Applicability of CSR Law

Newly enacted CSR law is not applicable to all companies. Sub – Section (1) of Section 135 is applicable to all companies; subject to limitation based on its net worth, turnover and net profit. These threshold limits are:

1. Net worth rupees five hundred crore or more (Rs. 500,00,00,000/-) or rupees five arab
2. Turnover rupees one thousand crore or more (Rs. 10,00,00,00,000/-) or rupees ten arab
3. Net Profit rupees five crore of more (Rs. 5,00,00,000/-)

Plain reading of this provision make it clear that provision of this section are applicable only to above mentioned companies. The Section does not make difference between private or private companies. The term “company” according to clause (20) of Section 2 means a company incorporated under this Act or under any previous company law.

The Companies (Corporate Social Responsibility Policy) Rules 2014 not only applies to a company under clause (20) of Section 2 of the Act but also include foreign company defined under clause (42) of Section 2 for the purpose of CSR. However, there is no difference in case of monetary criteria.

According to the Rule 3, every company including its holding or subsidiary, and a foreign company having its branch office or project office in India, which fulfils the criteria specified in sub – section (1) of the Section 135 of the Act shall comply with the provision of the Section 135 of the Act and these Rules.

Intention of inclusion of holding and subsidiary is seems to be just for application purpose. I suppose, Group holding company should lead CSR initiatives of the group and harmonise CSR policies across group.

The term ‘net worth’ as defined in clause (57) of Section 2 means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

The term ‘turnover’ as defined in clause (91) of Section 2 means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year.

There is no definition of net profit under the Act. The rules define the net profit for the purpose of CSR related calculations. Net profit under these rules means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely:

(i)           Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and

(ii)          An dividend received from other companies in India, which are covered under and complying with the provision of Section 135 of the Act.

Net profit in respect of a financial year for which the relevant financial statement were prepared in accordance with the provisions of the companies Act, 1956 shall not be required to be re – calculated in accordance with the provision of the Companies Act, 2013.

This is clear from this definition that “Net profit for CSR” is to be calculated form “net profit” of the company as calculated as pet the provision of the Act. Explanation to sub – section (5) of 135 hints that “average net profit” shall be calculated in accordance with the provisions of Section 198. Section 198 provide for a manner to calculate net profit. For the purpose of threshold limit of applicability of CSR Law, we may take help of Section 198.

Net profit for CSR shall be calculated from the net profit calculated as per section 198.

In case of foreign company; proviso to sub – rule (1) of Rule 3 say; net worth, turnover or net profit of a foreign company shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub – section (1) of Section 381 and Section 198 of the Act.

Out of CSR net:

Section 135 is silent regarding ceasing of applicability of the CSR law on a company which cease to fulfil the criteria set out in sub – section (1). The rules give a help to come out of CSR net. Every company which ceases to be a company covered under sub – section (1) of section 135 of the Act for three consecutive financial years shall not be required to –

(a)  Constitute a CSR Coommittee; and

(b) Comply with the provisions contained in sub – section (2) to (5) of the said section,

Till the time it meets the criteria specified in sub – section (1) of section 135.

Reference Period for Applicability Criteria:

Plain reading of Section 135(1) denote that a company which fulfil the criteria under the sub – section during any financial year of its life time shall be subject to the CSR Law.

Rule 3(2) as discussed above offer some relief. Section 135(1) read with rule 3(2) denote where a company has fulfilled any of these three criteria during any of last three consecutive financial years should comply with CSR law.

When the CSR law come into force on 1^st April 2014, we have to check financial statements of financial years 2011 – 12; 2012 – 13 and 2013 – 14 shall be relevant. This may be a very complex decision for companies which may fall under CSR criteria first time in year 2013 – 14. These companies may form CSR committee and keep policy ready and defer implementation once audited financials are ready. 

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.