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.