Section 135: Corporate Social Responsibility.

Corporate Social Responsibility:

135. (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 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.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), 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:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.

This provision is covered by Chapter IX on Accounts of Companies [Sections 128 to 138].

Section 135 is brought to force from April 01, 2014.

For this chapter, the Companies (Corporate Social Responsibility Policy) Rules, 2014 (here after referred to as “the Rules”) are notified with effect from April 01, 2014.

Corresponding provision under Companies Act, 1956: No such provision.

Provisions of section 135 and the Rules will come into force with effect from 01 April 2014 ((Rule 1(2) )).

Section 135 of the Companies Act, 2013 provides social responsibility of companies and the rules to be followed for fulfilling the responsibility.

Corporate Social Responsibility (CSR) means and includes but is not limited to:
1. Projects or programs on activities specified in Schedule VII to the Act; or
2. Projects or programs on activities undertaken by the Board of Directors of a company in pursuance of recommendation of the CSR Committees of the Board as per declared CSR Policy of the company subject to condition that such policy will cover subjects enumerated in Schedule VII of the Act ((Rule 2(1)(c) )).

Applicability:
Provision relating to Corporate Social Responsibility is applicable to all companies. However, some relaxation is given to private companies, certain unlisted public companies and foreign companies with respect to requirement of constitution of Corporate Social Responsibility Committee.

Every company, including its holding company or subsidiary; also a foreign company ((as defined under section 2(42) of the Act and having its branch office or project office in India)) fulfilling the following criteria is required to comply with section 135 of the Act and the Rules ((Rule 3(1) )). This, inter alia, includes –
(a) constituting a Corporate Social Responsibility (“CSR”) Committee of the Board of Directors,
(b) spending 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 the CSR Policy.

Definition of “foreign company” is given under section 2(42) of the Act and reference of foreign company is made under Rule 3(1). Provision of section 2(42) is brought to force from April 01, 2014.

With regard to foreign companies, issues need clarification from the Ministry of Corporate Affairs:
Meaning of the expression “branch office or project office in India” is not defined under the Rules or the Act. Though the term “branch office” is defined under section 2(14) of the Act, the context does not suggest that it is meant for a foreign company. Further, as per the golden rule of interpretation of statutes, if a term is not defined then its general meaning may be resorted. However, even such interpretation is not warranted as it may give absurd meaning. In my view, meaning of expression “branch office or project office in India” shall be the same as used under Foreign Exchange Management Act, 1999.

As per Section 135(1), CSR apply to every “company” who qualify as per mentioned thresholds criteria. As per Section 2(20) “company” means a company incorporated under this Act or under any previous company law. It seems that by this reading, we cannot infer that every “company” also includes foreign company. However, as per CSR Rule 3 (1) every “company” including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfils the criteria specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules. By the combined reading of above provisions of the section and rules together, it can be said that CSR provisions are also applicable to Foreign Companies having branch office or project office in India. However, the legal question is, can rule making power under Section 469, relax (exemption for Pvt. Companies from independent director requirement in CSR committee) or enhance the scope (CSR provisions applicable to Foreign Companies) of the provision of Section 135?

Foreign companies having a branch office or project office in India are required to undertake CSR activities need to take approvals under the Foreign Contribution Regulation Act 2010 (FCRA). Such approvals under FCRA are administered by Ministry of Home Affairs. This CSR spend requirement will also trigger an amendment in the Foreign Exchange Management (FEMA) Regulations, as Indian branch of a foreign company can undertake only eight specific activities and CSR isn’t being part of those one of the specific activities, requires Reserve Bank of India (RBI) approval. Also worth noting is that Foreign Direct Investment (FDI) isn’t permitted in case of a trust or societies.

Clarification of MCA on following is also required:

There is a provision in the CSR rule((Rule 4(6) )) which says that companies may build on CSR capacities from their own personnel, subject to a maximum limit of 5% of the total CSR expenditure of the company in a financial year. It is not clear as to whether the time-value of the company’s personnel for CSR activities is allowed under this 5% limit.

