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CSR Notification: An Analysis!

Published on Fri, Feb 28,2014 | 13:00, Updated at Fri, Feb 28 at 13:00Source : Moneycontrol.com 

By: Sai Venkateshwaran, Partner and Head - Accounting Advisory Services, KPMG India

The release of the Companies (CSR Policy) Rules is a welcome development and signals the strong intent of the Ministry of Corporate Affairs to make the Companies Act 2013 fully operational at the earliest.  This is the first set of rules that have been released by the MCA after the consultation on the draft rules late last year.  It is also heartening to note that several of the representations made by the industry have been taken into account as the MCA has finalized these rules and made amendments to Schedule VII to the Companies Act 2013. 

Key amendments in Schedule VII

Key amendments in Schedule VII are highlighted below in Red in the table below.  Essentially, some of the activities permitted as per the earlier schedule have been elaborated and widened in scope.  Further some activities such as social business projects, employment enhancing vocational skills, combating HIV/AIDS and reducing child mortality and improving maternal health have been done away with.  Instead activities relating to benefit of armed forces veterans, promotion of sports, protection and promotion of heritage, arts and culture have been included. 

As per Schedule VII to Companies Act 2013, as enacted

As per Schedule VII to Companies Act 2013, as amended

(i) eradicating extreme hunger and poverty;

(i) eradicating extreme hunger and poverty and malnutrition, promoting preventive healthcare and sanitation and making available safe drinking water

(ii) promotion of education;

(ii) promotion of education; including special education and employment enhancing vocation skills especially among children, woman, elderly and the differently abled and livelihood enhancement projects

(iii) promoting gender equality and empowering women;

(iii) promoting gender equality and empowering women; setting up homes and hostels for women and orphans, setting up old age homes, day care centres, and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups

(iv) reducing child mortality and improving maternal health;

Deleted

(v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

Deleted

(vi) ensuring environmental sustainability;

(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining of quality of soil, air and water.

(vii) employment enhancing vocational skills;

 

(viii) social business projects;

 

 

(v) protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up of public libraries; promotion and development of traditional arts and handicrafts;

 

(vi) measures for the benefit of armed forces veterans, war widows and their dependents

 

(vii) training to promote rural sports, nationally recognized sports, and paraolympic sports and Olympic sports

(ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

(viii) contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;

 

(ix) contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government

(x) such other matters as may be prescribed.

(x) rural development projects

 Salient features of the Companies (CSR Policy) Rules 2014

 CSR expenditure to be in line with the amended Schedule VII of the Companies Act 2013

CSR to include activities undertaken by the Board pursuant to policy developed by the Company, as long as the policy covers areas included in Schedule VII.  This seems to indicate that the Board policy can cover other areas as well.  However, it is also clarified that only expenditure on any item not in conformity with Schedule VII will not be considered as eligible CSR expenditure.  Therefore, companies will have to draw up the policy and action plan to ensure that they spend the required 2% amount on the activities included in Schedule VII

CSR expenditure to exclude those incurred in normal course of business

CSR expenditure to also exclude those on activities undertaken in pursuance of normal course of business of a company.  Companies would need to clearly distinguish those activities which are undertaken specifically in pursuance of normal course of business and those that are done incrementally as part of the CSR initiatives. 

Net profit to be after tax; exclude dividends from other Indian companies and profits generated outside India

Net profit means net profit as per financial statements of the Company and excludes profits generated outside India through overseas branches or subsidiaries and any dividend received from other companies in India that are complying with the CSR provisions.  This would provide relief to companies, and avoid any cascading effect of CSR spending on up-streaming of dividends.

Foreign companies covered under CSR provisions

Foreign companies to contribute to CSR based on the profits of their Indian business operations. 

Indian branches and project offices of foreign companies covered under CSR provisions

Indian branches and project offices of foreign companies covered under CSR provisions.  This will also require such foreign companies to set up a CSR committee, etc to comply with these requirements.

3 years of non-applicability required to exit CSR compliance requirements

Once covered under CSR provisions, companies will need to have 3 consecutive years where the provisions do not apply to them before they can stop complying with the requirements relating to CSR

Group CSR projects or joint CSR projects permitted

Companies belonging to the same group can set up a trust of not for profit company to undertake CSR.  Companies can also join hands with other companies to undertake CSR projects jointly.  This would allow groups and companies operating in an area to come together and undertake projects of a larger scale.

CSR expenditure on projects or activities in India only

Only expenditure incurred on projects or activities in India to qualify as CSR expenditure. 

Capacity building costs of own personnel or those of implementation agencies to qualify as CSR expenditure; capped at 5% of total CSR expenditure

Companies may build CSR capacity through their own personnel or through their implementation agencies.  However the total expenditure should not exceed 5% of the total CSR expenditure in that year

Political contribution excluded from CSR expenditure

Contributions, directly or indirectly to any political party shall not be considered as CSR expenditure.

Private companies and certain unlisted public companies exempted from requirement for independent directors for CSR committee

Private companies and certain unlisted public companies, which are otherwise not required to have an independent director are exempt from the requirement of having an independent director on their CSR committee.  This is a good development, and provides relief to a lot of private companies who would have had to get independent directors on their boards.  This would also ease the demand for independent directors at a time when there is already a demand-supply mis-match for independent directors. 

Surplus from CSR activities not business profits of company

Surplus arising from CSR activities are not to be considered as business profits of the company and may therefore need to be ploughed back into CSR activities. 

CSR policy and spending to be displayed on website

Companies will be required to display the CSR policy and projects undertaken and amount spent in the Board Report and on the Company’s website. 

 
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