Corporate Social Responsibility – Private Equity, India
Corporate social responsibility
(“CSR”), a new initiative under the Companies Act 2013 (“CA13”),
is the process by which an organization thinks about and evolves its
relationships with stakeholders for the common good, and demonstrates its
commitment in this regard by adoption of appropriate business processes and
strategies.
- CA13 requires that every Company having net
worth of Rs. 500,00,00,000/- (Rupees Five Hundred Crore) or more, or turnover
of Rs. 1000,00,00,000/- (Rupees One Thousand Crore) or more, or net profit of
Rs. 5,00,00,000/- (Rupees Five Crore) or more, during any financial year,
shall constitute a CSR Committee of 3 (three) or more directors, 1 (one) of
which has to be an independent director, and the composition of such committee
is required to be included in the Board’s report. - The CSR Committee will be required to formulate
and recommend to the Board, and monitor, a CSR policy, including activities
relating to: (i) eradicating extreme hunger and poverty; (ii) promotion of
education; (iii) promoting gender equality and empowering women; (iv) reducing
child mortality and improving maternal health; (v) combating human
immunodeficiency virus, acquired immune deficiency syndrome, malaria and other
diseases; (vi) ensuring environmental sustainability; (vii)
employment enhancing vocational skills; (viii) social business projects; (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 (x) such
other matters as may be prescribed and recommend expenditure to be incurred;
the contents of the report have to be disclosed on the company’s website. - 2% (two percent) of a company’s average net
profits (computed as 2% of the average net profits made by the company during
every block of 3 years) will need to be used for CSR every financial year, and
if not, the Board must specify in its report the reasons for not spending such
amount. - CSR policy must specify that the corpus would
include (a) 2% (two percent) of the average net profits as aforesaid, (b) any
income arising there from, and (c) surplus arising out of CSR activities. The
policy should additionally provide that surplus arising out of the CSR activity
will not be part of business profits of a company. - Where a company has set up an organization which
is registered as a trust or a Section 8 company (erstwhile Section 25 company),
or society or foundation or any other form of entity operating within India to
facilitate implementation of its CSR activities in accordance with its stated
CSR Policy, the following shall apply: (a) the contributing company would need
to specify the projects/programmes to be undertaken by such an organization,
for utilizing funds provided by it, and (b) the contributing company shall
establish a monitoring mechanism to ensure that the allocation is spent for the
intended purpose only. - A company may also conduct/implement its CSR
programmes through trusts, societies, or Section 8 companies operating in
India, which are not set up by the company itself. - Spends on such not for profit organizations may
be included as part of the company’s prescribed CSR spends, only if such
organizations have an established track record of at least 3 (three) years in
carrying on activities in related areas. - Companies may alternatively collaborate or pool
resources with other companies to undertake CSR activities and any expenditure
incurred on such collaborative efforts would qualify for computing the CSR
spending. - Preference shall be given to local area and
areas around which it operates. - Only activities which are not exclusively for
the benefit of employees of the company or their family members shall be
considered as CSR activity. - Only such CSR activities will be taken into
consideration as are undertaken within India.
Details of the CSR activities
will need to be specified in the Board’s report as well as on the website of
the company. Many Indian corporate are already involved in voluntary CSR
activities but the mandatory nature of the CSR activities now introduced by
CA13 intends to expand the scope and reach of these activities to deserving
socio-economic causes and projects.
By: Ms. Seema Jhingan, Partner ([email protected])
and Mr. Himanshu
Chahar, Senior Associate ([email protected]).