CSR Rules: Ambit Of The Act Enlarged?

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By: Harinderjit Singh, Partner, Price Waterhouse

harinderjit190In Corporate Social Responsibility (CSR), a firm engages in actions that further social (and environmental) good, beyond the obvious interests of the company, its business relationships and that which is required by law. The Ministry of Corporate Affairs, Government of India has formally notified CSR provisions under the Section 135 of Companies Act 2013 (the ‘2013 Act) and the related rules effective from 1st April 2014. To decide the applicability of Section 135, audited accounts of any financial year will be taken into consideration with effect from 1 April 2014. Since the CSR spend amount is based on the average net profit of the last three years, companies can plan its CSR expenditure well in advance. The Companies Act, 2013 follows an ‘apply or explain’ approach. As per the provisions of section 135, a company with turnover of INR 1000 crore or more or a net-worth of INR 500 crore or more or net profit of INR 5 crore or more in any financial year shall constitute a CSR Committee and would be required to spend at least 2% of their average net profits of the past three years on CSR activities. If for any reason a company is unable to do so, they would be required to explain the reason for that. An annual report on CSR activities must be included in the Board Report of a company spending on CSR. The Schedule VII (the Schedule) of the 2013 Act states certain new activities that could be classified as CSR activities.. It elaborates in respect of certain existing activities and the scope of certain others has been enhanced. Still, the Schedule is restrictive in nature in terms of choice of the company. Many existing CSR programmes have to realign their activities with the newly amended Schedule VII. The Government should have permitted the companies to have their choice of CSR activities. The contribution of any State setup funds, social business projects has been removed. Further, it seems that the concept of shared value proposition has been ruled out, for instance, a company cannot choose a project which also support their business object. If a water purifier company do CSR in the area of providing safe drinking water and run a campaign to create awareness regarding safe drinking water, this will have a shared value proposition. Such company also derived some value for its future business prospects. It would have been better, if this shared value concept would have been recognised in the rules.The ambit of the Act does not specifically cover foreign companies, but Rules clearly includes foreign companies having its branch or project office in India. 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. Section 2 (42) defines “foreign company” means any company or body corporate incorporated outside India which has a place of business in India; and conducts any business activity in India in any other manner. 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?The net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance the provision of clause (a) of sub-section (1) of section 381 and section 198 of the section. And, the CSR spend must be reported as an annexure in the balance sheet. CSR Committee of a foreign company shall comprise of at least two persons of which one person shall be as specified under section 380(1)(d) of the Act and another person shall be nominated by the foreign company.Further, CSR activities have to be carried out in India only to be qualified as CSR spend under the Companies Act 2013. 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.Further the Rules are silent over the tax treatment. There is no clarification on the tax treatment of the CSR expenditure in the Rules. The request for clarification by the industry was based on the interpretation that if CSR is not “normal course of business”, such expenses may not be tax deductible expense.There is a provision in the CSR rule 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.CSR is very novel concept and having a statutory provision regarding CSR in the law is very unique in the world. The Rules has been very prescriptive in nature, it spell out clearly as what is included as CSR and what will not be considered as CSR. The provision related to independent directors not being applicable to private company is a welcome change and relief to the private companies. The Rules allowing pooling of resources enabling companies to enhance their spend capacity to take bigger CSR project is a good idea. The recent notification under the Act along with ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Businesses’ released in 2011, this development is already being considered one of the most forward looking and futurist framework in recent times to help businesses become more responsible.
With inputs from Gajendra P Singh, Associate Director -Price Waterhouse

[Moneycontrol.com]

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