Mandatory CSR Under Companies Act, 2013: What lies ahead?

GameChanger Law Advisors

CSR- What It Means?

Process where companies integrate social, environmental and economic objectives with company’s operations and growth

Resources of the Company are not used solely for the purpose of increasing profits of the Company, but also used for activities that benefit society at large

Ethical foundation for mandating CSR obligations lies in placing social and environmental responsibility at the doorstep of a company for its business activities

CSR in India Companies that meet a certain threshold are required to

compulsorily spend a portion of their profits on CSR activities under the Companies Act, 2013 (“Act”)

First country to mandate spend on CSR activities through a statutory provision

Section 135 of the Act deals with CSR

Prescribed threshold:

Every company having:

• net worth of INR 500 Crores or more, or

• turnover of INR 1000 Crores or more or

• a net profit of INR 5 Crores or more

Mandatory Spend on CSR

Every company that satisfies prescribed threshold is required to spend at least 2% of its average net profit of 3 preceding financial years on specified CSR activities

Section 3(d) of the proposed CSR Rules, defines Net Profit as:“net profit before tax as per books of accounts and shall not include profits arising from branches outside India.”

Corpus to include:• 2% of the average net profits;• income arising from the corpus;• surplus arising out of CSR activities

CSR Committee

Qualifying companies required to from a CSR Committee consisting of 3 Directors, at least 1 of whom has to be Independent Director

Responsibilities of the CSR Committee:

a) To formulate and recommend a CSR policy to the Board

b) To recommend amount of expenditure to be incurred on CSR activities

c) To monitor CSR policy of the company from time to time

Directors’ Responsibilities

a) approval of CSR policy recommended by CSR Committee;

b) disclosure of contents of policy in the Directors’ report and on company’s website;

c) ensuring that prescribed CSR activities are undertaken by the company;

d) ensuring that a minimum of 2 % of net average profits are spent on CSR activities;

e) reporting CSR activities in the Directors’ report

Preference to be given to local areas and areas around where Company operates, for spending amount prescribed for CSR activities.

Schedule VII of the Act lists activities to be undertaken as part of CSR-

a) Eradication of extreme hunger and poverty;b) promotion of education;c) promoting gender equality and empowering women;d) reducing child mortality and improving maternal health;e) combating HIV, AIDS, malaria and other diseases;f) ensuring environmental sustainability;g) employment enhancing vocational skills social business

projects;h) contribution to the Prime Minister's National Relief Fund or

any other fund set up by the Government

What to Spend on?

How to Spend?

Proposed CSR Rules prescribes manner in which activities are to be conducted:

• to be conducted as projects, only within India;• excludes activities undertaken in pursuance of the normal

course of business of a company;• may pool resources with other companies;• activities not to be exclusively for benefit of employees;• a trust, society or non-profit company can be set up to

facilitate implementation of CSR activities;• implementation can also be done through NGOs not set up by

Company, which have track record of at least 3 years in carrying on activities in such areas;

Provisions on reporting likely to take effect from financial year 2014-2015

Consequences of non-compliance

For failure to spend prescribed amount on CSR activities:

Disclosure to be made in the Directors’ report under Section 134(3)(o) of the Act, specifying reasons for not spending the amount

For failure to provide details on CSR policy in the Directors’ Report as required under Section 134(3)(o):

• Company: Fine of not less than INR 50,000, and up to INR 25,00,00

• Every officer in default: Imprisonment for a term which may extend to 3 years or fine of not less than INR 50,000, and up to INR 5,00,00, or both

Comparative Analysis of CSR Obligations elsewhere..

United Kingdom

• Section 417(5) of Companies Act 2006 (UK), requires Listed Companies to include in the Director’s Report, as part of Business Review, information about:

a) environmental matters (including the impact of the company’s business on the environment);

b) social and community issues; and

c) information about any policies of the company in relation to those matters and the effectiveness of those policies

• In the event the information is not provided, a disclosure to this effect is to be made in the Director’s Report

CSR in Australia

Australia

• No specific Statutory CSR reporting requirement in Australia

• Section 299(1)(f) Of Corporations Act 2001 provides that, the annual directors’ report must contain general information about activities with specific details on any significant environmental regulation under a law of the Commonwealth/State/Territory to which the Company’s operations are subject, and details of the entity’s performance in relation to these

• In the event the information is not provided, a disclosure to this effect is to be made in the Director’s Report

CSR in Denmark Denmark

• Section 99A of Danish Financial Statements Act, requires all large businesses to disclose in their annual reports, information on:

a) CSR policies;

b) How these policies are translated into action;

c) What the business has achieved as a result of this, and whether they have any future expectations

• Businesses which do not have any CSR policy must make a disclosure to this effect in the report

Shades of Grey… Tax treatment of amount spent on CSR activities unclear:

• Draft rules provide that it will be in accordance with the Income-Tax Act, 1961 as may be notified by Central Board of Direct Taxes (CBDT)

• CBDT yet to issue notification

List of CSR activities exhaustive?

Not clear whether list of CSR activities specified under Schedule VII of the Act is exhaustive

Non-Compliance with CSR Obligations

The only consequence for failure to spend the prescribed amount towards CSR is a disclosure to that effect in the Directors’ report; however, non-disclosure of policy attracts penalties

May be prudent for legislators to require companies to report non-compliance with CSR obligations on a “if not, why not” basis

Shades of Grey (Continued) Constitution of Committee: Clarification needed on

applicability to qualifying private companies:

• Act stipulates that a minimum of 3 directors are needed for CSR committee: A private company only needs a minimum of 2 directors

• Independent director on the CSR committee: Private companies are not otherwise required to appoint an independent director

THANK YOU..

For further information on this presentation, please feel free to contact

Amrut Joshi (amrut@gamechangerlaw.com) or

Neha Rao (neha@gamechangerlaw.com)