Corporate Social responsibility Rules under Companies Act 2013
The much needed rules for the corporate social responsibility- CSR regime are already notified in the Official Gazette on Thursday.
While CSR was meant to be a voluntary , the new Companies Act has made it compulsory for most of the companies. Hence, lets understand what are the legal requirements as per the Sec 135 which deals exclusively with the CSR as well as the New rules which are to come into force from April 01, 2014.
First, lets look at the applicability part of these legal provisions.
Networth - 500 crore or more
Turnover - 1000 crore or more
Net Profit - 5 crore or more
fall under Sec 135 and have to form a CSR committee.
The CSR activities should be within India and shall also apply to foreign companies registered in India
Funds given to political parties and the amount expended for benefit of the company’s own employees and their families will not be regarded as CSR expenditure.
CSR Committee - Its Constitution & Powers, Functions
CSR Committee shall consist of min 3 directors and out of which atleast 1 director should be an independent director. The Board’s Report which is annexed to annual report shall disclose composition of CSR Committee.
Functions of CSR Committee:
i. Formulate and recommend a CSR Policy to the board indicating the CSR Activities (within the scope of Sch VII of Companies Act 2013)
ii. Recommend the Amount of CSR Expenditure to be incurred on those CSR Activities
iii. Monitor the CSR policy from time to time.
iv. Prepare a monitoring mechanism to ensure implementation of the CSR Projects
What is Board of Director's reponsibility as per these rules?
- Ensure minimum 2% of average net profit of last 3 years is spent on CSR projects in each and every year
- Approve CSR Policy considering the suggestions of CSR Committee.
- Disclose CSR policy and the initiatives taken in Board’s report and Company’s website.
- Ensure CSR activities are actually taking place as per the policy.
- Report with reasons , if the company does not spend 2% of net profits.
Some Important words and their meaning
- Net Profit means, net profit before tax (PBT) as per books of accounts and shall not include profits arising from foreign branches.
- 2% should be computed for every block of three years.
It is very pertinent to note that Companies Act, 2013 still prescribes a “comply or explain” approach only.
In case, a company is unable to spend 2% amount, then it has to give explanations for the same in BOD report. Hence, we can say CSR spending is still not mandatory for companies.
Other issues like Contents of CSR policy, CSR Activities can be referred to in the Companies-Corporate-Social-Responsibility-Policy-Rules-2014.pdf or can be downloaded from here
Who can carry out CSR activities ? There are many options for companies. Only that, it has to ensure proper usage of funds is happening towards CSR activities.
- Companies can set up own trusts, societies or section 8 companies
- Companies can fund existing firms operating in India to implement CSR activities
- Several Companies can jointly float a new company/ trust and carry out CSR activities
Now Lets look at Penal consequences under this section.
A company which is mandated to spend on CSR as per Sec 135 of the Act fails to do so shall explain the reason for its inability to do so in any year. A failure to do so will attract a fine of not less than Rs 50 thousand and not more than Rs 25 lakhs
Impact on Taxation
The Rules have to be left to look at the taxation benefits which could accrue to the companies. Primafaceie it looks like companies will go for Employment anhancing vocational skills, social business projects which are quite essential as well to build the business.