Introduction: Corporate Social Responsibility (CSR) is attracting the
attention of every Company andstakeholders. CSR activities are not new but it
has been recently the mostly discussed or debated topic for the reason that
companies Act has made it mandatory for certain companies to spend 2% of
average net profits of 3 preceding financial years. Many companies consider CSR
activities as philanthropic act towards society and do not want the Government
to exert pressure on them to spend compulsorily 2% of average net profits of
preceding 3 financial years. Finally Section 135 of Companies Act,
2013 (CA, 2013) and new CSR rules have been notified by the Ministry of Corporate
affairs for implementation. This Article analyses the provisions of
Section 135 and new rules framed under the CA 2013.
What is Corporate
Social Responsibility (CSR)?
Before we analyse
the implication of relevant Section and Rules, let us understand how business
enterprises and common people perceive CSR activities.
Companies generally
consider CSR activities as philanthropic activities. However some companies
with long term vision have realized that if they want to survive or want
sustainability in the long run, they have to adopt themselves to play an active
role to contribute for the welfare of its allstakeholders and
particularly society around it. This vision prompted companies to run their
business to produce an overall positive impact on society on a
continuous basis by contributing for the economic development and
betterment of quality of life of all stakeholders.
Community around the
company expects employment, development of infrastructure, care for
the environment, educational institutions and other developmental activities
from the companies operating around them. Beneficiaries of CSR activities
develop a positive attitude towards the companies and help in promoting the
brand value or goodwill of the philanthropic companies.
Companies Act,1956
and CSR :
Prior to coming into
existence of new Companies Act, many companies have been spending
monies in a limited way on CSR activities by contributing to Trusts/ charitable
organizations which run for the good of the society. Companies have been
using Section 293(1) (e) of the Old Act, 1956 so far for making contributions
for charitable activities.
Companies Act, 2013
and CSR
Section 135 of the
New Act deals with mandatory CSR provisions. This Section will come into force
w.e.f. 01.04.2013 as per notification dated 27th February,2014 issued
by the Central government. Draft CSR Rules have been displayed for comments
from public, professional bodies such as ICAI, ICSI and ICWA. After considering
the suggestions from various quarters, these rules have been published by notification dated
27th Feb, 2014 to come into force from 01.04.2014. Let us see what the section
mandates;
Section 135 states
that compliance of CSR is mandatory, if company( whether private or public )
meets any one of the following criteria
-Net worth of Rs.500 crore or more, or
-Turnover of Rs.1000 crore or more or
-Net profit of Rs.5 crore or more during any financial
year.
The CSR requirements to be complied with can be
summarized as follows:-
a) Companies which meet
the criteria (any one of 3) as mentioned above are required to constitute a CSR
committee with 3 or more directors (at least one of them to be independent
director).
b) The functions of CSR
Committee are as follows:-
-
It shall formulate a CSR Policy and recommend to board and indicate CSR
activities mentioned in Schedule VII for implementing.
- It shall
recommend to the Board, amount of expenditure to be spent for identified CSR
activities and
- Monitor
the CSR policy and review it from time to time.
c) Responsibility of
the Board:
- The Board
of directors of company must approve the CSR policy recommended by CSR
committee and disclose the same in the Directors report.
- Further
it should ensure that the CSR policy is displayed on the company’s web site in
such manner as may be prescribed.
- It should
ensure that the company spends at least 2% of the average net profits made
during the 3 financial years immediately preceding in pursuance of the
policy(net profits to be calculated as per Section 198)
- While
spending the committed CSR funds, preference must be given to local areas
around which the company operates.
- If the
company fails to spend, the company must specify the reasons for not spending
the amount in its Directors report.
-
Amount spent on CSR activities must be disclosed by way of note in the
profit and loss.
