Corporate Social Responsibility (CSR) Under Companies Act .

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Corporate Social Responsibility(CSR) under Companies Act, 2013ICAIBKCICACS Abdullah Fakih

ContentsParticularsConcept of CSRApplicability under Companies Act, 2013Computation of profit for CSRCompliance requirementsEligible activities for CSR PolicyCSR mechanics under Companies Act, 2013Clarifications by MCA and practical issuesPenalties and punishmentsQ&ACorporate Social Responsibility2

Concept of CSRWhy CSR Corporate Social Responsibility (CSR) refers to voluntary activitiesundertaken by a company to operate in an economic, social andenvironmentally sustainable manner. It denotes a company’s sense ofresponsibility towards the community and ecological and socialenvironment in which it operatesBenefits of CSR CSR not only benefits the surrounding community but it can also be goodfor business by helping the company grow and address shareholderconcernsStatutory basis CSR is a mandatory spend for specified companies under Companies Act,2013 (2013 Act) w.e.f. 1 April 2014Corporate Social Responsibility3

Applicability under Companies Act, 2013Which Companies?All companies including a holding or subsidiary company in IndiaApplicability – if any 1 of following criteria is metNet worth of 500crores or moreTurnover of 1000crores or moreNet profit of 5 crore ormoreHow much?Minimum 2% average net profit in last 3 FYQ – Are Indian branch or project offices of foreign companies covered underCSR provisions?Corporate Social Responsibility4

Computation of profit for CSRManner of computation of profitWhether to consider Profit Before Tax (PBT) or Profit After Tax (PAT)?What if there is loss in 1 of the 3 preceding financial years?Whether to set-off accumulated loss in computation of profit?Whether to re-compute profits calculated as per Companies Act, 1956?Profit from foreign branches?Dividend received from subsidiaries?Corporate Social Responsibility5

Compliance requirementsCSR provisions require coveredcompanies, through Board processes,to: Constitute a CSR CommitteeFormulate a CSR Policy (by CSR committee)Spend on CSRMonitor and report adherence to the CSR PolicyQ – What if company satisfies Net Worth / Turnover criteria but has made lossduring preceding 3 financial years?Q – What if Net Worth / Turnover / Net Profit criteria is met during 1 FY andnot for subsequent FY?Corporate Social Responsibility6

Eligible activities for CSR PolicyEradicating hunger,poverty andmalnutrition/sanitation(including contribution toSwach Bharat Kosh)Measures for benefit ofarmed forces veterans,war widows anddependentsPromotion of educationincluding employmentenhancing vocationalskillsTraining to promotesportsPromotion of genderequality/empoweringwomenContribution to PM’sNational Relief Fund/ anyspecified fundEnsuring environmentalsustainability (incl.contribution to the CleanGanga Fund)Protecting nationalheritage, art and cultureCSRFunds provided totechnology incubatorswithin academicinstitutionsRural developmentprojects / slum areadevelopmentCorporate Social Responsibility7

Whether eligible activities for CSR?Employee training programmes?Contribution to political party?Sponsoring Standard Chartered Marathon?Compensation for acquisition of land?Donations to IIM [A] for conservation of buildings?Promoting primary education in African country?Corporate Social Responsibility8

Activities that will not qualify as CSRActivities that are meant exclusively for employees and/or their families willnot qualify for CSR activities.Contribution to one–off events such as marathons, awards, charitablecontribution, advertisement, sponsorship of TV programs, etc.Contribution of any amount directly or indirectly to any political partyExpenses incurred for the fulfillment of any Act or Statute of regulations i.e.,CSR expenditure should not be for an activity for which the company isalready bound to do as an application of any other lawActivities undertaken in pursuance of normal course of business of a companyProjects or programmes or activities undertaken outside IndiaCorporate Social Responsibility9

