FAQs on Execution

Following our previous post, on FAQs on Compliance, this post presents FAQs on the execution of CSR projects in line with Sec 135 along with Schedule VII.

1.    Which activities are covered under CSR?

Schedule VII to the Companies Act, 2013 enlists the broad areas under which the Companies shall undertake their CSR activities. MCA has clarified that the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities. The projects or programs must be in line with the CSR Policy of the Company, which, in turn, has to comply with Schedule VII.

Areas broadly covered under Schedule VII:

• 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 centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backwards 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

•   Rural development projects

•  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, Paralympic 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 fund provided to technology incubators located within academic institutions which are approved by the Central Government

•  Slum area development

•  Spending on relief operations in disaster-hit areas (as per recent clarification by Central Government

2.      Which activities will not qualify under CSR?

•   Social Activities meant exclusively for employees and their families

•   Activities undertaken in pursuance of normal course of business

•   Expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.)

•   Training of enforcement personnel (Govt. officials) 

•   Capacity building of Govt. Officials and elected representatives

•   Sustainable urban development and urban public transport systems

•   Contribution directly or indirectly for any religious purpose

•   One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes, etc.

•   Contribution directly or indirectly to any political party

3.    Many Companies have been undertaking CSR activities from past. Should such companies continue to follow that activity without seeking clarification from Ministry of Corporate Affairs?

If the activities are in line with Schedule VII of the Act, then the Companies can continue to follow what they were doing in the past and incorporate the said activity in CSR Policy.

4.  Whether the Law mandates any location preference for implementing CSR projects?

Section 135 mandates that the Company shall give preference to the local area where it operates and areas around it, for spending the amount earmarked for Corporate Social Responsibility activities.

Only CSR activities undertaken in India will be taken into consideration for the purpose of Section 135.

5.   How can a Company implement its CSR activities? Can it establish a trust to undertake CSR activities for all the Group companies?

The Company can implement its CSR activities through the following approaches:

•   Directly on its own through its employees

•  Through registered trust or registered society or non-profit company established by the company or its holding or subsidiary or associate company. No minimum experience is required for such registered trust or registered society or non-profit company

• Through other registered trust/registered society/Section 8 Company with an established track record of >= 3 years in undertaking similar programs or projects

•  Collaborate with other companies in such manner that the CSR Committees of respective companies are in a position to report separately

•  Contribution to Prime Ministers National Relief Fund or any other fund set up by Central Government for socio-economic development and relief and welfare of the Schedule castes, tribes, minorities and women

•  Contribution to technology incubators located within academic Institutions approved by Central Government (such as IIT)

6.    A company makes payment to a registered trust for carrying out CSR activities. Should the company treat payment made to the trust or actual expenditure incurred by the trust as its CSR expenditure?

As per the provisions of the Act, the CSR committee has to monitor and the Board has to ensure that Company spends 2% on CSR every year. The emphasis is on spending and not on contribution.  The intent of the Legislature seems to ensure that the Companies spend on CSR. Further, CSR rules require the CSR committee to monitor the activities of the agency.

7.     Whether the activity a company is required to do as per statutory obligation under any law, would be termed as CSR activity?

No, the activity undertaken in pursuance of any law would not be considered as CSR activity. In this regard, Ministry of Corporate Affairs Circular No. 21/2014 dated June 18, 2014 clarifies that the expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act, 2013.

8.     Where CSR activities lead to profits then what about such surplus?

Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 provides that the CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. This impliedly means that the surplus arising out of CSR projects or programs or activities of the company need to be spent on CSR.

Accordingly, the surplus should be added to the minimum amount of 2% to be spent on CSR.

9.     CSR provisions talk about “registered trusts”. In many states there is no trust Act or registration of trust is not mandatory, then in such case how CSR spending can be done through a registered trust?

As per clarifications issued by MCA on June 18, 2014, ‘Registered Trust’ (as referred in Rule 4(2) of the Companies CSR Rules, 2014) would include Trusts registered under Income Tax Act 1956, for those States where registration of Trust is not mandatory. As a corollary, for those States where registration of Trust is mandatory, the Trust needs to be duly registered under the laws of such State.

FAQs on Compliance

We bring to you, from our Knowledge Resource Center, FAQs on the Compliance to Sec 135 of Companies Act, 2013. Also to follow, FAQs on Execution - 

1.        Which Companies are covered under Section 135 of the Companies Act, 2013 to undertake CSR activities?

All companies fulfilling any one of the following three criteria during any of the immediately preceding three financial years (clarification issued by MCA on June 18, 2014) are required to undertake CSR activities:

(1)      Net Profit of INR 50 million or more; or

(2)      Net Worth of INR 5 billion or more; or

(3)      Turnover of INR 10 billion or more.

