of the Act. CSR Policy of the Company shall specify that the surplus arising out of the CSR activities shall not form part of the business profit of the Company. CSR Reporting In case of an Indian Company, BoD Report shall include an annual report on CSR activities as per the Annexure In case of a Foreign Company, the Balance Sheet filed under Section 381(1)(b) of the Act shall contain an Annexure regarding report on CSR. The format of the Annexure has been mentioned in the Companies (CSR Policy) Rules, 2014. The CBDT is in the process of issuing guidelines/clarifications on the deductibility of the expenditure incurred on CSR activities. CNK & Associates 5
DISCLAIMER AND STATUTORY NOTICE This e-publication is published by CNK & Associates, India, solely for the purposes of providing necessary information to employees, clients and other business associates. This publication summarises the important provisions of the Section 135 and Schedule VII under the Companies Act 2013 and Companies (CSR Policy) Rules, 2014. Whilst every care has been taken in the preparation of this publication, it may contain inadvertent errors for which we shall not be held responsible. This document is a proprietary material created and compiled by CNK & Associates. All rights reserved. This newsletter or any portion thereof may not be reproduced or sold in any manner whatsoever without the consent of the publisher. This publication is not intended for advertisement and/or for solicitation of work. CNK & Associates 6