Analysis of
New CSR Rules:
A careful reading of the Rules will clarify the
following points for due compliance.
a) Applicability: CSR
rules will be applicable from 01.04.2014. Every company including holding and
subsidiary company and a foreign company{section 2(420} having its branch
office or project in India has to comply with CSR provisions, if it fulfils the
applicability criteria.
b) Definition
of CSR: CSR activities have been defined to include those projects or
programs relating to activities specified in Schedule VII but not
limited to those. The words “but not limited”has to be read to mean the
expandable activities specified in Schedule VII but it can not be
interpreted as discretion given to companies to choose any activities other
than those listed inSchedule VII.
c) CSR
activities: Schedule VII lists out CSR activities, such as
eradicating hunger and poverty, promotion of education and employment, lively
hood enhancement projects, promoting gender equality, women empowerment,
hostels for women and orphans, old age homes, day care, environmental
sustainability, protection of flora and fauna, contributions to PM relief fund,
measures to benefit armed forces veterans, war widows and dependants, promotion
of sports, and rural development projects.
d) Basis
for calculation of Net profit: Rules clarify that the net profit for
determining mandatory spend of 2% has be calculated as per the
requirements of Section 198 of the Act. However profits from overseas branches
are to be excluded and so also any dividends received from companies which
comply with CSR provisions
e) Options
for implementation: Companies have been given free hand to choose and
implement CSR activities as per its policies decided by its board
-
either directly or through Trusts/Societies or section 8
companies (entities) operating in India and set up by it
- Companies
have also option to take up CSR activities through entities specified above but
not set up by it. The condition is that these entities must have an established
track record of at least 3 years in the line. However monitoring of these
activities by company is mandatory.
- Companies
can also collaborate with other companies in their CSR projects but those
companies’ committees must report CSR activities CSR as per Rules.
f) Exclusions/Restrictions:
Following are the restrictions :-
o Programs or activities undertaken exclusively for employees or
their families shall not be considered as CSR
o Any contributions made to political parties u/s 182 of CA,2013
shall not be given credit
o Projects or activities undertaken in India will only be given
credit or counted for the purpose of mandatory spend limit
o Companies are allowed to spend up to 5% of total spend in any
financial year to build capacities of their own CSR personnel or the agencies
through whom CSR activities are undertaken
g) Constitution
of CSR committee: Listed public Ltd companies must have at least 3
directors on the committee, of which at least one director must be an
independent director. Unlisted companies and private companies are exempt from
the requirement to have presence of one independent director and can operate
with 2 directors. This is welcome measure.
h) CSR
expenditure: Any expenditure to be considered as CSR activities has to
be as per the policy approved by the Board and those activities must be within
the ambit of Schedule VII activities . The expenditure can be towards
corpus or could be revenue in nature.
i) CSR
reporting: The Board’s report of a company shall annex a report on CSR
activities undertaken during the year as per format provided in the Rules. This
requirement is applicable on or after the financial year 2014-15.
j) Format: Prescribed
Format is designed to give information such as CSR policy of the company, constitution
of committee, Mandatory amount to be spent on CSR, details of amount spent and
reasons for any unspent amount.
k) Display
of information on web site: Companies must display their CSR polices
and information on CSR activities as per particulars in format
Road ahead :
Now that Rules are framed,
companies have a clear directions for complying with the CSR provisions. The
coming financial year being the first year, many clarification are expected
from the Ministry of Corporate affairs. Even when the voluntary guidelines
are introduced, it is noticed that many companies have been taking CSR
activities very seriously since it builds a good will and increases its brand
value.
Areas of concern: There is a concern whether the amounts spent on CSR will be allowed
asbusiness expenditure under Income Tax Act. Section 37(1) Income tax
Act,1961 allows business expenditure, if it is wholly and exclusively for
business or nexus can be shown between the expenditure and its business.
Certain corpus payments whether qualify for deduction or not is doubtful.
Clarifications from ministry of finance should come fast so that many Companies
will come forward to spend voluntarily, if such income tax deductions/
exemptions are allowed. It is not clear whether failure to spend mandatory 2%
percentage of average net profits will be treated as violation and penalty will
be levied. May be in the initial years, MCA may go soft for non compliance of
Section 135 or rules framed thereunder.
Conclusion:
Although there is resentment about mandatory
spend, many big companies have voluntarily complied with the requirement and
smaller companies will follow the path gradually. If there is a will, companies
can play a vital role in changing the lives of many people living around it.
No comments:
Post a Comment