Corporate Social Responsibility (CSR) means that beyond making profits, a business has social obligations considering the interest of customers, employees, communities, and ecological considerations (i.e. stakeholders) for common good. Thus, CSR is not charity or mere donations. On 27th February, 2014 the Government of India(ministry) has notified the rules for CSR spending u/s 135 of the new Companies Act, 2013 along with Companies (Corporate Social Responsibility Policy) Rules,2014 applicable from 1st April, 2014. In an official release, Corporate Affairs Minister, Sachin Pilot said the rules have been finalised after extensive consultations with all stakeholders. “The rules provide for the manner in which CSR Committee shall formulate and monitor the CSR policy, manner of understanding CSR activities, role of the board therein and format of disclosure of such activities in board’s report.” Pilot said.
Under the rule, government has fixed a threshold limit of 2% of the average ‘Net Profits’ of the block of previous three years on CSR activities. It is noteworthy that the rules excludes political funding and funding for the benefit of own employees and their families. Surplus from CSR activity shall not be included in the business profits of the company. Approximately, an expenditure of `60,000 crore will be done in India on CSR activities in FY 2014-15. If the company fails do spend such amount, they are liable to disclose the reason for falling short and make a provision of such amount at year end as per AS 29 of Institute of Chartered Accountants of India (ICAI).
Every company(includes foreign companies with branches or projects in India) having minimum net worth of `500 crore or turnover up to `1,000 crore or having a net profit of at least `5 crore during any financial year are covered by this provision. But an exemption has been given to the companies that do not satisfy the above thresholds for three consecutive years.
The government has amended Schedule VII of the act to include more activities that may be included in the CSR policies. Inter-alia, activities allowed under Schedule VII includes promotion of education, gender equality and women empowerment; eradicating hunger and poverty; enhancing employment; protection of national heritage, art and culture. A company may form an entity or collaborate with other companies operating in India for CSR spending, but each company will have to report separately. The Ministry has allowed 5% of annual CSR expenditure for capacity building of personnel/implementing agencies by intermediaries.
The company shall form a CSR committee consisting for 2 or more directors. The rules also clarify that any private company that does not have any independent director may also form CSR committees, with just two non-independent directors.
The government has excluded state government funds from Schedule VII after Chhattisgarh government asked firms to deposit funds to Chief Minister’s Community Development Fund rather than undertaking their own CSR responsibility.
Key Points:
1. A company may collaborate with other companies for CSR spending but each company will have to report separately.
2. Gains from CSR shall not be included in the profits of the company.
3. CSR activities can be done through registered trust or society or by forming a company.
4. Profits from braches in other countries and pidends from other companies shall not be included in the average profit for calculation
5. CSR excludes political funding and funding for the benefit of own employees and their families.
6. Any private company that does not have any independent director may also form CSR committees
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