Whether the activity a company is required to do as per statutory obligation under any law, would be termed as CSR activity?
Ans. No, the activity undertaken in pursuance of any law would not be considered as CSR activity. In this regard, please refer to the Ministry of Corporate Affairs Circular No. 21/2014 dated June 18, 2014 where it is clarified that expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act, 2013.
There are certain corporate groups who run hospitals and educational institutions, will this be considered as CSR?
Ans. If the hospitals and educational institutions are part of the business activity of the company they would not be considered as CSR activity. However, if some charity is done by these hospitals or educational institutions, without any statutory obligation to do so, then it can be considered as CSR activity.
What are the consequences for non-compliance of CSR provisions?
Ans. The concept of CSR is based on the principle ‘comply or explain’. Section 135 of the Act does not lay down any penal provisions in case a company fails to spend the desired amount. However, sub-section 8 of section 134 provides that in case the company fails to spend such amount, the Board shall in its report specify the reasons for not spending the amount.
In case the company does not disclose the reasons in the Board’s report, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty- five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees buut which may extend to five lakh rupees, or with both. (Section 134(8).
Whether section 135 is required to be complied by the company including its holding or subsidiary company?
Ans. Rule 3(1) of Companies (CSR Policy) Rules, 2014, every company including its holding or subsidiary which fulfils the criteria specified in sub-section (l) of section 135 of the Act with regard to networth/ turnover or net profit shall comply with the provisions of section 135 of the Act and these rules.
As per section 135(1), every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall
constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
The criterion needs to be fulfilled by individual company. Therefore, if the holding company or the subsidiary company fulfils the criteria specified in Section 135, all the provisions mentioned therein becomes applicable to such company.
For compliance under section 135 i.e. Corporate Social Responsibility, from which Financial Year CSR Expenditure & Reporting Begins?
Ans. Since section 135 relating to Corporate Social Responsibility and schedule VII has become effective from April 01, 2014, every company which meets the criteria specified under sub-section (1) of section 135 is required to comply the same from April 01, 2014. Companies have to spend the amount on CSR activities as required by section 135 during the F.Y. 2014-15 and Reporting of the same would be in 2015 Board’s Report or otherwise state the justification for the same in Board Report.
Accordingly, amongst other things, the constitution of CSR Committee, preparation of CSR Policy, the spending of amount on CSR activities needs to be during the financial year 2014-15.
Whether the provisions of CSR are applicable to section 8 companies?
Ans. Since section 8 companies are supposed to apply their profits in promoting the objects such as commerce, art, science, sports, education etc., these companies are perhaps not, required to follow CSR provisions.
Rather, under Rule 4 of Companies (CSR Policy) Rules, 2014 companies may route their CSR activities through a section 8 company (Rule 4 of Companies (CSR Policy) Rules, 2014).
In case of companies having multi-locational operations, which local area of operations should the company choose for spending the amount earmarked for CSR operations?
Ans. Proviso to Section 135(5) of the Companies Act 2013 provides that a company shall give preference to the local area and the areas around it where it operates for spending the amount earmarked for CSR activities. In case of multi-locational operations, the company could exercise discretion in choosing the area for which it wants to give preference.
In case the company has appointed personnel exclusively for implementing the CSR activities of the company, can the expenditure incurred towards such personnel in terms of staff cost etc. be included in the expenditure earmarked for CSR activities?
Ans. The Ministry of Corporate Affairs vide General Circular No. 21/2014 dated 18th June, 2014 clarifies that Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.
Are the provisions with regard to CSR applicable to foreign companies?
Ans. In terms of Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2013, a foreign company having its office or project office in India which fulfils the criteria specified in Section 135(1) is required to comply with the provisions of Section 135 of the Act and the Rules thereunder.
The networth, turnover or net profit of a foreign company is to be computed in accordance with the balance sheet and profit and loss account of the foreign company prepared with respect to its Indian business operations in accordance with schedule III or as near thereto as may be possible for each financial year.
Therefore foreign company having its branch office or project office in India which fulfils the criteria specified under section 135(1) is required to constitute a CSR Committee and comply with the spending of 2% of average net profits as per financial statement of its Indian business operations in CSR activities in India.
Where CSR activities lead to profits then what about such surplus?
Ans. Rule 6(2) of the Companies (CSR Policy) Rules, 2014 provides that the CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. This impliedly means that the surplus arising out of CSR projects or programs or activities of the company shall not form part of the business profit of a company.
Ideally, the surplus should be rolled over to CSR Corpus.
If a company having turnover of more than Rs. 1000 crores or more but has incurred loss any of the preceding three financial years then whether such company is required to comply with the provisions of the section 135 Companies Act, 2013?
Ans. As per the provisions of section 135 of the Act, one of the three criteria has to be satisfied to attract Section 135. Therefore, if a company satisfies the criterion of turnover although it does not satisfy the criterion of net profit, it wil have to comply with the provisions of Section 135 and the Companies (CSR Policy) Rules, 2014.