2.        What is the first step for a Company required to undertake CSR activities?

The Board of Directors of the Company shall constitute a Corporate Social Responsibility Committee of the Board.

3.        How many Directors should be there on the CSR Committee?

Public Company required to appoint Independent Director	Minimum 3 directors out of which minimum 1 shall be an independent director
Public Company not required to appoint Independent Director	Minimum 3 directors
Private Companies with 3 or more Directors	Minimum 3 directors
Private Company with 2 Directors	Both Directors

4.        What is the role of the Board of Directors in CSR?

·         Constitute CSR committee

·         Approve the CSR Policy

·         Ensure implementation of the activities

·         Ensure that the company spends, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in India in pursuance of its CSR Policy.

·         Specify reasons for not spending such amount, if such amount not spent

·         Disclose CSR policy, composition of CSR Committee and Annual Report on CSR in the Directors’ Report and publish it on the Company’s website

5.        What is the role of the CSR Committee?

·         Formulate and recommend a CSR policy to the Board indicating the activities as specified in Schedule VII of the Companies Act, 2013

·         Recommend the amount of expenditure to be incurred on the activities indicated in the policy

·         Monitor the CSR policy regularly

·         Institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken

·         Issue a responsibility statement every year that implementation and monitoring is in compliance with CSR objectives and Policy

6.        For compliance under Section 135 i.e. Corporate Social Responsibility, from which financial Year CSR expenditure and reporting begins?

Every company which meets the threshold financial criteria is required to comply with CSR requirements with effect from April 1, 2014. Companies have to spend the amount on CSR activities as required by section 135 starting from FY 2014-15.

7.        How much money should be spent by the Companies on CSR activities?

The company is required to spend, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in India in pursuance of its CSR Policy.

8.        While calculating Net Profit as per the Companies Act, 2013, for Section 135, what about the Net Profit calculated as per the Companies Act, 1956 for any of the immediately three preceding financial years?

It has been clarified in the rules that Net Profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956 shall not be required to be re-calculated in accordance with the provisions of the Companies Act, 2013.

9.        What should be the contents of CSR Policy?

CSR Policy of the Company shall contain the following:

·         List of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII

·         Modalities of execution of such project or programs

·         Implementation schedules for the same

·         Mechanism for monitoring process of such projects or programs

·         Statement that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit.

10.    What should be the content of Annual Report on CSR to form part of the Directors’ Report?

•   Brief outline of the CSR policy including overview of projects with a reference to the web-link to the CSR policy and projects

•   Composition of the CSR Committee

•   Average net profit of the company for last three financial years

•   Prescribed CSR expenditure (2% of Average net profit as above)

•   Total amount to be spent for the financial year

•   Amount unspent, if any

•   Activity-wise details of the amount spent during the financial year (Sector / Location / Budget / Direct expenditure / Overheads / Cumulative expenditure / Breakup of amount spent directly and through implementation agency)

•   If the prescribed CSR expenditure is not fully spent, reasons thereof

•   Responsibility statement of the CSR Committee that the implementation and monitoring is in compliance with CSR objectives and Policy

This Annual Report shall be signed by Chairman of CSR Committee and CEO / MD / Director.

11.    What is the time limit for CSR spending and reporting?

As per Section 135(5), the Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR policy in India. This implies that the Companies which meet the threshold financial criteria under Section 135 would be required to spend at least 2% in the financial year 2014-15 i.e. up to March 31, 2015. Further, the reporting has to be done by the Board in its Report for the financial year 2014-15.

12.    Are there any penal provisions in case a Company does not spend the required amount in CSR activities in any financial year?

      

The provisions are currently based on “Apply or Explain” principle. Even if the Company, meeting the financial threshold criteria, is not able to spend the required amount or not required to spend due to negative average net profit, it is still required to follow all disclosure requirements.

If the Committee or Board fails in its duties, the Company is punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 25,00,000 and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000, or with both.

13.    Whether CSR expenditure done by Foreign Holding Company will constitute as CSR expenditure for Indian Subsidiary Company assuming that Indian Subsidiary is required to comply with CSR provisions?

As per clarifications issued by MCA on June 18, 2014, 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 spend as per Section 135. However the reporting and compliance of CSR provisions has to be done by the Indian Subsidiary.

