Corporate Social Responsibility & Foreign Contribution (Regulation) Act

Corporate Social Responsibility & Foreign Contribution (Regulation) Act

Contents Background to CSR Background to FCRA Practical Analysis of Provisions of CSR & FCRA Tax treatment of CSR Spend Recent News on CSR Recent News on FCRA Page 2

Background to CSR Government has been mulling over CSR and ways and means of making this a way of corporate life Globally, there are no legal mandates for CSR spends India has pioneered this through a provision in Companies Act, 2013 ( the Act ) Page 3

Background to CSR (Cont.) What is CSR? Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large However, CSR has not been defined anywhere under the the Act. Page 4

Background to CSR (Cont.) Applicability of CSR Section 135 of the Act deals with CSR Applicable to all companies having: Net worth >= Rs. 500 Crore, or Turnover >= Rs. 1000 Crore, or Net Profit >= Rs. 5 Crore during any of the preceding three financial years Page 5

Background to FCRA Regulation of Foreign Exchange in India Trade / Business Charity to control such trading / business transactions Regulated by Reserve Bank of India Regulation: Foreign Exchange Management Act, 1999 (FEMA) to regulate such unilateral / charity transactions Regulated by Ministry of Home Affairs, New Delhi Regulation: Foreign Contribution (Regulation) Act, 2010 (FCRA) Page 6

Background to FCRA (Cont.) FCRA is a national security legislation to consolidate the law to regulate the acceptance and utilization of Foreign Contribution Effective from May 1, 2011 FCRA, 1976 FCRA, 2010 Sections 32 54 Rules 9 24 Forms 9 10 Objective : o o o Removing the difficulties faced by stakeholders in the repealed FCRA, 1976 Increasing transparency and accountability of NGOs / NPOs Prevention of mis-utilization of foreign currency Page 7

Background to FCRA (Cont.) Applicability: o o o Whole of India Citizens of India outside India Associate branches or subsidiaries outside India of companies or body corporates, registered or incorporated in India Not Applicable to: o Transactions between Government of India and Government of any other country Page 8

Background to FCRA (Cont.) ET Bureau Jul 2, 2015, 04.25AM IST Page 9

Practical Application of Provisions of CSR & FCRA Case Study: A Limited Foreign Holding Company B Limited Indian Subsidiary of A Limited Required to spend on CSR i.e. meeting the specified applicability criteria XYZ Foundation: o o o a registered trust or a registered society or a Section 8 Company having an established track record of 3 years carries out the CSR activities as specified in Schedule VII, as amended, to the Companies Act, 2013 and is in compliance with the requirements of FCRA Page 10

Medium of Spending by B Limited Self Through a registered trust or a registered society or a company established under Section 8 of the Act by the Company, either singly or along with its Holding or Subsidiary or Associate Company, or along with any other Company or Holding or Subsidiary or Associate Company of such other Company or otherwise Through a registered trust or a registered society or a Section 8 company not established by the Company, either singly or along with its Holding or Subsidiary or Associate Company, or along with any other Company or Holding or Subsidiary or Associate Company of such other Company, provided it shall have an established track record of 3 years in undertaking similar programs or activities Page 11

Collaboration or pool resources with other companies Further, as per the clarification issued by Ministry of Company Affairs (MCA), expenditure incurred by foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian Subsidiary if, the CSR expenditure are routed through Indian Subsidiaries. Conclusion: B Limited can spend on CSR through XYZ Foundation by: i. Contributing directly or ii. A Limited spending on behalf of B Limited by routing through B Limited Page 12

Perspective of XYZ Foundation XYZ Foundation can approach larger organization having multiple entities who are required to spend on CSR so as to undertake projects requiring significant outlay. The said projects being well above the threshold limits of CSR cannot be individually taken up by the entities. Page 13

Compliances by XYZ Foundation wrt CSR Modalities of utilization of funds on such projects and programs as specified by B Limited Monitoring the projects where the funds are being utilised Maintaining the requisite details of the project undertaken and utilisation of funds so as to enable B Limited to comply with the disclosure requirements in Directors Report and Financial Statements as required under the Act Page 14

If XYZ Foundation receives contribution from A Limited, then in such case it ahs to comply with the provisions of FCRA Compliances by XYZ Foundation wrt FCRA Annual reporting requirements Form FC 6 (Receipt of Foreign Currency) o Required within 9 months of the end of a given financial year o Accompanied by income & expenditure statement, receipt / payment account, balance sheet, and authorized bank account statement for the designated FCRA account o Must include receipts and transfers in and out of the designated bank account o Must be certified by a Chartered Accountant Page 15

Further, if no foreign contribution is received or utilized during the year, Nil Report is required to be filed Form FC 7 (Receipt of Articles) o Filed in lieu of FC 6 if contributions were only in the form of articles, not currency Form FC 8 (Receipt of Securities) o Filed in lieu of FC 6 if contributions were in the form of foreign securities Other reporting requirements Organizations receiving foreign contributions in excess of Rs. 1 Crore or equivalent in a financial year must report the same in the public domain i.e. online, by listing records of the receipt and utilization of the funds. These would also be listed by the Ministry of Home Affairs on its website Page 16

