What you need to know about the new Company law and CSR

Did you know, even private limited companies that meet financial norms come under the purview of CSR provisions?

The Companies Bill, 2009 (the Bill), as passed by the Rajya Sabha on 8 August 2013 will introduce the concept of ‘Corporate Social Responsibility’ (CSR) into Indian company law. The World Business Council for Sustainable Development defines the concept of CSR as a “continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. Senior lawyers Joyjyoti Misra and Arjun Rajgopal  of Khaitan & CO  answer few frequently asked questions by Indian companies on the changes made by the government on the CSR provisions.

Who does the new CSR provisions apply to under the Bill?
Applicable to companies with: A net worth of Rs. 500 crore or more; a turnover of Rs 1,000 crore or more; and a  net profit of Rs 5 crore or more during any financial year.

What does the Bill require a company to do?

Companies qualifying are required to form a CSR Committee with at least one independent director. The CSR spend of a company which meets the aforementioned threshold is required to be 2% of the average net profits for the preceding three financial years.

My company is private limited. Is it required to meet the independent director requirement?

Yes, the concept of independent directors gets extended even to private limited companies if they meet the requisite financial thresholds.

What are the duties of a CSR Committee?
Formulate and recommend a ‘CSR Policy’ to the Board which indicate the activities to be undertaken by the company; Recommend the amount of expenditure to be incurred in relation to the CSR policy; and Monitor the progress of the CSR policy from time to time. The CSR policy is required to be disclosed on the company’s website.

What can my company use the CSR Spend for?
CSR activities recognised under the Bill include: Eradicating extreme hunger and poverty; Promotion of education; Promoting gender equality and empowering women;   Reducing child mortality and improving maternal health; Combating HIV, AIDS, Malaria and other diseases; Ensuring environmental sustainability; Imparting employment enhancing vocational skills;   Social business projects; and Contribution to certain funds. The company is to give preference to local areas when formulating its CSR policy.

Is there anything other than the Bill which we are required to comply with?
Yes, the Bill provides for rules to be prescribed in relation to CSR provisions. The rules are currently in the process of being drafted.

How is the CSR spend to be accounted for?
The draft CSR Rules presently require a company to report their CSR spend in a form provided therein and it is likely that such reporting requirements will be included in the final rules as well.

What are the consequences of not complying with the CSR aspects of the Bill?
The Bill only provides that sufficient reasons need to be provided for not making the requisite CSR spend. While no specific penalties are contemplated in the Bill with respect to CSR, Chapter XXIX of the Bill (Sections 450 and 451) provide for general penalties for contravention and repeat offences.