14.    If the Company fulfils turnover criteria but the Company is incurring loss since last 5 years?

The provisions of Section 135 will still be applicable. However, the 2% of the average net profit in the instant case will be negative, and hence the Company is not required to spend any amount on CSR in the current year.

15.    Whether a PE of a foreign company or a foreign company doing business through its agents and paying taxes in India for income accrued/received in India would be considered as a foreign company for the purpose of CSR?

As per Section 2(42) of Companies Act, 2013, a foreign company means any company or body corporate  incorporated outside India which has a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

Neither Section 135 nor sections 379 to 393 dealing with foreign companies nor the Foreign Companies Rules refer to applicability of the CSR requirements to foreign companies.

However, in terms of Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2013, a foreign company having its office or project office in India which fulfils the criteria specified in Section 135(1) is required to comply with the provisions of Section 135 of the Act and the rules there-under. Therefore, foreign company having its branch office or project office in India which fulfils the criteria specified under Section 135(1) is required to comply with the provisions of Section 135.

The net worth, turnover or net profit of a foreign company is to be computed in accordance with the balance sheet and profit and loss account of the foreign company prepared with respect to its Indian business operations in accordance with Schedule III or as near thereto as may be possible for each financial year.

CSR Committee of such foreign company will comprise of at least two persons of which one person shall be as specified under clause (d) of sub-section (1) of section 380 of the Act (AR) and another person shall be nominated by the foreign company. It is to be noted that these individuals need not be Directors of the foreign company.

The Annual Report on CSR needs to be signed by AR. The Balance Sheet filed under Section 381(1)(b) shall contain an Annexure regarding report on CSR.

16.    When CSR provisions cease to be applicable to a Company?

A Company which ceases to be covered under the threshold criteria (net profit/ turnover/ net worth) for 3 consecutive financial years shall not be required to comply with CSR provisions till such time it meets the threshold criteria.

CSR-Beyond the Mandate

Would companies carry out CSR if not mandated? Isn't it the responsibility enough of corporates to maximize profits? But don't companies have to compensate or make good for their impact on the environment? Well, whether CSR is required or not has been debated endlessly.

India is the first country in the world to have mandated CSR under the Companies Act, 2013. However, companies around the world have long realised their responsibilities as corporates and have given back in evolving forms - from religious and community philanthropy by the founders, to diluting capitalism to mixed economies till current times where CSR is integrated into the business strategy.

The significance of CSR is and will always be beyond the mandate or a mere compliance. Today, companies are becoming more sensitive towards their social responsibility, considering the fact that our planet needs attention, people deserve inclusion and profits ought to be responsible, Corporate Social Responsibility, based on Triple Bottom Line approach is the need of the hour. Sustainability has now started becoming the core of business strategies, considering the value that it has created over time not just for the environment or communities, but for the companies themselves. Following are a few broad reasons why CSR should be done - 

1. CSR & STRATEGY

• Shared Value – CSR today is an integrated business strategy carried out in line with and to forward the business goals. CSR can be designed to be a strategic function which in turn creates value for business and shared value with the stakeholders. 
• Risk Mitigation - CSR can be used as a very effective risk mitigation tool, especially for manufacturing companies.

2. CSR & STAKEHOLDERS

• Shareholders - Shareholders, like never before, are paying attention to the company’s CSR activities. This is reflected through questions asked at AGMs by shareholders, on Sustainability, CSR, compliance to mandate and others.
• Customers - According to a Neilson study of 2014, 55% of global online consumers across 60 countries said they were willing to pay more for products and services provided by companies that are committed to positive social and environmental impact with the propensity to buy socially responsible brands being strongest in Asia-Pacific at 64%. Thus, CSR can be used as an effective brand-building exercise which in turn reduces a company’s direct marketing costs. Conglomerates like TATA, Mahindra, Thermax, Maruti Suzuki have long seen customer and stakeholder loyalty and confidence as these companies have been actively involved in Corporate Social Responsibility and good Corporate Governance

3.  CSR & COMPANIES ACT, 2013

• Mandate - India is the first country in the world to make CSR mandatory under the Companies Act, 2013 making CSR spending mandatory for companies falling under its scope. The mandate has quite a few regulatory implications and compliances.
• Non-compliance – Non-compliance to the mandate attracts severe consequences of penalty and imprisonment for all the concerned officers of the company. Since the mandate has been made effective on April 1st, 2014, the Government is very serious regarding the compliance to sec 135.

Corporate Social Responsibility has been and is bringing about a significant change in the communities and environment. As much as the debate continues on whether CSR is truly a responsibility of the industry, the people, planet and profits too have been impacted positively through Corporate Social Responsibility.