Spend on CSR mandatory for profitable firms even if group incurs loss

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NEW DELHI: The Ministry of Corporate Affairs (MCA) proposes to mandate companies to spend two% of their average net profit for past three years on fulfilling their corporate social responsibilities (CSR) even if their Group makes consolidated net loss.

As per the draft rules under the newly enacted Companies Act, 2013, on which feedback is invited till October eight, this spend is based on the standalone net profit of the company, irrespective of loss or gain of the group.

“Two percent CSR spending would be computed as 2% of the average net profits made by the company during every block of three years. For the purpose of first CSR reporting the net profit shall mean average of the annual net profit of the preceding three financial years ending on or before 31 March 2014,” the draft rules said.

If a company fails to spend the amount, it will have to explain the reason for it in its annual reports.

The draft rules propose various other strict criteria to ensure spending of the money on social development. For instance, the draft rules suggest that donations or activities exclusively benefiting a company’s own employees and families will not qualify as CSR.

“Only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity,” the draft rules said.

The first set of draft rules, covering 16 of the total 29 chapters of the Act, was released by the Ministry of Corporate Affairs on Monday.

The Companies Act mandates companies having a net worth of Rs 500 crore or more; or a turnover of Rs 1000 crore or more; or a net profit of Rs 5 crore or more to have a CSR spend of at least 2% of their average net profit of past three years.

While the draft rules provide an indicative list of activities which will qualify for CSR, it has also allowed companies to collaborate or pool resources with other companies to undertake CSR activities. Any expenditure incurred on such collaborative efforts would qualify for computing the CSR spending, the draft rules said.

Besides, the draft proposed that contributions to the Prime Minister’s National Relief Fund and other Central and state government funds will continue to be eligible for CSR activities.

The CSR committee of a company will be responsible for specifying the projects and programmes to be undertaken by the company. The committee is also required to monitor and report the activities to the government.

The draft rules on CSR are proposed to be implemented from financial year 2014-15, while companies are required to do the first CSR annual reporting based on the three preceding years ending on or before March 31, 2014.

Apart from CSR, the draft rules also cover norms for auditors, appointment of directors, declaration and payment of dividends, besides setting up of National Financial Reporting Authority.
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(Business Standard, 10 September 2013)

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