• The Companies Act, 2013 (Act) had inter alia introduced the concept of Corporate Social Responsibility (CSR). The requirements concerning CSR were completely unknown to both the regulator and the industry alike. That being said, the provisions being hailed by the social activists with two percent of the net profits of the corporate giants being allocated towards social initiatives. We illustrate below some of the key considerations vis-à-vis CSR.
  • In terms of Rule 2 (c) Companies (Corporate Social Responsibility) Rules, 2014 (CSR Rules) as amended from time to time, CSR means and includes:
    • Projects or programs relating to activities specified in Schedule VII to the Act; or
    • Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.
  • Every Indian company including its holding or subsidiary company and a foreign company (body incorporated outside India, which has a place of business in India whether by itself or through an agent, physically or through electronic mode, and which conducts any business activity in India in any other manner) having its branch or project office in India, would be required to constitute CSR committee from amongst the Board if its fulfils any one of the below mentioned criteria during any of the preceding three financial years:
    • Net worth of Rupees Five Hundred Crores or more; or
    • Turnover of Rupees One Thousand Crores or more; or
    • Net Profit of Rupees Five Hundred Crores or more.

The 2017 Amendment Act contains the following noteworthy changes:

  • The meaning of the words ‘during any financial year’ used in section 135(1) has not been clear. In the absence of such clarification, differing views are possible as to whether a company should consider net worth/turnover/net profits for the immediately preceding financial year or the current financial year.
    • In order to address the above issue, the 2017 Amendment Act replaces the words “during any financial year” with the words “during the immediately preceding financial year.” Thus, the applicability of CSR  requirement  will  be  decided based on net worth/turnover/net profits for the immediately preceding financial year.
  • The 2013 Act contained different criteria for applicability of CSR and appointment of IDs. Based on the prescribed criteria, a company that is not otherwise covered under the ID appointment requirements would have required to appoint an ID for purposes of inducting into the CSR committee.
    • In light of the above , the CSR rules have stated that a non-listed public company or a private company, which is not required to appoint an ID, can have its CSR committee without an ID.
    • Since the requirement to have an ID on the CSR committee was arising from the 2013 Act, there was a concern that the CSR rules may be overriding the 2013 Act. The 2017 Amendment Act addresses this concern by including CSR rules clarification in the Act itself.
  • An explanation to section 135(5) of the 2013 Act states that for the purpose of this section, the average net profit will be calculated in accordance with section 198.
    • Section 198 deals with calculation of profits for managerial remuneration and requires specific addition/deduction to be made in the profits for the year.
    • Subsequently, the CSR rules states that whilst calculating net profit, any profit arising from overseas branches of the company and dividend received from other companies in India covered under section 135 should be reduced. Since section 198 does not contain these deductions, there was an apparent conflict between the two requirements.
    • To address this issue, the 2017 Amendment Act stated that the Central Government may prescribe sums which will not be included for calculating net profit of a company under section 135.
  • Rule 3 of the CSR rules explains that foreign companies are also required to comply with the provisions of CSR. However, section 384 of the 2013 Act, which prescribes the applicability of various provisions to a foreign company, does not specify the applicability of CSR requirements.
    • For clarity, the 2017 Amendment Act contained a corresponding change in section 384 of the 2013 Act, i.e., section 135 relating to CSR would also apply to a foreign company if it meets the prescribed criteria for its India business.
  • The 2013 Act requires the board of each company covered under the CSR to ensure that the company spends, in every financial year, at least 2% of its average net profits made during the three immediately preceding financial years in pursuance of its CSR policy.
    • Neither the 2013 Act nor the CSR rules prescribe any specific penal provision if a company fails to spend the amount. Moreover, there is no legal obligation on companies to make good the deficiency of one year in the subsequent years. However, the board, in its report, needs to specify the reasons for not spending the specified amount.
    • The Companies Law Committee considered a suggestion as to whether companies should be required to carry forward unspent amounts and to transfer any unspent balance for five years to one of the funds listed in Schedule VII of the 2013 Act. The Committee was of the view that whilst a carry forward might be desirable, the requirement for mandatorily transferring the unspent amount at the end of five years would go against the principle of ‘comply or explain’ and would not be appropriate.
    • Hence, the Committee recommended the continuance of the current provisions, where the actual expenditure was reported with no obligation to carry over.
  • Every company satisfying any one of criteria as mentioned above would be required to constitute a CSR committee with three or more directors out of which at least one director shall be an Independent Director, barring in case of:
    • A company which is not required to appoint an Independent Director shall have its CSR committee without such director.
    • A private company having only two directors on its Board shall constitute its CSR committee with such two directors.
    • A foreign company meeting the aforementioned criteria shall constitute a CSR committee with a least two persons of which one person shall be a resident Indian and another person shall be nominated by the foreign company.

Activities which may be included by companies in their CSR policy:

  • Activities relating to eradicating extreme 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;
  • 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 centres 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, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water (including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga);
  • 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 and handicrafts:
  • Measures for the benefit of armed forces veterans, war widows and their dependents;
  • Training to promote rural sports, nationally recognized sports, Paralympics 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 Castes, 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; and
  • Slum area development.
  • The activities in Schedule VII of the Act are to be interpreted liberally so as to capture the essence of the subjects enumerated in the aforesaid schedule. It is for the Board of the company to determine what is included within the same.
  • A company which is required to constitute a CSR committee is required to spend at least two percent of the average net profit of the past three financial years on CSR activities specified in its CSR policy.
  • For this purpose, “net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act and shall not include:
      • Profits arising from branches outside India; and
      • Any dividend received from other companies in India which are covered under and complying with CSR provisions as provided in the Act.