Companies Act, 2013: An overview
The Companies Act, 2013 (2013 Act), enacted on 29 August 2013 on accord of Honble Presidents assent, has the potential to be a historic milestone, as it aims to improve corporate governance, simplify regulations, enhance the interests of minority investors and for the first time legislates the role of whistle-blowers. The new law will replace the nearly 60-year-old Companies Act, 1956 (1956 Act).
The 2013 Act provides an opportunity to catch up and make our corporate regulations more contemporary, as also potentially to make our corporate regulatory framework a model to emulate for other economies with similar characteristics. The 2013 Act has introduced several provisions which would change the way Indian corporates do business and one such provision is spending on Corporate Social Responsibility (CSR) activities. CSR, Which has largely been voluntary contribution, by corporates has now been included in law. Basis the CSR provisions, as laid down under the 2013 Act and the draft CSR rules made available for public comments. in this bulletin we bring out the key provisions, analysis and challenges relating to the compliance of these provisions for companies to consider.
What is CSR?
Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy.
Applicability and constitution of a CSR Committee under The Companies Act, 2013:
Section 135 of the 2013 Act states that every company having: net worth of Rs 500 crore or more, or turnover of Rs 1000 crore or more ,or net profit of Rs 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board.
The committee would comprise of three or more directors, out of which at least one director shall be an independent director. The mandate of the said CSR committee shall be: to formulate and recommend to the Board, a Corporate Social Responsibility Policy, which shall indicate the activities to be undertaken by the company as specified in Schedule VII; to recommend the amount of expenditure to be incurred on the activities referred to above; to monitor the Corporate Social Responsibility Policy of the company from time to time approve the CSR Policy for the company and disclose contents of such Policy in its report and also place it on the companys website, and ensure that the activities as are included in CSR Policy of the company are undertaken by the company, and ensure that the company spends, in every financial year, at least two per cent of the average net profits If the Company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount Average net profit shall be calculated in accordance with the provisions of section 198 of the 2013 Act Its report specify the reasons for not spending the amount Like for all good things, corporate India had to wait a long time for a corporate reporting framework that is current, and with some work, can be considered visionary.
Introduction of the comply or explain principle in the case of CSR rule is one such example. Vishesh C Chandiok, National Managing Partner Grant Thornton India LLP CSR activities as per Schedule VII of The Companies Act, 2013: CSR activities to include:
Eradicating extreme hunger and poverty promotion of education promoting gender equality and empowering women reducing child mortality and improving maternal health combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases ensuring environmental sustainability employment enhancing vocational skills social business projects contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and such other matters as may be prescribed
Draft rules and CSR:
Draft CSR rules provide for the following:
Net Profit for the section 135 and these rules shall mean, net profit before tax as per books of accounts and shall not include profits arising from branches outside India Reporting will be done on an annual basis commencing from FY 2014-15 Tax treatment of CSR spend will be in accordance with the IT Act as may be notified by the Central Board of Direct Taxes (CBDT) CSR activities may generally be conducted as projects or programmes (either new or ongoing) excluding activities undertaken in pursuance of the normal course of business of a company
The CSR Committee shall prepare the CSR Policy of the company which shall include the following: specify the projects and programmes to be undertaken prepare a list of CSR projects/programmes which a company plans to undertake during the implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same CSR projects/programmes of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value surplus arising out of the CSR activity will not be part of business profits of a company would specify that the corpus would include 2 percent of the average net profits, any income arising therefrom, and surplus arising out of CSR activities Where a company has been set up with a charitable objective or is a Trust/Society/Foundation/any other form of entity operating within India to facilitate implementation of its CSR activities, the following shall apply: contributing company would need to specify the projects/ programs to be undertaken by such an organisation, for utilizing funds provided by it; Contributing company shall establish a monitoring mechanism to ensure that the allocation is spent for the intended purpose only.
Indian branches and project offices of foreign companies covered under CSR provisions:
Indian branches and project offices of foreign companies are covered under CSR provisions. This will also require such foreign companies to set up a CSR committee, CSR policy etc. to comply with these requirements.
APPOINTMENT OF INDEPENDENT DIRECTORS ON THE BOARD
The CSR Rules have dispensed with the requirement of appointing an independent director on the CSR Committee of the Board of an unlisted company as well as a private company.
It has brought in the much needed clarity, as under the boarder scheme of the Companies Act, there is no requirement regarding appointment of independent director on the board of directors of the unlisted or private company. Further, the CSR Rules have relaxed the requirement regarding the presence of three or more directors on the CSR Committee of the Board. In case where a private company has only two directors on the Board, the CSR Committee can be constituted with these two directors.
The CSR Committee of a foreign company shall comprise of at least two persons wherein one or more persons should be resident in Indiaand the other person nominated by the foreign company.
The CSR Rules, by including foreign companies within its ambit, have provided latitude to treat persons authorized by the foreign company akin to directors of an Indian company for the purposes of affixing a fiduciary duty and liabilities in the event of any breach in the reporting requirements for CSR provisions.
By expanding the scope of CSR Rules, it is apparent that the government has overlooked the limited role (to accept on behalf of company service of process and any notices or other documents) of the authorized persons of the foreign companies in India.
CSR Expenditure: CSR expenditure shall include all expenditure including contribution to corpus, for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on any item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.
CSR Reporting: The Board's Report of a company covered under these rules pertaining to a financial year commencing on or after the 1st day of April, 2014 shall include an annual report on CSR containing particulars specified in In case of a foreign company, the balance sheet filed under sub-clause (b) of sub-section (l) of section 38 shall contain an annexure regarding report on CSR. Surplus from CSR activities not business profits of company:
The CSR policy shall specify that the surplus arising from CSR activities are not to be considered as business profits of the company. Such surplus may therefore need to be ploughed back into CSR activities. CSR policy and activities to be displayed on website Companies will be required to display the CSR policy and projects undertaken and amount spent in the Board Report and on the Companys website.
Three years of non-applicability required to exit CSR compliance requirements: Once covered under CSR provisions, companies will need to have 3 consecutive years, where the provisions do not apply to them, before they can stop complying with the requirements relating to CSR.
CONCLUSION: The introduction of CSR provision in the Companies Act is a welcome step. In order to enable corporates to participate fully in the philanthropy space, the participation must start with inclusive management of CSR policies where government and industry work side by side, which does not assume that (social) business and CSR are incompatible.
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