Companies (Corporate Social Responsibility Policy) Rules 2014 & amended Schedule VII

Next after the notification of 98 sections of the Companies Act, 2013 on September 9, 2013, The Ministry of Corporate Affairs (MCA) has, now vide Notification dated February 27, 2014, appointed April 1, 2014 as the date on which the provisions of Section 135 and Schedule VII of the Companies Act, 2013 will come into force. The Ministry has also notified the Companies (Corporate Social Responsibility Policy) Rules 2014. Further, in exercise of power conferred by Section 467 (1) of the Companies Act, 2013, the Central Government has altered Schedule VII of the Companies Act, 2013 which specifies the activities to be undertaken by the Company for undertaking Corporate Social Responsibility (CSR) activities.

This newswire intends to inform the reader of the major highlights of the notified Companies (Corporate Social Responsibility Policy) Rules 2014 (the “Rules”) and amended Schedule VII of the Companies Act, 2013.
Following are the major highlights of the notified Companies (Corporate Social Responsibility Policy) Rules 2014 (the “Rules”):

• Definition of “Corporate Social Responsibility” has been included in the Rules to include but not limit to:
  1. Projects or programs relating to activities specified in Schedule VII of the Act; or
  2. Projects or programs relating to activities undertaken by the BOD in pursuance of recommendations of the CSR Committee of the Board subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.
     
     

     It is interesting to note that the activities mentioned in both the prescribed sub- clauses are somewhat similar in nature and intent.

• Definitions of “CSR Committee” and “CSR Policy” have also now been provided  in the Companies (Corporate Social Responsibility Policy) Rules 2014. “CSR Committee” has been defined to mean the Corporate Social Responsibility Committee of the Board referred to in section 135 of the Act and “CSR Policy” has been defined as – Policy that relates to the activities to be undertaken by the company as specified in schedule VII to the act and the expenditure thereon, excluding, activities undertaken in pursuance of normal course of business of a company.

• The Companies (Corporate Social Responsibility Policy) Rules 2014 also elaborately define and clarify the calculation of the “Net Profit” as relevant to the concept of calculation of the corpus for, and the threshold for the calculation for the purposes of CSR. “Net Profit” has now been defined as under:
  
  

  “Net Profit” means a net profit of the company as per its financial statements prepared in accordance with the applicable provisions of the act, but shall not include the following, namely :-

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

   Provided that net profit in respect of the financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956) shall not be required to be re- calculated in accordance with the provisions of the Act:

   Provided further that in case of a foreign company covered under these rules, net profit means the net profit of such company as per profit and loss account prepared in terms of clause (a) of sub – section (1) of section 381 read with section 198 of the Act.

   It is to be noted that with the notification of this definition, a lot of clarity has come for the purposes of calculation of the net profit. It is noteworthy that the definition excludes any dividend received from other companies in India, which are covered under and complying with Section 135 of the Companies Act, 2013. Further, the definition also clarifies that net profit in respect of the 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 of 2013.

• A separate and exhaustive explanation has also been provided for the concept of “Corporate Social Responsibility” which now provides that every company including its holding or subsidiary, and a foreign company defined under section 2(42) of the Act, having its branch office or project office in India, which fulfils the criteria in Section 135(1), shall comply with section 135 of the Act of 2013. This shall be subject to the proviso that 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 with Section 381(1)(a) and section 198 of the Act of 2013.
  
  

  Further, the Rules clarify on a substantial question in the mind of many regarding the requirement of a company to comply with the provisions of section 135. The Rules now clarify that every company which ceases to be a company covered under section 135(1) for three consecutive financial years shall not be required to constitute a CSR committee and to comply with the provisions of Section 135(2) to (5), till such time that it meets the criteria of the thresholds prescribed under section 135(1).

• With respect to CSR activities, it has now been clarified that only such organisations i.e. trust, society or company established under section 8 of the Act for the purposes of CSR activities, shall be required to have an established track record of three years in undertaking similar programs or projects, that are not established by the company or its holding or subsidiary or associate company for the purposes of undertaking of the CSR activities as approved by the CSR Committee of the company.

