India’s new Companies Act 2013 (Companies Act) has introduced several new provisions which change the face of Indian corporate business. One of such new provisions is Corporate Social Responsibility (CSR). The concept of CSR rests on the ideology of give and take. Companies take resources in the form of raw materials, human resources etc. from the society. By performing the task of CSR activities, the companies are giving something back to the society. Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014. In the following paragraphs, I will discuss various aspects of CSR activities.
The following companies are required to constitute CSR committee –
- Companies with net worth of Rs. 500 crores or more, or
- Companies with turnover of Rs. 1000 crores or more, or
- Companies with net profit of Rs. 5 crores or more.
If any of the above financial strength criteria is met, the CSR provisions and related rules will be applicable to the company. These companies are required to form CSR committee consisting of its directors. This committee oversees the entire CSR activities.
Role of Board of Directors
The board plays an important role in CSR activities. The role of Board are as follows –
- Approve CSR policy.
- Ensure its implementation.
- Disclose the contents of CSR policies in its report.
- Place the same on Company’s website.
- Ensure that statutory specified amount is spend by the company on CSR activities.
It’s important to note that there is no penalty if the specified amount is not spend on CSR activities. In such case, the board’s report should specify the reason for such short spending.
CSR – Spending, Policies & Activities
Few important points of CSR spending are as follows –
- The companies covered by section 135 are required to spend at least 2% of their average net profits during the three immediately preceding financial years.
- The section postulates that “net profit” shall be calculated in accordance with the provisions of section 198.
- Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.
- Where the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount.
- The CSR committee shall formulate and recommend CSR policy to the Board.
- The policy shall indicate the activities to be undertaken by the company as specified in Schedule VII.
- The CSR Committee shall recommend the amount of expenditure to be incurred on the activities referred in CSR Policy
- The CSR Policy of the company shall be monitored by CSR committee from time to time.
As per schedule VII, the following activities may be included by companies in their CSR policies:
- Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water.
- Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.
- Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
- 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.
- Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
- Measures for the benefit of armed forces veterans, war widows and their dependents.
- Training to promote rural sports, nationally recognized sports, para Olympic sports and Olympic sports.
- 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 Caste, the Scheduled Tribes, other backward classes, minorities and women.
- Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.
- Rural development projects.
Net Profit Considered for CSR Spending
Net Profit means the net profit of a company as per its financial statement prepared in accordance with
Section 198 of the Act, but shall not include the following, namely: ‐
- Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise.
- Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
- Profit from premium of shares/Debentures.
- Profit from sales of Forfeited share.
- Profit in terms of capital natures (in terms of undertaking of company or any part of thereof).
- Profit from the sale of immovable property/fixed assets/any capital nature.
- Any surplus change in carrying amount of an assets or liability recognized in equity reserves.
Following shall not be considered as expenditure:
- Income tax and any other tax on income
- Compensation, damages or other payments made voluntarily
- Loss of capital natures including loss on sale of undertaking of company or any part of thereof
- Any transfer to assets/liabilities revaluation/equity reserves.
Impact of CSR Provision
The new Companies Act 2013 was much awaited. With the new Act coming into force, lots of new provisions came in picture. One such new provision was relating to CSR activities. This provision was much debated. Many companies said that this new provision will create financial burden on them as they need to spend specified percentage of their profits. Now, since the new Act is in force, every company is following the new regulation. Considering the intent of law that companies take so many resources from society they should give back something to it, the provision of CSR is justified. Also there are few good points for Companies like:
- The companies can spend less than specified percentage. In such case the board need to disclose the reason for lower spending in its report.
- The Institute of Chartered Accountants of India (ICAI) also issued a guidance note that clarifies that no provision is required in books of companies for CSR spending. The need to book only actual expenditure.
Also the above spending will help in benefitting the underprivileged who are deprived of basic necessities. Since the new provision is only one and half year old, it is difficult to analyze its benefit. But in long run the society as a whole would surely stand benefitted from it. In cost benefit analysis of this provision, its sure that its benefit will exceed its cost.
With new CSR regulation, the task of Companies has increased. They are not only required to spend money but are also required to follow the disclosure and other statutory requirement. It would take some time for companies to get used to these new regulations. But this new regulations is good from social equality and development of underprivileged. As far as these new regulation benefits society in large, it’s always welcome.