On February 27, 2014, after public consultations, the Indian government published the Companies (Corporate Social Responsibility Policy) Rules, 2014 (the Rules)[1], which come into force on April 1, 2014. The Rules clarify the Corporate Social Responsibility (CSR) requirements of section 135 of India’s new Companies Act, 2013[2]. An estimated 16,000 companies in India will fall within the Rules’ ambit.

The Act and its Rules should be of interest to Canadian companies as they apply to both Indian companies as well as foreign companies doing business in India.

Background: The Companies Act, 2013 and Corporate Social Responsibility

The Act, the first of its kind, requires both public and private companies in India which have either

  1. net worth of Rs. 5 billion or more (US $83 million),
  2. turnover of Rs. 10 billion or more (US $160 million), or
  3. net profit of Rs. 50 million or more (US $830,000)

within any of the previous three financial years, to contribute 2% of their average net profits from the three preceding financial years to Corporate Social Responsibility initiatives, or specify their reasons for not spending that amount in their Board of Director’s annual reports.

The CSR spending of each company is to be overseen by a sub-committee of the company’s board of directors, whose duties include developing a CSR policy, recommending CSR activities to be undertaken and the amount of spending on each activity, and monitoring the company’s CSR policy. The company’s board of directors is responsible for ensuring that at least 2% of the average net profit of the company over the past three years is spent on CSR initiatives.

The Companies (Corporate Social Responsibility Policy) Rules, 2014

The Rules clarify that the 2% net profit contribution requirement applies to all companies which meet the threshold requirement, including holdings or subsidiaries and foreign companies which have a place of business in India (themselves or through an agent, physically or electronically) and conducts any business in India in any other manner. A company’s “net profit” under section 135 does not include profits arising from branches outside of India or dividends received from other companies in India that comply with section 135 of the Act.

The Rules also set out the disclosure requirements for the Board of Directors’ Annual Report where a company meets the section 135 threshold. The information to be disclosed to the Registrar in the Board’s Annual Report includes the CSR policy and projects, composition of their CSR Committees, average net profits for the last three fiscal years, prescribed CSR expenditures, details of CSR spending during the fiscal year, reasons for failing to meet their CSR spending if the company has failed to spend the 2% required, and a statement by the CSR Committee that the implementation and monitoring of the CSR policy is in compliance with the CSR objectives and Policy.

The Board must also display the company’s CSR policy on its website, if such a website exists. However, the Rules are unclear as to whether a company would be required to publish further details required in the Annual Report on the company’s website.

The Rules clarify that:

  • those companies which cease to meet the contribution threshold for three consecutive years are not required to have a CSR Committee or to comply with the other requirements under section 135 until they meet the threshold again;
  • any surplus arising out of CSR activities shall not be considered part of a company’s business profit;
  • a company’s CSR policy shall specify the CSR projects and programs to be undertaken, modalities of execution, implementation schedules and monitoring processes;
  • companies may choose to conduct their CSR programs through trusts, societies or charitable companies operating in India, provided that if the entity is not set up by the company, its holding or subsidiary or associated company, that entity has been carrying out related activities for at least three years;
  • companies may collaborate or pool resources with other companies to undertake their CSR activities, so long as the companies can report separately on those CSR activities;
  • CSR activities must be undertaken within India;
  • activities that are for the exclusive benefit of employees of the company or their families, contributions to political parties and activities in the normal course of business are excluded from the CSR spending; and
  • up to 5% of a company’s annual CSR expenditures may be used for capacity building of the company’s own personnel or of their implementing agencies.

The Rules also provide situations in which the composition of a company’s CSR committee may differ from that stated in section 135; for example, where a private company has only two directors on its Board, the CSR committee will be composed of those two directors.

Also, Schedule VII of the Act, which lists the types of activities for which CSR expenditures can be made, was amended. Activities have been both added and removed from the original list and more detail has been provided as to what types of activities are acceptable. For example, the eradication of hunger and poverty now also includes “promoting preventive healthcare and sanitation and making available safe drinking water.”

Commentary

The Rules’ reporting requirements for section 135 companies’ websites are unclear. The Rules appear to only require that the company’s CSR policy, with an overview of the projects proposed to be undertaken, be published on the website. However, the Rules may be interpreted as requiring all CSR information provided in the Annual Report, including the company’s average net profit for the last three financial years, to be published. If the broader interpretation is used by the Indian government, it can expect a backlash from private companies that fall within the section’s scope.

Though the Rules clarify the requirements of section 135, some questions remain regarding compliance with the section’s spending requirements. Both the Act and the Rules state that where the 2% has not been spent, a company must disclose why the company failed to meet the spending requirement; however, they do not address whether there will be penal consequences for the company’s failure. The Rules also do not consider any circumstances in which a company under the scheme may avoid spending the 2% of average net profits.

Adherence to these CSR requirements will commence April 1, 2014 and the first annual reports disclosing companies’ policies and spending will follow in April 2015. Further questions from the corporate community and guidance from the government are likely during this first year implementing India’s CSR spending scheme.