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Companies Act, 2013Corporate Social

ResponsibilityBy CS Mamta Binani

Chairperson (Year 2010), EIRC of ICSI

At the ‘You’ Institute for professionals

SECTION 135 (incorporating notification dated 27.02.2014)

Under Chapter IX

Room No.6, 4th Floor, Commerce House2A, Ganesh Chandra Avenue, Kolkata 700013

Connect me @ : (033) 3028 8955-57; (033) 3002 5630-33; 98310 99551

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MCA vide notification dated 27th February 2014, has notified Section 135, Schedule VII of the Companies Act, 2013 (provisions relating to CSR) and  the Companies (Corporate Social Responsibility Policy) Rules, 2014.

The same is effective from 1st April, 2014.

Section 135: Corporate Social Responsibility

(CSR)

What does CSR mean?Corporate Social Responsibility

(CSR) As per Rule 2(1)(c) of the Companies (Corporate Social Responsibility Policy) Rules, 2014: CSR means and includes but is not limited to:

(i) Projects or programs relating to activities specified in Schedule VII to the Act; or

(ii) 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.

(My comments: This is in the nature of an exhaustive definition but still the language denotes it as an inclusive one)

Corporate Social Responsibility (CSR) – a brief outline (Section

135)Section 135 of the Act mandates CSRIt encompasses mainly 5 important elements:

• CSR Applicability

• CSR Committee

• CSR Policy & Activities

• CSR Expenditure

• CSR Reporting

135(1): Every company with either of the following 3:

Net worth of Rs.500 crores or more during any financial year

Turnover of Rs.1000 crores or more during any financial year

Net profit of Rs.5 crores or more during any financial year

shall constitute a CSR Committee of the Board

Rule 3 of CSR Rules-Applicability

Rule 3: Who has to be comply with section 135 and its rules?

1. Every company including: a. its holding company; or b. its subsidiary company 2. A foreign company (as defined under sec 2(42))

having its: a. branch office or b. project office in India and which fulfills the criteria specified in section

135(1) of the Act shall have to comply with sec 135 and the relevant Rules

What is CSR Committee

Definitions:

• Rule 2(1)(d) defines CSR Committee as: It means the Corporate Social

Responsibility Committee of the Board referred to in section 135 of the Act.

CSR Committee-CompositionComposition (as given in section 135(1):

At least 3 Directors out of which at least 1 Independent Director.

However, an unlisted Public Company or a Private Company not required to compulsorily appoint an Independent Director shall have its Committee without an Independent Director (Rule 5(1)(i)).

A Private Company having only two Directors on Board shall constitute the Committee with two such Directors (Rule 5(1)(ii)).

For a Foreign Company-atleast 2 persons. 1 out of these 2, shall be the person mentioned in section 380(1)(d) of the Act. The other one shall be as nominated by the foreign company

Disclosure of composition of CSR committee-Sec 135(2)

Sec 135(2): The Board’s Report (u/s 134(3)) shall disclose the composition of the CSR Committee

Section 135(3) - CSR Policy and Expenditure

The CSR Committee shall (section 135(3))– formulate the CSR Policy and recommend the same to the Board recommend the amount of expenditure to be

incurred on the activities monitor the implementation of the CSR policy by

the Company from time to time.

• Rule 2(1)(e) defines CSR Policy as: It relates to the activities to be undertaken by the

company as specified in Schedule VII and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company

Section 135(4) – Duty of the Board

The Board of every such company shall – Take into account the recommendations made

by the CSR Committee and Approve the CSR policy for the Company Disclose contents of such policy in the Board’s

Report and Also place it on company’s website, if any

The Board of the company shall have to ensure that the activities as are included in the CSR Policy of the company are undertaken by the company.

CSR Policy – Rule 6

Rule 6(1)• The CSR Policy shall lay out the list of CSR

projects/ programs

• It will specify the modalities of execution

• The implementation schedules

•Monitoring process

Rule 6(2) The CSR Policy shall have to specify that the

surplus arising out of the CSR projects or programs or activities shall not form part of the business profits of a company.

Display of CSR activities on its website

Rule 9 The Board of Directors of the company

shall, after taking into account the recommendations of CSR Committee, approve the CSR Policy for the company & disclose contents of such policy in its report and the same shall be displayed on the company’s website, if any, as per the particulars specified in the Annexure

CSR Expenditure

Section 135 (5) The Board of every company covered under CSR shall ensure for every financial year that:

At least 2% of average net profits of the company made during 3 immediately preceding financial years is spent on CSR.

