Basic Provisions of Corporate Social Resposibility (CSR)

Basic provisions related to CSR Policy

Corporate Social Responsibility requirements

As per the Companies Act, 2013, section 135, every company having:

1. Net worth of rupees five hundred crore or more, or

2. Turnover of rupees one thousand crore or more or

3. Net profit of rupees five crore or more

During any financial year, shall ensure that the company spends, in every financial year, at least (2%) 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.

This rule is applicable to every company, including its holding or subsidiary, and a foreign company having its branch or project office in India.

What comprises of the CSR Committee?

The CSR Rules have clarified that the companies that are covered under Section 135 of the Act (who fulfill the one or more above conditions of the three) shall:

1. Constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors,

2. Out of three at-least one director shall be an independent director,

3. For an unlisted public company or private company, there is no requirement to have an independent director,

4. Also, a private company having only two directors can form a CSR Committee Constituting of two directors only,

5. For foreign companies, the CSR Rules have clarified that out of the two directors on the CSR Committee, one must be a resident of India.

What qualifies as CSR activities?

a. Eradicating hunger, poverty & malnutrition, promoting preventing health care and sanitation and making available safe drinking water;

b. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, differently abled and livelihood enhancement projects;

c. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and facilities for senior citizens, measures for reducing inequalities faced by socially and economically backward groups;

d. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;

e. Protection of national heritage, art and culture including restoration off buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

f. Measures for the benefit of armed forces veterans, war widows and their  dependents;

g. Training to promote rural sports, nationally recognized sports, Paralympic and  Olympic sports;

h. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by Central Government for socio-economic development and relief and welfare of Scheduled Castes, Scheduled Tribes other backward classes, minorities and women;

i. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

j. Rural development projects.

CSR Spends at 2% of average Net Profits

Section 135(5) provides that,

1. The Board of every company shall ensure that the company spends in every financial year at least 2% of the average net profits of the company made during the three immediately preceding financial years,

2.Under Section-135, for the purposes of this Section,” average Net Profit” shall be calculated as under:

As the CSR provisions are applicable from April 1, 2014, it means that firstly the average net profits during the three preceding years will have to be considered. Hence profits made by the Company in the years 2011-12,2012-13 and 2013-14 will be added and the divided by three.

How Net profits shall be calculated?

Under section- 198 of Companies Act 2013, Net profit for the purpose of calculation of CSR shall be arrived as under: