India is unique in mandating that organisations satisfying certain profitability, net worth and size thresholds are required to spend at least 2% of their net income on corporate social responsibility (CSR). The purpose of this blog is to give you a fair understanding of legal provisions pertaining to CSR implementation.
In India, the concept of CSR is governed by clause 135 of the Companies Act, 2013. The CSR provisions within the Act is applicable to companies with an annual turnover of 1,000 crore INR and more, or a net worth of 500 crore INR and more, or a net profit of five crore INR and more. The Act encourages companies to spend at least 2% of their average net profit in the previous three years on CSR activities. The ministry’s draft rules, that have been put up for public comment, define net profit as the profit before tax as per the books of accounts, excluding profits arising from branches outside India
The first step towards formalising CSR projects in a corporate structure is the constitution of a CSR committee as per the specifications in the Act, clause 135. This CSR Committee shall comprise three or more directors. As clarified by the Ministry of Corporate Affairs (MCA), for private limited companies the CSR Committee need not have an independent director. Many sought a clarification that whether an employee can also be part of the CSR Committee. The intention of the legislature is clear. The CSR Committee should comprise minimum three Directors and the Organization can include few other employees who can proactively contribute for CSR planning and its implementation.
Objectives of the CSR Committee:
- Formulate and recommend a CSR policy to the board, indicating the activities as specified in Schedule VII of the Act
- Recommend the amount of expenditure to be incurred on the activities indicated in the policy
- Monitor the CSR policy regularly
CSR Strategy and Policy:
Most of the CSR Projects require long-term commitments and their impact often takes a while to accrue, a good CSR practice requires a long-term (three to five years) vision and strategy which is reviewed annually and the activities and budgets are planned on an annual basis. This method is in compliance with CSR policy requirements of the Act.
The CSR Policy should include the following:
- List of programs that the Company plans to undertake, which shall fall within the purview of the Act.
- Modalities of execution of such programs.
- Schedule for implementation of the programs.
- Process for monitoring the programs.
- Undertaking that the surplus arising out of the CSR activities shall not form part of the business profit of the Company.
Mode of implementation
The company can implement its CSR activities through the following methods:
– Directly on its own, provided the organization should have a track record of at least three years in similar activities
– Through its own non-profit foundation set- up so as to facilitate this initiative
– Through independently registered non-profit organizations that have a record of at least three years in similar activities
– Collaborating or pooling their resources with other companies
Reporting obligation of the Company
The Act requires that the Board of the company shall, after taking into account the recommendations made by the CSR committee, approve the CSR policy for the company and disclose its contents in their report and also publish the details on the company’s official website, if any, in such manner as may be prescribed. If the company fails to spend the prescribed amount, the board, in its report, shall specify the reasons.
Among the four available options for CSR compliance, working with NGOs (as implementation partners) is the most viable option for many organisations. It would be ideal if we have a better understanding on the applicability of Foreign Contribution Regulation Act (FCRA) of India and the qualifying criteria for the NGOs.
Is FCRA applicable to you?
Through Finance Act 2016, the government of India has amended the definition of “foreign source” in FCRA. Under the new definition, so long as the foreign company’s ownership of an Indian entity is within the foreign investment limits prescribed by the government for that sector (it is 100% for Information Technology), the company will be treated as “Indian” for the purposes of the FCRA.
Before this amendment, many corporates were considered as a foreign source due to its shareholding structure – more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by citizens of a foreign country or territory; By applying the same logic many well-known Indian Companies (including Britannia Industries, ICICI and HDFC) were classified as foreign source.
Foreign contribution is defined to mean any donation, delivery or transfer made by a foreign source of any article, currency (whether Indian or foreign) or any security. Thus, the definition of contribution is very wide both in terms of coverage and mode of transfer of the assets in question. It brings within its ambit not only money but every asset transferred from a foreign source to an Indian non-profit entity.
A discreet move to amend FCRA through the Finance Bill 2016 went mostly unnoticed due to non-coverage in the main stream media. The amendment appears to serve a twin purpose — unlock an estimated Rs. 10,000 crore that corporates want to spend on corporate social responsibility (CSR) activities in India and clear the legal path for political parties to receive donations from what were hitherto classified as foreign companies. The ruling government has quietly moved to let the BJP and Congress off the legal hook for violating the (FCRA) when they accepted donations from the London-based multinational, Vedanta. The Delhi high court ruled in 2014 that both parties were guilty of violating the FCRA and ordered the government and the Election Commission to act against them. Both the parties went to Supreme Court challenging the order and their appeal is still pending.