First Notes 28Feb14 CSR Rules

8/11/2019 First Notes 28Feb14 CSR Rules

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2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative(KPMG International), a Swiss entity. All rights reserved.

28 February 2014

First Notes on:

Financial ReportingCorporate law updates

Regulatory andOther Information

Disclosures

Relevant to:

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CFO

Others

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Information,Communication,Entertainment

Consumer and IndustrialMarkets

Infrastructure andGovernment

Transition:

ImmediatelyWithin the next3 months

Post 3 months butwithin 6 months

Post 6 months

FIRST NOTESKPMG in India

Notification of provisions relating to corporatesocial responsibil ity under the Companies Act, 2013

Introduction

The Ministry of Corporate Affairs (MCA) has videits notification dated 27 February 2014, and inexercise of powers conferred by section 1(3) of theCompanies Act, 2013 (the Act), notified 1 April2014 as the date on which the provisions ofsection 135 and Schedule VII of the Act shall comeinto force.

Section 135 covers the fol lowing:Applicability

It covers all companies in India meeting any one ormore of the following conditions: Turnover of INR 1,000 crores or more

Networth of INR 500 crores or more Net Profit of INR 5 crores or more

The corporate social responsibility (CSR)contribution would have to be at least two per centof the average net profit, made during the threeimmediately preceding financial years.

Administration and reporting

The Board would appoint a three member CSRcommittee including one Independent Director.

The CSR committee would be responsible toformulate CSR policy, recommend CSR

initiatives and monitor CSR expenditure. The Board would be required to mandatorily

report on CSR in the Boards report. In case offailure to spend the prescribed amount,reasons would have to be disclosed in theBoards report.

Implementation CSR committee is to develop CSR policy which

shall indicate the activities to be undertaken bythe company as specified in Schedule VII.

The company shall give preference to the localarea and areas around it where it operates forspending.

Companies (Corporate Social responsibili tyPolicy) Rules, 2014

The MCA has also notified the Companies(Corporate Social Responsibility Policy) Rules, 2014(the Rules) to be effective from 1 April 2014.

The Rules have just released and as these are

evaluated in detail, further areas requiring claritymay emerge. The salient features of the Rules areas follows:

Net profit to exclude dividends from otherIndian companies and profits generatedoutside India

Net profit means net profit as per the financialstatements of the Company and excludes profitsgenerated outside India through overseasbranches or subsidiaries and any dividend receivedfrom other companies in India that are complyingwith the CSR provisions. This could provide reliefto companies by avoiding any cascading effect of

CSR spending on up-streaming of dividends.


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A pri vate comp any or an unl is ted publ iccompany exempted fr om the requirement ofhaving independent directors for CSRcommittee

A private company or unlisted public company,which are otherwise not required to have anindependent director, is exempted from therequirement of having an independent director ontheir CSR committee. This is a constructivedevelopment, and provides relief to a number ofprivate companies who would have had to getindependent directors on their boards. This mayalso ease the demand for independent directorsat a time when there already may be a demand-supply mis-match for high quality independentdirectors.

CSR expenditure to be in line with theamended Schedule VII of t he Companies Act2013

CSR to include activities undertaken by the Boardpursuant to policy developed by the Company, aslong as the policy covers areas included inSchedule VII. This seems to indicate that theBoard policy can cover other areas aswell. However, it is also clarified that expenditureon any item not in conformity with Schedule VIIwill not be considered as eligible CSRexpenditure. Therefore, companies will have todraw up the policy and action plan to ensure thatthey spend the required 2 per cent amount on theactivities included in Schedule VII.

CSR expenditure to exclude those incurred inthe normal course of business

CSR expenditure would also exclude those onactivities undertaken in the normal course ofbusiness of a company. Companies would needto clearly distinguish those activities which areundertaken in the normal course of business andthose that are done incrementally as part of theCSR initiatives.

Foreign companies covered under CSRprovisions

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

Indian branches and project offi ces of foreigncompanies covered under CSR provisions

Indian branches and project offices of foreigncompanies are covered under CSR provisions.This will also require such foreign companies toset up a CSR committee, CSR policy etc. tocomply with these requirements.

Three years of non-applicability required toexit CSR compliance requirements

Once covered under CSR provisions, companieswill need to have 3 consecutive years, where theprovisions do not apply to them, before they canstop complying with the requirements relating to

CSR.