CSR mechanics under Companies Act, 2013InternallyExternallyEntity set upOutside agency Section 8 company; Registered trust; or Registered societyestablished by thecompany either singlyor along with any othercompany Section 8 company; Registered trust; or Registered societywith established track record of at least 3 years inundertaking similar projects or programs(monitoring mechanism etc. should be in place)Government recognized entityWithin the companyDepartmentally withinthe company by buildingCSR division of their ownpersonnel or that ofimplementing agenciesSection 8 company or Registered Trust orRegistered Society, formed by the Central or StateGovernment of India or any entity establishedunder an Act of Parliament or of State legislatureCollaborationIn collaboration with other companies operating inIndiaCorporate Social Responsibility10

Compliance under theCompanies Act, 2013Corporate Social Responsibility11

Constitution of CSR committeeConstitution of CSR committee Company is required to constitute a CSR committee of the Board CSR committee shall constitute of 3 or more directors with at least 1 independentdirectorQ – Is unlisted public company / private company required to appoint independentDirector to comply with CSR committee requirement?Q – Constitution of CSR committee in case of private company having only twodirectors?Q – Constitution of CSR committee in case of foreign company registered in India?Corporate Social Responsibility12

Roles and ResponsibilitiesRoles and ResponsibilitiesCSR CommitteeBoard CSR Committee shall formulate a CSRpolicy which indicates the activities to beundertaken TheBoardshallconsidertherecommendations made by the CSRCommittee and approve the CSR Policy CSR committee shall recommend to theBoard such policy formulated by them CSR Committee shall also recommend thequantum of CSR expenditure to beincurred on the CSR activitiesThe Board shall ensure that the activitiesincluded in the CSR Policy are related tothe activities included in Schedule VII The Board shall comply with the reporting/ disclosure requirements CSRCommitteeshallinstituteatransparent monitoring mechanism forimplementation of the CSR projects,programs and activities undertaken bythe companyCorporate Social Responsibility13

CSR PolicyCSR Policy CSR Policy of the company shall include the following: List of projects or programs which the company plans to undertake as perSchedule VII of the Co. Act Specifying modalities of execution of such project or program Implementation schedules for the same Monitoring process of such projects or programsQ – Surplus arising from CSR activity – whether to include in business profits?Corporate Social Responsibility14

Reporting / Disclosure requirementAnnual report on CSR activities The Board’s report of a company for FY commencing on or after 1 April 2014 shallinclude an annual report on CSR containing the following: Brief outline of the company’s CSR policy Composition of CSR Committee Average net profit of the company for the last 3 FYs Prescribed CSR expenditure Details of the amount spent in the FY towards CSR activities Total amount to be spent for the FY Amount unspent, if any Manner in which the amount is spent during the FY giving the required details In case of failure to spend on CSR, reasons for not spending such amount A responsibility statement that the implementation and monitoring of CSR Policy is incompliance with the CSR objectives and the policy of the companyDisplay of CSR activities on company website Board of the company shall display the approved CSR Policy on its official website, if anyCorporate Social Responsibility15

Clarifications by MCA andpractical issuesCorporate Social Responsibility16

Clarifications by MCA For deciding applicability of CSR provisions under section 135(1), networth of 500crore, turnover of 1000 crore or net profit of 5 crore, the same needs to be testedfor any of the 3 preceding financial years Initiatives mentioned in Schedule VII are to be interpreted liberally so as tocapture the essence of subjects enumerated in the Schedule. Following are theinstances of projects / activities will be covered in schedule VII: Rural development projects would mean any project meant for the development ofrural India Research and Studies in the areas specified in Schedule VII will be covered underthe respective areas of items or else under ‘promoting education’. CSR activities should be undertaken by the companies in project/ programmemode. One-off events such as marathons/ awards/ charitable contribution/advertisement/ sponsorships of TV programmes etc. would not qualify as part of CSRexpenditure. Salaries paid to regular CSR staff as well as to volunteers (in proportion to company’stime/hours spent specifically on CSR) can be factored into CSR project cost as part ofthe CSR expenditure Contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSRexpenditure if: Trust/ society/ section 8 companies etc. is created exclusively for undertakingCSR activities; or Where the corpus is created exclusively for a purpose directly relatable to asubject covered in Schedule VII of the ActCorporate Social Responsibility17

