COMPANIES (CORPORATE SOCIAL RESPONSIBILITY POLICY) RULES, 2014 - AN OVERVIEW

[Mr. M. GOVINDARAJAN]

In exercise of the powers conferred under Section 135 and Section 469 (1) and Section 469 (2) of the Companies Act, 2013 the Central Government made the rules called as ‘Companies (Corporate Social Responsibility Policy) Rules, 2014’ (‘Rules’ for short).   These Rules shall come into effect from 01.04.2014.

Rule 2(C) defines the term ‘Corporate Social Responsibility’ (‘CSR’ for short).  It means and includes but is not limited to-

• Projects or programs relating to activities specified in Schedule VII of the Act; or
• Projects or program relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover such subjects enumerated in Schedule VII of the Act.

Activities in Schedule VII

The following are the activities that may be included by Companies in their Corporate Social Responsibility Policy as amended by Notification which will come into effect from 01.04.2014-

• Eradicating hunger, poverty, malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
• Promoting education, including special education and employment enhancing  vocation skills especially among children, women, elderly and the differently abled and livelihood enhancement projects;
• Promoting gender equality,  empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
• 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;
• Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up public libraries, promotion and development of traditional arts and handicrafts;
• Measures for the benefit of armed forces veterans, war widows and their dependents;
• Training to promote rural sports,  nationally recognized sports, paralympic sports and Olympic sports;
• Contribution to Prime Minister’s Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Schedule Tribes, other backward classes, minorities and women;
• Contributions or funds  provided to technological incubators located within academic institutions which are approved by the Central Government;
• Rural development projects.

CSR Policy

Rule 2(e) of the Act defines ‘CSR Policy’ which relates to the activities to be undertaken by the company as specified in Schedule VII of the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company.

Rule 6 provides that the CSR Policy of the company shall include the following:

• A list of CSR projects or programs which a company plans to undertake falling within the purview of Schedule VII of the Act, specifying the modalities of execution of such project or programs and implementation schedules for the same; and
• Monitoring process of such project or programs.

The CSR activities does not include the activities undertaken in pursuance of normal course of business of a company.

The Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the activities included in Schedule VII of the Act,.

The CSR policy of a company shall specify that surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.

Rule 9 provides that the company shall, after taking into account the recommendations of CSR Committee, approve the CSR Policy for the company and disclose contents of such policy in its report and the same shall be displayed in the Company’s website, if any.

Obligation of the companies                 

Rule 3(1) provides that every company including its subsidiary, and a foreign company under Section 2(42) of the Act, having its branch office or project office in India, which fulfils the criteria specified in Section 135 (1) of the Act, shall comply with the provisions of Section 135 of the Act, and these Rules.   The net worth, turnover or net profit of a foreign company shall be computed in accordance with the balance sheet and profit and loss account of such company prepared in accordance with the provisions of Section 381 (1) and Section 198 of the Act.

Every company which ceases to be a company covered under Section 135 (1) of the Act for three consecutive financial years  shall not be required to-

• Constitute a CSR Committee;
• Comply with the provisions contained  in sub sections (2) to (5) of Section 135;

till such time it meets the criteria specified in Section 135 (1).

Net profit

Rule 2(f) defines ‘net profit’ as the net profit of a company as per its financial statements prepared in accordance with the applicable provisions of the Act but shall not include the following, namely:-

• Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
• Any dividend received from other companies in India, which are covered under and complying with the provisions of Section 135 of the Act.

The net profit in respect of a financial year  for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956 shall not be required to be re-calculated in accordance with the provisions of the Act.   In case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss accounts prepared in terms of Section 381(1)(a) read with Section 198 of the Act.

CSR Committee

Rule 5 provides that the eligible company shall constitute CSR Committee.  An unlisted company or a private company which is not required to appoint an independent director shall have its  CSR Committee without such  director.   A private company having only two directors on its Board shall constitute its committee with two such directors. With respect to a foreign company the Committee shall comprise of at least two persons of which one person shall be as specified under Section 380(1)(b) of the Act and another person nominated by the foreign company.

The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects  or programs or activities undertaken by the company.

Expenditure

Rule 7 provides that CSR expenditure shall include all expenditure including contribution to corpus for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.

CSR Report

Rule 8 provides that the Board’s Report of a company pertaining to the financial year commencing on or after 01.04.2014 shall include an Annual Report on CSR containing the following particulars-

• A brief outline of the company’s CSR policy, including overview of projects or programs to be conducted  and a reference to web link to the CSR policy and projects or programs;
• The composition of the CSR Committee;
• Average net profit of the company for the last three financial years;
• Prescribed CSR expenditure;
• Details of CSR spent during the financial year;
• In case the company has failed to spend the prescribed 2% of the average net profit of the last three financial years or any part thereof, the company shall provide the reasons for not spending the amount in its Board’s report;
• A responsibility statement of CSR Committee that the implementation and monitoring of CSR Policy, is in compliance with CSR objectives and policy of the company.