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New Companies Act, 2013 Insight Series Volume IV Corporate Social Responsibility
13 September 2013

Executive summary

Corporate Social Responsibility (CSR) provisions are likely to be effective from financial year 201415. Every company satisfying certain financial strength criteria is mandatorily required to spend at least 2 percent of its average net profit of three preceding financial years on specified CSR activities. Each qualifying company to form a CSR committee which will formulate the CSR policy of the company and effectively monitor the CSR activities of the company. Board of Directors of the companies are responsible to ensure that the company spends the mandatory CSR spend on specified CSR activities in accordance with the CSR policy of the company and disclose the CSR policy and CSR activities of the company as specified in the provisions. Recently, the Ministry of Corporate Affairs (MCA) has issued draft rules on CSR for public discussion. The said draft CSR rules lay down the framework and guidance on the manner in which every eligible company is expected to undertake CSR initiatives.

The specific activities that could be regarded as CSR are specified in Schedule VII of the New Companies Act, 2013. The other modalities of carrying out CSR activities are specified in the draft CSR rules.

Background

In this bulletin, we will discuss the Corporate Social Responsibility provisions (CSR provisions) introduced in the New Companies Act, 2013 (the Act). When the President of India gave assent to the Companies Bill, 2013, India became the first country to mandate spend on CSR activities through a statutory provision. In India, while many corporate houses have been traditionally engaged in doing CSR activities voluntarily, the new CSR provisions put formal and greater responsibility on companies to set out clear framework and process to ensure strict compliance.

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Overview

As per Section 135 of the Act, companies with a specified net worth or turnover or net profit are required to mandatorily spend 2 percent of its average net profit towards specified CSR activities. Recently, the rule making committee of MCA has published the draft CSR rules and uploaded the same on MCA website for public discussion and debate. Our comments in this bulletin are based on the provisions as laid down under the Act and the CSR rules. Our comments are subject to final rules that may be notified by the Government considering the public discussion and debate. CSR draft CSR after

Appointment of CSR committee

Every qualifying company needs to constitute a CSR committee of the Board consisting of 3 or 2 more directors . Though the CSR provisions under the Act required minimum 3 directors for constitution of CSR committee, the issue that needs to be clarified is whether qualifying private companies (which requires minimum two directors only) would be required to appoint one more director only to constitute CSR committee and comply with the CSR provisions. The mandate of the said CSR committee shall be: To formulate and recommend a CSR policy to the Board; To recommend amount of expenditure to be incurred on CSR activities; To monitor the CSR policy of the company from time to time.

While the Government is soon expected to notify the effective date of applicability of CSR provisions, the draft CSR rules suggest that CSR provisions will be made effective from financial year 2014-15. The analysis on the CSR provisions and salient features of the draft CSR rules are provided as under.

Applicability

Every company having net worth of INR 5000 million or more, or turnover of INR 10000 million or more or net profit of INR 50 million or more during any financial year will have to comply with the CSR provisions as laid down under the Act. If any of the above financial strength criteria is met, the qualifying company is mandatorily required to spend at 1 least 2 percent of the average net profit of past three financial years on specified CSR activities. While the threshold limit of net worth criteria and the turnover criteria are kept higher, the net profit threshold limit of mere INR. 50 million will bring majority of companies under the CSR net. Under the draft CSR rules, net profit is defined to mean net profit before tax as per books of accounts and shall not include profits arising from branches outside India. While the reporting framework under the draft CSR rules suggest that the unspent amount of the specified CSR spend to be rolled over to the succeeding financial years, it does not clarify whether the excess spend of over and above 2 percent mandatory CSR spend in any particular financial year can be carried forward in succeeding financial year or not.

In this context, the draft CSR rules specifies that following should be included in CSR policy: Details regarding list of projects / programs to be undertaken, modalities of execution, areas / sector chosen, implementation schedules, etc; That the surplus arising out of the CSR activity will not be part of business profits of a company; That corpus to include the following: 2 percent of average net profits; Any income arising therefrom; Surplus arising out of CSR activities.

Responsibility of the Board

The Board of every qualifying company is required to hold following responsibilities:

To approve the CSR policy recommended by

the CSR committee and disclose the contents of such policy in its report and place it on companys website;

To ensure the CSR activities are undertaken by

the company;

___________________
1

As per the provision of the Act, the average net profit shall be computed in accordance with the provision of section 198 of the Act after considering the additions / deletions specified in the said section.

To ensure 2 percent spending on CSR

activities;

To report CSR activities in Boards report and

disclose non-compliance (if any) with the CSR provisions.

___________________
2 At least one CSR committee member should be an independent director 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

 The draft CSR rules provide the format in which all qualifying companies shall report the details of their CSR initiatives in the Directors report and in the companys website.

CSR projects / programs may also focus on

integrating business models with social and environmental priorities and processes in order to create shared value.

What constitutes eligible CSR spend

Activities which may be considered as eligible CSR spend are provided in Schedule VII of the Act. The specified activities are as under:

CSR activities shall not include activities

exclusively for the benefit of employees and their family members. In this context, some of the issues still not clarified / need further clarity are as under:

Environment sustainability Empowering women and promoting gender equality Education Poverty reduction and eradicating hunger Social business projects Reducing child mortality & improving maternal health Improvement of health Imparting of vocational skills Contribution towards Central & State Government
funds for socio-economic development and relief

The concepts of business process integration

and shared value are not defined in the Act / draft CSR rules.

While the draft CSR rules specify that CSR

activities shall not be exclusively for the benefit of employees / their families, it does not provide any objective criteria of certain benefits (not exclusive) given to employees / their families that could be regarded as CSR activities.

Whether the list of activities specified under

Schedule VII of the Act is exhaustive?

While the draft CSR rules suggest that tax

treatment of CSR spend will be in accordance with the Income-tax Act, 1961 as may be notified by Central Board of Direct Taxes (CBDT), one will have to wait and watch for notification from CBDT and whether the same provides adequate certainty on tax treatment of CSR spend.

Such other matters as may be prescribed

The companies shall give preference to the local area and area around it where it operates for spending the amounts earmarked for CSR activities. The draft CSR rules further provide following guidelines / manner in which the company can undertake CSR activities and incur CSR spend:

The company can set-up a not-for-profit organisation

in the form of trust, society or non-profit company to facilitate implementation of its CSR activities. However, the contributing company shall specify projects / programs to be undertaken by such an organisation and the company shall establish a monitoring mechanism to ensure that the allocation to such organisation is spent for intended purpose only.

A company may also implement its CSR programs

through not-for-profit organisations that are not set up by the company itself.

Such spends may be included as part of companys

prescribed CSR spend only if such organisations have an established track record of at least 3 years in carrying on activities in related areas.

Companies may also collaborate or pool resources

with other companies to undertake CSR activities.

Only CSR activities undertaken in India would be

considered as eligible CSR activities.

CSR activities may generally be conducted as

projects or programmes (either new or ongoing), however, excluding activities undertaken in pursuance of the normal course of business of a company.

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2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.