India’s Corporate Social Responsibility Mandate: The Companies Act 2013

March 12, 2014 Posted by India Briefing Reading Time: 4 minutes

MUMBAI – Among the provisions outlined in India’s Companies Act 2013, the corporate social responsibility (CSR) requirement has received the most attention by far from domestic and foreign firms.

Often referred to as the “2 percent” requirement, India’s CSR requirement has made India the first country in the world to mandate that qualifying companies contribute at least 2 percent of their average net profits from the preceding three years to CSR.

According to the provisions outlined in the new Companies Act:

135. (1) Every company having a net worth of rupees five hundred crore or more [Rs50 million or US$830,000], 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 provisions apply to any company incorporated in India, regardless of whether it is domestic or a subsidiary of a foreign company. In addition to the Rs50 million net profit qualification mentioned above, the provisions apply to companies with a turnover of at least Rs10 billion (US$160 million) or net worth of Rs5 billion (US$83 million).

With these requirements, an estimated 8,000 companies operating in India will be required to spend a combined Rs150 billion (US$2 billion) annually on CSR activities.

The CSR committee or board is responsible for reviewing, approving, and validating investments in CSR. A report must be submitted prior to the committee’s annual meeting that details CSR initiatives undertaken during the previous financial year and justifying any failure to meet the required contribution amount (justifiable reasons have not yet been specified).

Because the board is composed of independent directors, it is hoped that this will help ensure the credibility of the process.

(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,—

(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and

(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,—

(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and

(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

The Companies Act 2013 additionally outlines the realm of activities that fall under the umbrella of CSR. These include poverty reduction, health, environmental sustainability, etc. and companies are granted the flexibility to choose which of these areas to invest in or contribute the required amount to central or state government funds earmarked for socioeconomic development. The act does explicitly state, however, that companies “shall give preference to the local area and areas around which it operates.”

[Schedule VII]

Activities which may be included by companies in their Corporate Social

Responsibility Policies

Activities relating to:—

(i) eradicating extreme hunger and poverty;

(ii) promotion of education;

(iii) promoting gender equality and empowering women;

(iv) reducing child mortlity 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.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as as well as liaison offices in Italy and the United States.

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