Companies can collaborate with each other for CSR

In a move that could benefit the corporate sector at large, the government has allowed companies to enter into collaboration with each other to engage in corporate social responsibility (CSR).

The Companies Act had earlier prescribed companies can do CSR work only on their own or through a holding, subsidiary or associate company.

The ministry of corporate affairs has issued a notification to amend the CSR provision in the new Companies Act, allowing two companies to collaborate with each other on their own, or through their holding, subsidiary or associate companies. These two companies can form a trust, society or another third company for CSR work.

“Companies would now be able to undertake CSR activities together with other entities, whether forming part of the same group or otherwise, through a separate legal entity,” said Sai Venkateshwaran, partner and head of accounting advisory services, KPMG in India.

Companies above a threshold of their earnings have to spend a portion for CSR or explain the reasons for not doing so to the shareholders.

The rules have permitted collaborative CSR efforts between unrelated entities, and this amendment would help operationalise that using a separate legal entity structure, he added.

According to the Companies Act, 2013, any company with a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore needs to spend at least two per cent of its average net profit in the preceding three financial years on CSR activities.

The company’s report of the Board of Directors attached to the financial statements is required to include an annual report on the CSR activities of the company. This would cover a brief outline of the CSR policy, the composition of the CSR Committee, the average net profit for the past three financial years and the prescribed CSR expenditure.

If the company concerned fails to spend the specified amount on CSR, it has to specify the reasons for not spending in this report.

CSR activities include spending on eradicating hunger, poverty and malnutrition, promoting preventive health care, education and gender equality, setting up homes for women, orphans and senior citizens, measures for reducing inequalities faced by socially and economically backward groups.

It also includes spending on ensuring environmental sustainability and ecological balance, animal welfare, protection of national heritage and art and culture, measures for the benefit of armed forces veterans, war widows and their dependents, training to promote rural, nationally recognised Paralympic or 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 Scheduled Castes, Scheduled Tribes, other backward classes, minorities and women.

Contribution to political parties is not a part of CSR and only activities in India would be considered for computing such an expenditure.