Amendments in Corporate Social Responsibility (CSR) By CS Shubham Phule



Corporate Social Responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it because it is good for our business- Niall Fitz Gerald

The MCA has notified Section 135 of the Companies Act, Schedule VII and CSR Policy Rules 2014 for CSR.

Applicability

Section 135(1)

(1) 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  the immediately preceding 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.

                              

Definition:

Net worth: Net worth means the aggregate value of the paid-up share capital and all reserves created out of the profits [securities premium account and debit or credit balance of profit and loss account], after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

Turnover: Turnover means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.

Net Profit: Net Profit means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the act, but shall not include the following, namely:-

  1. Any profit arising from the overseas branch or branches of the company, whether operated as a separate company or otherwise; and

  2. any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act: Provided that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub-section (1) of section 381, read with section 198 of the Act;

Definition under CSR Rules

A. CSR Means the activities undertaken by a Company in pursuance of its statutory obligation laid down in section 135 of the Act in accordance with the provisions contained in these rules, but shall not include the following namely:-

i) activities undertaken in pursuance of normal course of business of the company:

Provided that any company engaged in research and development activity of new vaccine, drugs and medical devices in their normal course of business may undertake research and development activity of new vaccine, drugs and medical devices related to covid 19 for financial years 2020-21, 2021-22,2022-23 subject to the conditions that-

  1. such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of schedule VII of the Act;

  2. Details of such activity shall be disclosed separately in the Annual report on CSR included in the Board’s Report;

ii) any activity undertaken by the company outside India except for training of Indian sports personnel representing the State or Union territory at national level or India ta International level;

iii) contribution of any amount directly or indirectly to any political party under section 182 of the Act;

iv) activities benefitting employees of the company as defined in clause(k) of section 2 of the Code on wages, 2019( 29 of 2019);

v) activities supported by the companies on sponsorship basis for deriving marketing benefits for its products or services;

vi) Activites carried out for fulfilment of any other statutory obligations under any law force in India;

B) CSR Policy means a statement containing the approach and direction given by the board of a company, taking into account the recommendations of its CSR Committee , and includes guiding principles for selection, implementation and monitoring of activities as well as formulation of the annual action plan;

C) ongoing project means a multi-year project undertaken by a Company in fulfilment of its CSR obligation having timelines not exceeding three years excluding the financial year in which it was commenced, and shall include such project that was initially not approved as a multi-year project but whose duration has been extended beyond one year by the board based on reasonable justification;

CSR Implementation

The Board shall ensure that CSR Activites are undertaken by the Company itself or through-

  1. a company established under section 8 of the Act, or a registered society, registered under section 12 A and 80 G of the income tax act, 1961 established by the company singly or along with any other company, or

  2. a company established under section 8 of the Act or a registered trust or a registered society established by the Central Government or State Government.

  3. Any entity established under an act of Parliament or State legislature; or

  4. A company established under section 8 of the Act, or a registered public trust or a registered society, established track record of at least three years in undertaking similar activities.

Every entity covered under this rule have to file Form CSR-1 electronically with the Registrar of Companies duly certified by Chartered Accountant in practice or a Company Secretary in practice or a Cost Accountant in practice.

On submission of the form on the portal a unique CSR Number shall be generated automatically.

CFO Certification:

The Board of a company shall satisfy that the funds have been utilised for the purposes and in the manner as approved by it and the Chief Financial Officer or the person responsible for financial management shall certify to the effect.

The CFO shall give Certificate to the Board about the utilization of funds so disbursed by the Board in their meeting and Board shall take note of the same in the meeting.

Annual Report on CSR and Website Disclosure:

The Board’s Report of a Company shall include Annual Report on CSR containing particulars specified in annexure I or annexure II as applicable.

Annexure-I is applicable for Financial Year commenced prior to 1st April, 2020 and the Annexure-II (new format) is applicable for Financial Year commencing on or after 1st April, 2020.

The board of directors of the company shall mandatorily disclose the composition of CSR Committee, CSR Policy and projects approved by the Board on their website, if any, for public access.

The Board will have to display the above on the website of the company

CSR Expenditure:

The Board shall ensure that administrative overheads shall not exceed five per cent of the total CSR Expenditure of the company for the financial year.

Any surplus arising shall not form part of business profit and shall be ploughed back and transferred to the unspent CSR Account and spent in pursuance of CSR Policy. The surplus shall be transferred in schedule VII within a period of 6 months.

Surplus out of CSR Activities:

Any surplus arising out of CSR Activites shall not form part of the business profit of the Company and shall be:-

  • Ploughed back into the same project

  • Transferred to the unspent CSR account and spent in pursuance of CSR policy and annual action plan of the company or

  • Transfer such surplus amount to a Fund specified in Schedule VII

Set off of excess amount of CSR Expenditure: where a company spends an amount in excess of requirement provided under section 135(5), such excess amount may be set off against the requirements of CSR expenditure up to immediate three succeeding three financial years subject to the conditions that-

  1. The excess amount available for set off shall not include any amount arising out of CSR activities; and

  2. Board resolution shall be passed by the Company for utilisation of the excess amount spend.

CSR Expenditure in Capital Assets:

The CSR Expenditure may be spent by a company for creation or acquisition of capital asset, which shall be held by-

  1. A company established under section 8 of the Act, or a Registered trust or registered society, having charitable objects and CSR Registration No.

  2. Beneficiaries of the said CSR project, in the form of self help groups, collectives entities; or

  3. A public authority

Provided that any capital asset created by the company prior to the commencement of the (Companies Social Responsibility policy) Amendment Rules, 2021, shall within a period of one Hundred and eighty days from such commencement comply with the requirement of this rule, which may be extended by a further period of not more than 90 days based on the approval of the board based on reasonable justification.

The Capital asset created or acquired by the company shall fall under two categories:

  • Capital assets created or acquired out of the profits of the company( eg. Land, building etc.) that are incidentally used for CSR Activites.

  • Capital assets created or acquired out of the CSR funds allocated for a financial year.

Rule 7(4) requires transfer of only those capital assets that are created or acquired out of the CSR funds allocated for a financial year. 

Transfer of unspent CSR amount:

If a company fails to spend 2% of the average net profits, the Board shall in its report made under section 134, specify the reasons for not spending the amount and, unless the unspent amount relates to any on-going project, transfer such unspent amount to a fund specified in schedule VII, within a period of 6 months of the financial year.

Transfer of unspent CSR amount of ongoing project:

Section 135(6) has been newly inserted and pursuant to which any amount remaining unspent pursuant to any ongoing project, fulfilling such conditions as may be prescribed, undertaken by a company in pursuance of its CSR Policy shall be transferred by the company within a period of thirty days from the end of the financial year to a special account to be opened by the company in that behalf for that financial year in any scheduled bank to be called the Unspent Corporate Social Responsibility Account (unspent CSR account), and such amount shall be spent by the company in pursuance of its obligation towards the CSR Policy within a period of three financial years from the date of such transfer, failing which, the company shall transfer the same to a Fund specified in Schedule VII, within a period of thirty days from the date of completion of the third financial year.    

                                             

Lex comply

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