4 March 2014 | Volume 5 Issue 3
Provisions of Corporate Social Responsibility under Companies Act, 2013 Notified

On 27 February 2014, the Ministry of Corporate Affairs (MCA) notified section 135 and Schedule VII relating to Corporate Social Responsibility (CSR) under the new Companies Act, 2013 (the Act). Furthermore, the Companies (Corporate Social Responsibility Policy) Rules, 2014 (the Rules) have also been notified. These provisions mandate CSR spending by specified classes of companies and will come into force on 1 April 2014. CSR generally includes activities by a business entity towards social welfare.

Is your company required to spend on CSR activities?

CSR provisions are mandatory if:
  • You are an Indian company or a foreign company registered in India; and
  • You have a net worth of at least INR 5 billion or a minimum turnover of INR 10 billion or net profit of at least INR 50 million during any financial year.
In case your company ceases to meet the above criteria for three consecutive financial years then the CSR provisions will not apply.

What should your company do to implement the CSR provisions?


A CSR Committee of the Board will have to be constituted if any company meets the above criteria. In case of a listed public company, the CSR Committee will comprise of three directors, one of whom shall be an independent director. An unlisted public company or a private company need not have an independent director on its CSR Committee. Additionally, the CSR Committee of a private company having only two directors can be constituted with only those two directors. The CSR Committee of a foreign company shall comprise of at least two persons, of which one person should be the one who is authorised to accept notices or other documents on behalf of the foreign company in India and the other person should be nominated by the foreign company.
 
The CSR Committee will formulate and recommend a CSR policy to the Board indicating the activities to be undertaken and expenditure to be made. This policy once approved by the Board, will have to be disclosed in its report and also has to be made available on the company's website, if any. The policy needs to be monitored from time to time.
 
The Board of Directors shall ensure that the company, in each year, spends at least 2% of the average net profit of the 
last three years on CSR activities. In case the company fails to spend the requisite amount, the Board shall specify the reasons for such non-spending.

What CSR activities can be undertaken?

CSR activities to be undertaken should fall within the ambit of Schedule VII of the Companies Act, 2013 which includes healthcare, education and vocational skills, gender equality, and empowering women.
 
Reducing inequality, eradication of poverty, environmental sustainability, protection of national heritage, promotion of traditional arts and rural development projects, contribution to specified funds, measures for the benefit of armed forces' veterans or war widows, and training to promote specified sports will also fall under the ambit of CSR activities.
 
CSR projects or programs or activities undertaken only in India will amount to CSR expenditure. Companies will have to give preference to local areas around which it operates. Moreover, CSR projects or programs or activities that benefit only the employees of the company and their families will not be considered as CSR activities.


Conclusion

CSR provisions are aimed at encouraging companies to spend a portion of their profits on projects that benefit society. Although provisions relating to CSR are now mandatory for specified classes of companies, there is still some guidance required on the accounting treatment for the amount to be spent on CSR activities. Furthermore, the Central Board of Direct Taxes (CBDT) is yet to clarify whether the amount spent on CSR activities will be allowed as a deduction from income. We hope that regulatory authorities will soon come up with guidance on these issues so as to facilitate smooth implementation of these provisions.

SKP

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