Key Provisions of Corporate Social Responsibility


Key Provisions of Corporate Social Responsibility

Applicability of CSR

As per section 135(1) of the Companies Act, 2013, the companies having networth of Rs.500 crore or more; or Turnover of Rs.1,000 crore or more; or Net Profit of Rs.5 crore or more during any financial year shall be required to constitute a Corporate Social Responsibility Committee of the Board with effect from 01.04.2014.

As per CSR Rule 3(1) every “company” including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfils the criteria specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules

Rule 3(2) of the Corporate Social Responsibility Rules, 2014 provides that every company which ceases to be a company covered under section 135(1) for three consecutive financial years shall not be required to:

(a) constitute a CSR Committee ; and
(b) comply with the provisions contained in sub-sections (2) to (5) of the said section till such time it meets the criteria specified in section 135(1).

Accordingly, if a company, for 3 consecutive financial years, ceases to be covered under the ambit of section 135(1), it shall not be required to fulfill the conditions relating to the constitution of CSR Committee and other related provisions.

Constitution of CSR Committee

The CSR Committee shall comprise of three or more directors, out of which at least one director shall be an independent director. Rule 5 provides that in case of an unlisted public or private company which is not required to appoint an independent director shall have its CSR committee without such a director.

A private company having only two directors on its Board shall constitute the CSR committee with two directors only.

In case of a foreign company, CSR committee shall comprise of at least two persons. One of such persons shall be nominated by the foreign company and other person shall be the one, who is resident in India and authorised to accept (on behalf of the foreign company) service of process and any notices or other documents required to be served on the foreign company under the Act and whose name and address is delivered to the Registrar of Companies for registration under section 380(1)(d) of the Act.

CSR expenses

The eligible company shall spend in every financial year, at least two per cent of the average net profits of the last three financial years. “Average net profit” shall be calculated in accordance with the provisions of section 198 of the Companies Act, 2013.

There is a provision in Rule 4(6) which says that companies may build on CSR capacities from their own personnel, subject to a maximum limit of 5% of the total CSR expenditure of the company in a financial year.
MCA vide its Circular No. 21/2014 dated 18.06.2014 has clarified that expenses incurred by companies for the fulfillment of any Act/Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act. Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.

Expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.

Activities covered under Schedule VII of the Companies Act, 2013

The Ministry of Corporate Affairs vide its Notification dated 27th February, 2014 effective from 01.04.2014 has come up with the modified Schedule VII which covers wide range of activities which can be undertaken by the Companies as a part of their CSR initiatives.

The activities involve the following:

1. eradicating hunger, poverty and malnutrition, [promoting health care including preventive health care] and sanitation [including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation] and making available safe drinking water;

2.  promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

3.  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;

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 4[including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga];

5.  protection of national heritage, art and culture including restoration of and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

6.      measures for the benefit of armed forces veterans, war widows and their dependents;
7.   training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;
8.    contribution to the Prime Minister's 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;
9.   contributions  or  funds  provided  to  technology  incubators  located  within academic institutions which are approved by the Central Government;
10. rural development projects.
11. slum area development.
Explanation.—For the purposes of this item, the term 'slum area' shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.

The above mentioned activities constitute the CSR activities and the companies which are covered under the provisions of section 135 shall be required to carry out any one or more of the activities as specified above as part of its CSR Policy.

The MCA vide its Circular No. 21/2014 dt.18.06.2014 has clarified that Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule.

It is further clarified that CSR activities should be undertaken by the companies in project/programme mode One-off events such as marathons/awards/charitable contribution/advertisement/sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.

Reporting for CSR

Rule 8 of the CSR Rules provides that the companies upon which the CSR Rules are applicable on or after 01.04.2014 shall be required to incorporate in its Board's report an annual report on CSR containing the following particulars:

1.  A brief outline of the company's CSR Policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects or programs;

2.      Composition of the CSR Committee;

3.  Average net profit of the company for last three financial years; Prescribed CSR Expenditure;

4.      Details of CSR Spent during the financial year;

5.   In case the company has failed to spend the 2% of the average net profit of the last three financial year, reasons thereof;

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