• The Rules provide that a company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules. This rule expected to go a long way in increasing the corpus of the CSR activities and at the same time ensuring that each of the collaborating companies fulfills their CSR requirements as per the requirements of law.

• Probably with a view to regulate the spending on the CSR activities and the Implementing agencies, the Rules provide that the companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through institutions subject to the other conditions prescribed, but such expenditure shall not exceed 5% of the total CSR expenditure of the company in one financial year.

• The Rules provide that contribution of any amount directly or indirectly to any political party under section 182 of the Act shall not be considered as CSR activity.

• Importantly, the Rules prescribes for the constitution of the CSR Committees in different classes of companies as under:

1. an unlisted public company or a private company covered under sub - section (1) of section 135 which is not required to appoint an independent director pursuant to sub - section 4 of section 149 of the Act, shall have its CSR Committee without such director;
2. a private company having only two directors on its board shall constitute its CSR Committee with two such directors;
3. with respect to a foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall as specified under section 380(1)(d) of the Act and another person shall be nominated by the foreign company.
   

   Hence, those public limited companies and private companies which did not otherwise had the requirement of having an Independent Director on their Board; may constitute such committee without the Independent Director also.

• With respect to the CSR Policy, the Rules contain provisions same as per prescribed under the draft CSR Rules and provide that the CSR Policy of the company shall include 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.

• The Rules very explicitly provide for the meaning and interpretation of the expression “CSR Expenditure”, which was also not provided under the draft Rules released earlier. It is provided 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.

• As regards CSR Reporting, the Rules provide that in addition to what was prescribed under the Draft CSR Rules, the reporting requirements of foreign companies has been separately provided for. It is provided that in case of a foreign company, the balance sheet filed under Section 381(b) of the Companies Act, 2013 but the company shall also contain an Annexure regarding report n CSR by the company.

• The provisions regarding the display of CSR activities on the company’s website remain the same as was provided under the Draft CSR Rules and provide that the BOD shall, after taking into account the recommendations of the CSR Committee, approve the CSR Policy of the company and disclose the contents of such Policy in its report and on the website, if any, as per the details provided in the Annexure.

• The contents of the Annexure provided in the CSR Rules for the reporting of the CSR activities of the company remains the same as was provided under the Draft CSR Rules except that the requirement of mentioning the amount carried forward for the year has been done away with.
  
  

  Following are the changes in Schedule VII of the Act of 2013 as against the schedule prescribed under the Companies Act of 2013:
  
  Items modified and elaborated:

1. Malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
2. Including special education and employment enhancing vocation skills specially among children, women, elderly, and differently abled and livelihood enhancement projects;
3. 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;
4. Ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;
5. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Schedule Castes, the scheduled tribes, other backward classes, minorities and women (However, the earlier Schedule VII also provided for the funds set up by the State Government.

Items added:

1. 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;
2. Measures for the benefit of armed forces veterans, war widows and their dependents;
3. Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;
4. Contribution or funds provided to technology incubators, located within academic institutions which are approved by the Central Government;
5. Rural development projects.

Items deleted:

1. reducing child mortality and improving maternal health;
2. combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
3. social business projects
4. such other matters as may be prescribed

Notably, the amendment has removed the clause that allowed other activities to be prescribed as CSR activities, even though the power to amend the Schedule remains with the Central Government by virtue of Section 467 of the Companies Act, 2013. .

Conclusion
Notification of Section 135, Companies (Corporate Social Responsibility Policy) Rules 2014 and altered Schedule VII of the Companies Act, 2013 has come at a time when the corporate world was in much speculation of the far reaching effects of the new Act, its provisions and the resulting increase in responsibilities and role. A pro- community initiative and a mandatory responsibility of the companies reaching the thresholds prescribed, entrusted by the Companies Act of 2013, have finally been notified to come into effect from the 1st of April 2014. The new financial year will hopefully become a boon for the sectors and segments of the society that are in dire need of such initiatives.