This spending to be made in pursuance of its laid CSR Policy.

What is ‘Net Profit’Rule 2(1)(f) of the Rules:

‘Net Profit’ means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:

a. any profit arising from any overseas branch(es) of the company, whether operated as a separate company or otherwise; and

b. any dividend received from other companies in India, which are covered under and complying with provisions of sec 135

What is ‘Net Profit’Net Profit definition continued:

• Provided that net profit in respect of a FY 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 Act.

• In case of a foreign company here, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sec 381(1) read with sec 198 of the Act.

CSR ExpenditureSection 135 (5) - Provisos

1st Proviso: Companies shall give preference to local areas and areas around it where it operates, for spending the amount earmarked for CSR activities.

2nd Proviso: If the Company fails to spend such amount, the Board shall have to specify the reasons for not spending the said amount. This reporting will have to be made under clause (o) of section 134(3).

Section 135 (5) – Explanation For the purposes of section 135, ‘average net

profit’ shall be calculated as per section 198.

CSR ExpenditureRule 7

CSR expenditure shall include all expenditure including contribution to:

a. corpus; or b. on projects; or c. programs relating to CSR activities

approved by the Board on the recommendation of its CSR Committee

But does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.

CSR ReportingRule 8(1) 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 Annexure.

Rule 8(2) In case of foreign company, the balance

sheet filed under sub-clause (b) of sec 381(1) shall contain an Annexure regarding report on CSR.

CSR Activities

Schedule VII lays down the activities to be undertaken by Companies in their CSR policies.

The Central Government, vide notification dated 27.02.14, has amended the existing Schedule VII with an intent of making it more exhaustive.

Activities relating to –i. eradicating extreme hunger, poverty and

malnutrition, promoting preventive health care and sanitation and making available safe drinking water; [scope widened, clubbing clauses i and iv of earlier Schedule]

CSR Activities contd.ii. promoting education, including special education and

employment enhancing vocational skills, especially among children, women, elderly, and the differently abled and livelihood enhancement projects; [scope widened; clauses ii and vii clubbed from earlier Schedule]

iii. promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centre and such other facilities for senior citizens and measure for reducing inequalities faced by socially and economically backward groups; [no effective change, well defined from earlier Schedule]

iv. ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro forestry, conservation of natural resource and maintaining quality of soil, air and water; [Clause vi from earlier Schedule, further detailed]

CSR Activities contd.v. protection of national heritage, art and culture

including restoration of buildings and sites of historical importance and work of art; setting up public libraries; promotion and development of traditional arts and handicrafts; [new insertion]

vi. measures for the benefit of armed forces veterans, war widows and their dependents; [new insertion]

vii.training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports; [new insertion]

viii. 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, Scheduled Tribes, other backward classes, minorities and women;[corresponds with Clause ix of earlier Schedule. However, ‘contributions to funds set up by State Governments’ has been excluded in the revised Schedule]

CSR Activities contd.ix. contributions or funds provided to technology

incubators located within academic institutions which are approved by the Central Government; [new insertion]

x. rural development projects. [new insertion]

Deviations from earlier Schedule VII:Activities relating to – Social business projects; and Combating human immunodeficiency virus,

acquired immune deficiency syndrome, malaria and other diseases;

have been excluded in the revised Schedule. Although, clause (i) of revised Schedule includes ‘promotion of preventive health care’.

CSR via section 8 companies

Rule 4(2) The BOD may decide to undertake its CSR

activities approved by the CSR Committee:

• through a registered trust; or

• a registered society; or

• a sec 8 company established by the company or its

holding company or its subsidiary company or

associate company

Some pre-conditions-Proviso to Rule 4(2)• If the trust, society or company is not

established by the company or its holding/subsidiary/associate company, it shall have an established track record of three years in undertaking similar programs or projects.

• In all cases, the company has to specify: a. project or programs to be undertaken

through these entities b. the modalities of utilisation of funds on

such projects and the programs c. the monitoring mechanism d. the reporting mechanism

Collaboration with other companiesRule 4(3)

A company may also collaborate with other companies for undertaking CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such activities in accordance with the CSR Rules.