Clarifications by MCA Expenditure incurred by Foreign Holding Company for CSR activities in India willqualify as CSR spend of the Indian subsidiary if, the CSR expenditures are “routedthrough” Indian subsidiaries and if the Indian subsidiary is required to do so as persection 135 of the Act. CSR activities must be beneficial for the community or the society in general Preference to be given to the local area and areas around it where it operates, forspending the amount earmarked for CSR activities Companies can collaborate for undertaking projects or programs or CSR activitiesprovided CSR Committees of respective companies are in in position to reportseparately on such projects or programsCorporate Social Responsibility18

Practical IssuesWhether CSR provisions are applicable to section 8company?Whether it is necessary to expend CSR amount in cash?Will contribution ‘in kind’ count?If excess amount is spent on CSR in particular FY, can itbe carried forward to next year?Can unspent amount out of minimum CSR spend for theFY be carried forward to next year?Whether Government has a role in monitoring CSR spendby companies?Corporate Social Responsibility19

Penalties and punishmentsContravention regarding CSR disclosures in Board’s Report If company fails to comply with CSR disclosures in Board report – It shall be punishable with fine which shall not be less than 50,000 but which mayextend to 25,00,000 Every officer who is in default shall be punishable with imprisonment for a term whichmay extend to 3 years or with a fine which shall not be less than 50,000 but mayextend to 500,000 or with bothContravention of any other CSR provisions under Co. Act There is no specific penalty or punishment provided for contravention of any other CSRprovisionsQ – In absence of specific penalty or punishment, whether such contravention couldattract general punishment under the Act?Corporate Social Responsibility20

AnnexureCorporate Social Responsibility21

Annexure I – Schedule VIIActivities which may be included by companies intheir CSR policiesActivities relating to:— Eradicating hunger, poverty and malnutrition, promoting health care including preventivehealth care and sanitation including contribution to the Swach Bharat Kosh set-up by theCentral Government for the promotion of sanitation and making available safe drinkingwater Promoting education, including special education and employment enhancing vocation skillsespecially among children, women, elderly, and the differently abled and livelihoodenhancement projects Promoting gender equality, empowering women, setting up homes and hostels for womenand orphans; setting up old age homes, day care centres and such other facilities for seniorcitizens and measures for reducing inequalities faced by socially and economically backwardgroups Ensuring environmental sustainability, ecological balance, protection of flora and fauna,animal welfare, agroforestry, conservation of natural resources and maintaining quality ofsoil, air and water including contribution to the Clean Ganga Fund set-up by the CentralGovernment for rejuvenation of river Ganga Protection of national heritage, art and culture including restoration of buildings and sites ofhistorical importance and works of art; setting up public libraries; promotion anddevelopment of traditional arts and handicraftsCorporate Social Responsibility22

Annexure I – Schedule VIIActivities which may be included by companies intheir CSR policies Measures for the benefit of armed forces veterans, war widows and their dependents; Training to promote rural sports, nationally recognised sports, paralympic sports andOlympic sports Contribution to the Prime Minister's National Relief Fund or any other fund set up by theCentral Government for socio-economic development and relief and welfare of the scheduledcastes, the scheduled tribes, other backward classes, minorities and women Contributions or funds provided to technology incubators located within academicinstitutions which are approved by the central government Rural development projects Slum area developmentExplanation — For the purposes of this item, the term 'slum area' shall mean any areadeclared as such by the Central Government or any State Government or any other competentauthority under any law for the time being in forceCorporate Social Responsibility23

Corporate Social Responsibility24

Abdullah Fakih, ACSMobile: 91 9766 562 550Corporate Social Responsibility25

Corporate Social Responsibility 14 CSR Policy CSR Policy CSR Policy of the company shall include the following: List of projects or programs which the company plans to undertake as per Schedule VII of the Co. Act Specifying modalities of execution of such project or program Implementation schedules for the same

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