Corporate Social Responsibilty

Applicability for Corporate Social Responsibility ('CSR')

The Ministry of Corporate Affairs under the Central Government has notified April 1st, 2014 as the effective date from which the CSR provisions as explained u/s. 135 of the Companies Act, 2013 ('Act') shall come into force.

Under the Act, CSR which was until now a voluntary exercise for companies in India has become a formal process with greater responsibility on companies to set out clear framework and ensure stricter compliance. An entity which satisfies any of the criteria below in respective financial year will need to comply with CSR provisions under the Act:

Net worth ≥ ₹ 500 crore, or
Turnover ≥ ₹ 1,000 crore, or
Net profit ≥ ₹ 5 crore during any financial year.

Formulation of CSR Mechanism

• CSR Committee

Every company, to which CSR is applicable, shall constitute a sub-committee of the Board being a CSR Committee. The CSR Committee to comprise of three or more directors, out of which at least one director should be an independent director. No requirement for an independent director in case of unlisted companies.

The CSR Committee shall carry out the following activities: -

Formulate and recommend to the Board a CSR policy which would include the activities to be undertaken by the Company as specified in Schedule VII of the Act,
Recommend the amount of expenditure to be incurred on the activities as listed above. Expenditure' for this purpose would mean to include contribution to the corpus for projects/ programmes relating to CSR activities carried out in India.
Monitor the CSR activities carried out by the company from time-to-time in accordance with the policy framed

• CSR Policy

CSR policy should contain the list of projects/ programmes the company intends to undertake under the ambit of Schedule VII of the Act,
The policy would also mention measures to execute/ implement the programmes/ projects,
The policy would provide coverage to monitoring mechanism by the Committee, methods of utilisation of funds, treatment of surplus arising out of the CSR activities.
It is advisable to have the CSR policy document as an elaborate, self-sustaining document for ensuring effective deployment of the CSR spend.

The CSR policy shall also be uploaded on the website of the company.

• Directors Report Disclosures

The report of the board of directors forming part of the Annual Report shall contain a separate chapter on CSR activities of the company. In the event that a company is unable to spend the amount on CSR activities, the same shall require a specific mention along with reasons for the same in the CSR section under the directors’ report. Other items requiring disclosure under the directors’ report includes:

Disclosing the key contents of the approved CSR policy,
Composition of the Committee,
Calculation of average net profit of the Company for last 3 years,
Prescribed CSR expenditure and its spend,
Initiatives taken by the Company for carrying out/ performing such activities during the year,
Responsibility statement of the CSR Committee for implementation of its objective and its monitoring,
Reasons if the Company fails to utilise the amount earmarked by it for CSR activities.

Activities eligible for CSR

Activities which constitute CSR would include the below listing as prescribed under Schedule VII of the Act and as listed in the CSR policy. Schedule VII entries include the below:

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;
Projects or programmes relating to activities undertaken by the board of directors of a company in pursuance of recommendations of the CSR Committee as per declared CSR policy of the company subject to the condition that such policy shall cover subjects enumerated in under the above items.

It is worth noting that the companies are required to give preference to the local area and areas around which it operates for spending the amount earmarked by it under the Act for such CSR activities.

Specific exclusion list of the projects/ programmes that would not form part of the eligible activities as listed above to be undertaken by the company is as follows:

Activities/ expenditure that benefit the employees of the company or its families,
Activities that are undertaken by the company in normal course of the business,
Contribution to any political party.

CSR spend calculation

The Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits on the CSR activities. 'Average net profit' would mean average net profit made by the company during the three immediately preceding financial years and excludes the following:-

Any profit arising from the overseas branch/ branches of the company, whether operated as separate or otherwise,
Any dividends received from other companies in India which are under the ambit of complying with the CSR rules.

CSR through a Trust Route

The rules allow flexibility to companies to fulfil their CSR obligations through a trust/society/not-for-profit company. The following are the key requirements:

Formation of New Trust/Society/not-for-profit company:

The company may form a new trust/society/not-for-profit company and get it registered to carry out such CSR activities.

If such Trust is not established by the company or its holding or subsidiary or associate company, then the company should invest through such a trust/society/not-for-profit company which has a track record of 3 years in undertaking similar programmes/projects.