Conditions on Acceptance of FC FC received should be deposited only in the designated FC bank account Association should keep record of all FC clearly indicating the names of the donors, their locations and the purpose Utilization of FC FC should be utilized for the purpose it has been received Not more than 50% of FC received should be utilized for administrative expenses without the prior approval of the Central Govt. (However, as per the CSR provisions, expenditure on administrative overheads shall not exceed 5% of total CSR expenditure) Every assets purchased / acquired should be in the name of XYZ Foundation Interest earned on FC should be utilized towards its activities / projects of Page 17 XYZ Foundation

Restriction on transfer of FC FC can be transferred to only those associations who have been granted registration / Prior Permission FC, less than 10% of the total FC received in a financial year, may be transferred to an association not granted registration / Prior Permission only after obtaining the permission of the Central Govt. by filling Form FC 10 However, approval not required if such FC is transferred to Self Help Groups (SHGs) / individuals beneficiaries for the end utilization of FC received or the FC received is for definite programme for providing some direct financial assistance as charity In case of extending loans to SHGs / Community Based Organization (CBO), approval of the Government is required Page 18

Maintenance of Accounts There should be a separate FC designated account in the bank. FC cannot be deposited or utilized from the bank account used for local / domestic funds XYZ Foundation is required to maintain a separate set of account or records exclusively for the FC received and utilized Any standard or acceptable method of accounting can be used for maintaining books of account for FCRA purposes Local / domestic contribution should never be mixed up with FC All accounting statements, annual return and copy of statement of account from the bank regarding the exclusive FC account accompanying the annual returns should be preserved at least for a period of six years Page 19

XYZ Foundation should maintain separate register of investments and every register of investment must be submitted for audit All funds like General Fund, created from FC are to be reflected in the FC books of account Any asset created / purchased out of FC is FC asset and should be recorded in the FC books of account Page 20

Compliances by B Limited wrt CSR Role of BOD: Constitute CSR Committee of the Board Approval of CSR Policy Disclosure in Board Report Ensure that CSR activities are undertaken by the Company Role of CSR Committee: Formulate and recommended a CSR Policy to the Board Recommended the amount of expenditure to be incurred on the CSR activities Monitoring CSR Policy of the Company from time to time Page 21

Constitution of CSR Committee CSR Committee shall consist of: in case of listed public company at least 3 directors, out of which at least 1 director should be independent director in case of an unlisted public company which is not required to appoint an independent director, at least 3 directors in case of a private company having only two directors, such directors in case of foreign company, at least 2 persons of which 1 person shall be as specified under Section 380 (1)(d) of the Act and another person shall be nominated by the foreign company Page 22

Contents of CSR Policy CSR Policy should include : At least one of the activities as specified in Schedule VII to the Act, as amended CSR projects or programs which the Company plans to undertake Modalities of execution of such project or programs Implementation schedule of such project or programs Monitoring process of such projects or programs Page 23

Amount & Mode of Spending Amount of spending The Company shall spend, in every financial year, at least 2% of the average net profits made during the immediately preceding three financial years Mode of Spending List of programs and activities specified in Schedule VII of the Act, as amended Preference to the local area where it operates Programs and activities should be undertaken in India only Programs and activities should not be exclusively for employees & their families Page 24

Disclosure The Board's Report shall disclose: Composition of the CSR Committee Contents of CSR policy Reason for not spending the specified amount on CSR activities Further, the Board shall also disclose the CSR Policy and its contents on the Company's website, if any. Page 25

Steps to be followed by A Limited A Limited should instruct XYZ Foundation that the amount of contribution given is on behalf of B Limited s compliance with CSR provisions A Limited to instruct XYZ Foundation to give necessary details / information to B Limited to comply with the disclosure requirements in Directors Report and Financial Statements as required under the Act Documentary and secretarial compliances should be ensured by A Limited and B Limited Page 26

Tax Treatment of CSR Spend Finance (No. 2) Bill, 2014 has clarified that for the purposes of Section 37(1) of Income Tax Act, 1961, any expenditure incurred by an assessee on the activities relating to CSR referred to in Section 135 of the Act shall not be deemed to have been incurred for the purpose of business and hence, shall not be allowed as deduction under Section 37. However, the CSR expenditure which is of the nature described in Section 30 to Section 36 of the Income Tax Act, 1961 shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein. This amendment will take effect from 1st April, 2015 and will, accordingly, apply in relation to the Assessment Year 2015-16 and subsequent years. Page 27

Recent News on CSR Actual CSR spending in FY 2014-15 Corporate shirking responsibility? Only 14 Nifty cos spent 2% of net gain on CSR in FY15 ET Bureau 30 Sep, 2015, 04.11AM IST Page 28

Recent News on FCRA Greenpeace India s registration cancelled By PTI 6 Nov, 2015, 05.03PM IST Ford Foundation funding to non-fcra NGOs, Teesta Setalvad's Sabrang Trust PTI May 5, 2015, 04.24PM IST Govt cancels registration of 4,470 NGOs in fresh crackdown Source: Zee News Tuesday, June 9, 2015 21.40 IST Page 29

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