 

Criteria ((given under section 135(1) of the Act)):
During any financial year, a company is either having
(a) net worth of rupees 5,000,000,000/- (five hundred crore or 5 billion) or more, or
(b) turnover of rupees 10,000,000,000/- (thousand crore or 10 billion) or more or
(c) a net profit of rupees 50,000,000/- (five crore or 50 million) or more.

Term “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium 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. ((Section 2(57) of the Act, brought to force w.e.f. 12 September, 2013))

Term “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. ((Section 2(91) of the Act, brought to force w.e.f. 12 September, 2013))

Term “Net profit” for the purpose is defined ((under Rule 2(f) )) as net profit as per financial statement prepared in accordance with the applicable provisions of the Act. However, following shall not be included in determining “net profit”.
(i) Any profit arising from any overseas branch(es) of the company, whether operated as a separate company or otherwise; and
(ii) Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.

Where financial statement is prepared in accordance with the applicable provisions of the Companies Act, 1956 then net profit of a company (except foreign company) shall be as stated therein, and the company need not re-calculate net profit as per the provisions of the Companies Act, 2013 ((first proviso to Rule 2(f) )).

In case of a foreign company,
1. net profit and turnover shall be computed in accordance with the profit and loss account of such company, and
2. net worth shall be computed in accordance with the balance-sheet of such company
prepared in accordance with provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Companies Act, 2013 ((second proviso to Rule 2(f) and proviso to Rule 3(1) )).

What if criteria fulfilled in one financial year but not in subsequent financial year?
If a company once fulfills the aforesaid criteria in a financial year then it shall comply with section 135 and the Rules even if in a subsequent year it ceases to comply with the aforesaid criteria. However, if for three consecutive financial years it ceases to comply with the aforesaid criteria, then it shall not:
(a) Constitute a CSR Committee; and
(b) Comply with the provisions of section 135 (2) to (5)
until it meets the aforesaid criteria again ((Rule 3(2) )).

Constitution of CSR Committee:
In case of a listed company and unlisted public company, CSR Committee shall comprise of three or more directors. Atleast one of them shall be an independent director.

However, where an unlisted public company which is not required to have an independent director on its Board ((as per section 149(4) of the Act)), then such company is also not required to have an independent director in its CSR Committee ((Rule 5(1)(i) )). By implication it also means an unlisted public company which is required to have an independent director on its Board ((as per section 149(4) of the Act)) is also required to have an independent director in its CSR Committee.

In case of a private company, it is not required to have an independent director in its CSR Committee ((Rule 5(1)(i) )). And where a private company is having only two directors, it shall constitute CSR committee with its two such directors only ((Rule 5(1)(ii) )).

In case of a foreign company, CSR committee shall comprise of at least two persons. One of such persons shall be nominated by the foreign company and other person shall be the one, who is resident in India and authorised to accept (on behalf of the foreign company) service of process and any notices or other documents required to be served on the foreign company under the Act and whose name and address is delivered to the Registrar of Companies for registration under section 380(1)(d) of the Act ((Rule 5(1)(iii) )).

Role of CSR Committee:

1. CSR Committee shall formulate CSR Policy and recommend it to the Board ((Section 135 (3)(a) )),
2. Recommend to the Board about amount of expenditure to be incurred on CSR activities ((Section 135 (3)(b) )), and
3. Monitor CSR Policy from time to time ((Section 135 (3)(c) )). CSR Committee shall setup a transparent monitoring mechanism for implementation of the CSR project or programs or activities undertaken by the company ((Rule 5(2) )).
4. CSR Committee shall give a responsibility statement that implementation and monitoring of the CSR Policy is in compliance with CSR objectives and policy of the company ((item 7 of Annexure to the Rules)).

Role of the Board of Directors:
The Board is required to approve the CSR Policy, after considering recommendations of CSR Committee ((Section 135 (4)(a) )).