Rule 4(4) The CSR activities undertaken in India only

shall amount to CSR expenditure.Rule 4(5) The activities that only benefit the

employees of the company & their families shall not be considered as CSR for the purpose of section 135.

Contribution to political party-not CSRRule 4(7)

Contribution of any amount directly or indirectly to any political party under section 182, shall not be considered as CSR activity.

Rule 4(6) Companies may build CSR capacities of their

own personnel as well as those of their implementing agencies through Institutions with established track records of atleast 3 FY’s but such expenditure shall not exceed 5% of total CSR expenditure of the company in 1 FY.

Format of Reporting – Annexure

Provide a brief outline of the company’s CSR policy

Provide overview of projects or programs proposed to be undertaken

Provide a reference to the web-link to the CSR policy and projects or programs

The composition of the CSR CommitteeAverage Net Profit of the company for last 3

financial yearsPrescribed CSR expenditure (2% of the amount

mentioned above)

Format of Reporting – Annexure (contd)Details of CSR spent during the financial year:

a) total amount to be spent for the FY b) amount unspent, if any c) manner in which amount spent during the

financial year as per the format given in the annexure. It is quite exhaustive. There are 8 columns. They are:

i. Serial number ii. CSR project or activity identified iii. Sector in which the project is covered iv. Projects or programs: a) Local area or other b) Specify the state & district where

undertaken from

Format of Reporting – Annexure (contd)

Contd… v. Amount outlay (budget) project or

programs wise vi. Amount spent on the projects or programs:

Sub-heads: a) Direct expenditure on projects or

programs b) Overhead vii. Cumulative expenditure up to the

reporting period viii. Amount spent: Direct or through

implementing agency

Format of Reporting – Annexure (contd)Point 6 of the annexure

The report also has to mention that in case the company has failed to spend the 2% of the average NP of the last 3 FY’s or any part thereof, the company will have to provide the reasons for not spending the amount in its BOARD’s REPORT

Point 7 of the annexure A responsibility statement of the CSR

Committee that the: a) implementation and b) monitoring of CSR policy Is in compliance with the CSR objectives and

policy of the Co.

Format of Reporting – Annexure (contd)

Signature on this annexureThis report will have to be signed by the

following persons:a. CEO or MD or Director

b. Chairman – CSR Committee

c. Person specified under clause (d) of section 380(1) of the Act – (this is relating to foreign companies only)

(This brings us to an end of the annexure)

CSR Practices worldwide

The fact that the older organizations with well known CSR practices were founded in the 1980s and early 90’s and even earlier is an evidence that the concept of ‘Corporate Social Responsibility’ is there for a long long time.

Its world-over acceptance leaves no doubt that CSR is no longer looked as a nice-to-have piece of corporate business strategy!

Strategic CSRIt is about the business contribution to

sustainable development — how business can take into account the economic, social and environmental impact their operations will have on the society.

Strategic CSR could be conceived in this way...

“CSR can be much more than a cost, a constraint, or a charitable deed—it can be a source of opportunity, innovation, and competitive advantage.”

[The Centre for Business and Government at Harvard University]

Corporate Responsibility Index – measuring Strategic CSR

The Corporate Responsibility Index (CR Index), is a robust benchmarking tool that enables Companies to systematically measure, manage and integrate responsible business practices.

Developed in consultation with leading global business leaders, the first CR Index survey (The Corporate Responsibility Index) was launched in 2002 in UK.

Unilever, Heineken, Marks & Spencer, Lloyds Banking Group are few of the Companies which have been participating in the Index since its inception.

CR Index Framework

The CR Index follows a systematic approach to measure, manage and integrate responsible business practices.

Companies are assessed using the framework here.

India in CSR initiativesCSR is not new to India. Companies like TATA and

BIRLA have been imbibing the case for social good in their operations for decades long before CSR become a popular cause. 

ITC's e-Choupal is one such very successful case study. It is a powerful illustration of a unique business model that delivers large societal value by co-creating markets with rural communities. The initiative has won the Stockholm Challenge award apart from several others.

However, inspite of having such life size successful examples, CSR in India is in a very nascent stage.

To facilitate greater corporate participation in CSR areas, BSE (Bombay Stock Exchange) has recently signed a MoU with Indian Institute of Corporate Affairs (IICA) to collaborate and develop a CSR index and increase awareness about CSR.