Group CSR projects or joi nt CSR projectspermitted

Companies belonging to the same group can setup a registered trust or a registered society or acompany established under section 8 of the Act,

to undertake CSR activities. Companies can alsojoin hands with other companies to undertakeCSR projects jointly, in such a manner that suchcompanies can report separately on suchprojects. This is a positive development as itwould allow groups and companies operating inan area to come together and undertake projectsof a larger scale.

CSR expenditure on projects or activities i nIndia only

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

Capacity building costs of own personnel orthose of i mplementation agencies to qualifyas CSR expendit ure; capped at 5% of totalCSR expenditu re

Companies may build CSR capacity through theirown personnel or through their implementationagencies. However, the total expenditure shouldnot exceed 5% of the total CSR expenditure inthat year.

Political contribution excluded from CSRexpenditure

Contribution, directly or indirectly, to any politicalparty shall not be considered as CSR expenditure.

Surplus from CSR activities not businessprofits of company

The CSR policy shall specify that the surplusarising from CSR activities are not to beconsidered as business profits of the company.Such surplus may therefore need to be ploughedback into CSR activities.

CSR policy and activities to be displayed onwebsite

Companies will be required to display the CSRpolicy and projects undertaken and amount spentin the Board Report and on the Companyswebsite.

Schedule VII of the Act

The comparison of the Schedule VII, as enacted,and the Schedule VII, as amended, is as shown inthe table below. Essentially, some of theactivities permitted as per the earlier schedulehave been elaborated and widened in scope, afew activities have been added and some havebeen deleted.

First Notes - 28 February 2014


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Sr. No. Schedul e VII as enacted Schedul e VII as amended

1 Eradicating extreme hunger andpoverty

Eradicating hunger and poverty and malnutrition, promotingpreventive healthcare and sanitation and making available safedrinking water.

2 Promotion of education Promoting education; including special education and employmentenhancing vocation skills especially among children, woman,elderly and the differently abled and livelihood enhancementprojects.

3 Promoting gender equality andempowering women

Promoting gender equality, empowering women; setting up homesand hostels for women and orphans, setting up old age homes, daycare centres, and such other facilities for senior citizens andmeasures for reducing inequalities faced by socially andeconomically backward groups.

4 Reducing child mortality andimproving maternal health

Deleted

5 Combating humanimmunodeficiency virus,acquired immune deficiencysyndrome, malaria and otherdiseases

Deleted

6 Ensuring environmentalsustainability

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

7 Employment enhancingvocational skills

Integrated with Sr. No. 2 above

8 Social business projects Deleted

9 Contribution to the PrimeMinister's National Relief Fundor any other fund set up by theCentral Government or theState Governments for socio-economic development andrelief and funds for the welfareof the Scheduled Castes, theScheduled Tribes, other

backward classes, minoritiesand women

Contribution to the Prime Minister's National Relief Fund or anyother fund set up by the Central Government for socio-economicdevelopment and relief and welfare of the Scheduled Castes, theScheduled Tribes, other backward classes, minorities and women.

10 Such other matters as may beprescribed

Following new activities are added in the amended Schedule VII: Protection of national heritage, art and culture including

restoration of buildings and sites of historical importanceand works of art; setting up of public libraries; promotionand development of traditional arts and handicrafts.

Measures for the benefit of armed forces veterans, warwidows and their dependents.

Training to promote rural sports, nationally recognisedsports, and Paralympics sports and Olympic sports.

Contributions or funds provided to technology incubatorslocated within academic institutions which are approved bythe Central Government.

Rural development projects.


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Our comments

The release of the Companies (Corporate Social Responsibility Policy) Rules, 2014, is a welcomedevelopment which aims to provide clarifications that were needed and signals the strong intent of theMinistry 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 ruleslate last year. It is also heartening to note that several of the representations made by the industry havebeen taken into account, as the MCA has finalised these rules and made amendments to Schedule VII ofthe Companies Act, 2013.

The bottom line Companies should aim to assess the changes made in the Rules and move to implement their

corporate social responsibilities under the Companies Act, 2013, swiftly.


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KPMG in India

www.kpmg.com/in

The information contained herein is of a general nature and is not intended t o address the circumstances of anyparticular individual or entity. Although we endeavour to provide accurate and timely information, there can be noguarantee that such information is accurate as of the date it is received or that it will continue to be accurate in thefuture. No one should act on such information w ithout appropriate professional advice after a thorough examination ofthe particular situation.

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First Notes 28Feb14 CSR Rules