The Board shall make sure that
(i) the activities as included in CSR Policy of the Company are related to the activities included in Schedule VII of the Act ((second proviso to Rule 6(1) )).
(ii) the activities as included in CSR Policy of the Company are undertaken by the Company ((Section 135 (4)(b) )).
(iii) 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 the CSR Policy ((Section 135 (5) )). Average net profit needs to be calculated as per section 198 of the Companies Act, 2013 ((Explanation to Section 135 (5) )).
(iv) it gives preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities ((first proviso to Section 135 (5) )).

CSR Policy:
CSR Policy shall indicate the activities to be undertaken by the company as specified in Schedule VII to the Act and the expenditure thereon. It shall not include activities undertaken in pursuance of normal course of business of a company. ((Rule 2(1)(e) and first proviso to Rule 6(1) )).

CSR Policy shall include, inter alia, the following:
(a) a list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act,
(b) specify modalities of execution of CSR projects or programs,
(c) implementation schedule, and
(d) monitoring process ((Rule 6(1) )).

CSR Policy shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company ((Rule 6(2) )).

Disclosure:
The Board’s report shall disclose:
1) Composition of CSR Committee ((Section 135(2) )),
2) CSR Policy, as approved by the Board ((Section 135 (4)(a) )),
3) Where a company fails to spend 2% of average net profits, it shall state the reasons for the same ((second proviso to Section 135 (5) )),
4) An annual report on CSR containing particulars specified in Annexure to the Rules ((Rule 8(1) )); and
5) Report of directors’ of a company shall include responsibility statement of CSR Committee ((Rule 9)).

In case of a foreign company, the balance sheet filed with the Registrar of Companies shall contain a report on CSR containing details specified in an Annexure to the Rules ((Rule 8(2) )).

CSR Policy, as approved by the Board, shall be placed on the Company’s website ((Section 135 (4)(a) )). The details to be displayed on website of a company shall contain particulars specified in an Annexure to the Rules ((Rule 9 )).

Website of a company shall include responsibility statement of CSR Committee ((Rule 9)).

CSR Activities:
The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities. Such projects or programs or activities can be either new or ongoing. Activities undertaken by the company in its normal course of business is not treated as CSR activities ((Rule 4(1) )).

The Board of a company may decide to undertake its CSR activities through a registered trust or a registered society or a company established under section 8 of the Act or otherwise. Such trust, society or company can be either established by the company itself or by its holding company or subsidiary company or an associate company ((Rule 4(2) )). Use of words “or otherwise”, suggests that the company may undertake CSR activities itself or through section a company established under section 25 of the Companies Act, 1956.

Where a company intends to undertake its CSR activities through a registered trust or a registered society or a company established under section 8 of the Act and such trust, society or company which is not established by the company itself or by its holding company or subsidiary company or an associate company, then the company shall ensure that such trust, society or company have an established track record of three years in undertaking similar programs or projects ((proviso (i) to Rule 4(2) )).

Where a company undertakes CSR activities through aforesaid entities the company shall ensure to specify the projects or programs to be undertaken, the modalities of utilization of funds for the same and the monitoring and reporting mechanism ((proviso (ii) to Rule 4(2) )).

A company may also collaborate with other companies for undertaking its CSR activities. In such case it shall be ensured that CSR Committees of respective companies are in a position to report separately CSR projects or programs as required under the Rules ((Rule 4(3) )).

CSR projects or programs or activities that benefit only the employees and their families shall not be considered as CSR activities for the purpose of section 135 of the Act ((Rule 4(5) )).

CSR expenditure shall include all expenditure and contribution to corpus for projects or programs relating to CSR activities approved by the Board. Any expenditure on item not in conformity with activities which fall within the purview of Schedule VII of the Act ((Rule 7)).

Expenditure incurred by a company towards CSR projects or programs or activities undertaken in India are only counted towards minimum 2% of CSR expenditure ((Rule 4(4) )).

A company may spend amount to build CSR capacities of their employees as well as those of implementing agencies through institutions. Provided such institutions should have established track records of at least three financial years. Such expenditure of company shall be treated as CSR activities upto 5% of total CSR expenditure in one financial year ((Rule 4(6) )).

Any contribution to a political party shall not be considered as CSR activity ((Rule 4(7) )).