Corporate law highlight on Corporate Social Responsibility

Corporate Social Responsibility (CSR) becomes mandatory with effective from April 1, 2014

On 27th February, 2014, The Ministry of Corporate Affairs of India (MCA) has notified and made applicable the provisions of Section 135 (Corporate Social Responsibility) of the Companies Act, 2013, Schedule VII of the said Act and the Rules thereon effective from 1^st April, 2014.

As per Section 135 of the Companies Act, 2013, every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. The Board of every company to whom section 135 applies, shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Highlights of notified CSR rules:

• CSR activities to include preventive healthcare, sanitation, providing safe drinking water, protection of national heritage, rural development projects and measures to benefit armed forces veterans. Promoting rural sports, nationally recognized sports, setting up homes and hostels for women, orphans and senior citizens and measures to reduce inequalities faced by socially and economically backward groups and support to technology incubators in academic institutions have also been included in the CSR ambit.
• Net profit will not include dividend income received from another Indian company which is covered under and complying with the provisions of Section 135 of the Companies Act, 2013 or from profits of its own overseas branches.
• In the case of unlisted public companies and private limited companies covered under Section 135(1) of the Act and which are not required to appoint an independent director pursuant to sub-section 149 (4) of the Act, shall have its CSR committee without such director. Also, if the private limited company has only two directors, shall constitute its CSR committee with two such directors.
• The CSR activities need to be undertaken as per approval of the company’s board in accordance with its CSR policy and the decision of its CSR committee.
• A company can also carry out CSR works through a registered trust or society or a separate company.
• The CSR spending will have to be undertaken in India and should not benefit any employees of the company.
• Contribution of any amount directly or indirectly to any political party, shall not be considered as CSR activity.
• The Board’s annual report of a company shall include report on CSR and the company shall be required to display CSR activities on its website.

Source: Notification dated February 27, 2014 issued by MCA.