Tuesday, 24 January 2017

FAQs on Execution

Following our previous post, on FAQs on Compliance, this post presents FAQs on the execution of CSR projects in line with Sec 135 along with Schedule VII.

1.    Which activities are covered under CSR?

Schedule VII to the Companies Act, 2013 enlists the broad areas under which the Companies shall undertake their CSR activities. MCA has clarified that the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities. The projects or programs must be in line with the CSR Policy of the Company, which, in turn, has to comply with Schedule VII.

Areas broadly covered under Schedule VII:

 Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water
 Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently-abled and livelihood enhancement projects
• Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backwards groups
 Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water
   Rural development projects
  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
   Measures for the benefit of armed forces veterans, war widows and their dependents
  Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports
  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 Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
 Contributions or fund provided to technology incubators located within academic institutions which are approved by the Central Government
  Slum area development
  Spending on relief operations in disaster-hit areas (as per recent clarification by Central Government

2.      Which activities will not qualify under CSR?

•   Social Activities meant exclusively for employees and their families
•   Activities undertaken in pursuance of normal course of business
•   Expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.)
•   Training of enforcement personnel (Govt. officials) 
•   Capacity building of Govt. Officials and elected representatives
•   Sustainable urban development and urban public transport systems
•   Contribution directly or indirectly for any religious purpose
•   One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes, etc.
•   Contribution directly or indirectly to any political party

3.    Many Companies have been undertaking CSR activities from past. Should such companies continue to follow that activity without seeking clarification from Ministry of Corporate Affairs?

If the activities are in line with Schedule VII of the Act, then the Companies can continue to follow what they were doing in the past and incorporate the said activity in CSR Policy.

4.  Whether the Law mandates any location preference for implementing CSR projects?

Section 135 mandates that the Company shall give preference to the local area where it operates and areas around it, for spending the amount earmarked for Corporate Social Responsibility activities.

Only CSR activities undertaken in India will be taken into consideration for the purpose of Section 135.

5.   How can a Company implement its CSR activities? Can it establish a trust to undertake CSR activities for all the Group companies?

The Company can implement its CSR activities through the following approaches:

•   Directly on its own through its employees
•  Through registered trust or registered society or non-profit company established by the company or its holding or subsidiary or associate company. No minimum experience is required for such registered trust or registered society or non-profit company
• Through other registered trust/registered society/Section 8 Company with an established track record of >= 3 years in undertaking similar programs or projects
•  Collaborate with other companies in such manner that the CSR Committees of respective companies are in a position to report separately
•  Contribution to Prime Ministers National Relief Fund or any other fund set up by Central Government for socio-economic development and relief and welfare of the Schedule castes, tribes, minorities and women
•  Contribution to technology incubators located within academic Institutions approved by Central Government (such as IIT)

6.    A company makes payment to a registered trust for carrying out CSR activities. Should the company treat payment made to the trust or actual expenditure incurred by the trust as its CSR expenditure?

As per the provisions of the Act, the CSR committee has to monitor and the Board has to ensure that Company spends 2% on CSR every year. The emphasis is on spending and not on contribution.  The intent of the Legislature seems to ensure that the Companies spend on CSR. Further, CSR rules require the CSR committee to monitor the activities of the agency.

7.     Whether the activity a company is required to do as per statutory obligation under any law, would be termed as CSR activity?

No, the activity undertaken in pursuance of any law would not be considered as CSR activity. In this regard, Ministry of Corporate Affairs Circular No. 21/2014 dated June 18, 2014 clarifies that the 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.

8.     Where CSR activities lead to profits then what about such surplus?

Rule 6(2) of the Companies (Corporate Social Responsibility 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 need to be spent on CSR.

Accordingly, the surplus should be added to the minimum amount of 2% to be spent on CSR.

9.     CSR provisions talk about “registered trusts”. In many states there is no trust Act or registration of trust is not mandatory, then in such case how CSR spending can be done through a registered trust?

As per clarifications issued by MCA on June 18, 2014, ‘Registered Trust’ (as referred in Rule 4(2) of the Companies CSR Rules, 2014) would include Trusts registered under Income Tax Act 1956, for those States where registration of Trust is not mandatory. As a corollary, for those States where registration of Trust is mandatory, the Trust needs to be duly registered under the laws of such State.

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