In my recent post on CSR last week, I discussed definition and scope of Corporate Social Responsibility in India after recently notified Rules. Now, I will discuss administration of Corporate Social Responsibility in India.
The Corporate Social Responsibility Committee of the Board of the Company is responsible for administration of Corporate Social Responsibility of the company. The committee shall consist of three or more directors, out of which one shall be an independent director. This provision is equally applicable to all companies including private or small companies.
The Companies (Corporate Social Responsibility Policy) Rules 2014 try to give relief to small and private companies from this compulsory appointment of independent director.
An unlisted public company or a private company, which is not required to appoint independent director, shall shave its CSR Committee without independent director. A private company which has only two directors on its Board shall constitute its CSR Committee with two directors. With respect to a foreign company covered under these rules, the CSR committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of sub – section (1) of Section 380 of the Act and another person shall be nominated by the foreign company.
We understand, requirement of independent director in all companies under Section 135 and requirement of independent directors in certain companies under Section 149 has inconsistencies. These rules try to harmonise these two sections of the Companies Act, 2013. While doing so, these rules, in its preamble drive this power under sub – section (2) of Section 469. This Section provides that the Central Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provision is to be or may be made by rules. However, these rules do not come clean the test of Section 469 while these rules try to dilute provision for appointment of independent director of Section 135. No Section of the Act gives power to the Government to dilute any provision of the Act. There is no inherent difficulty in administration of this Section in its present form; these rules may not take recourse of Section 470.
Once, the Government have came out with these rules, there will not be a complaint against the companies following these rules. This is still open, whether other interested persons may approach Tribunal for violation of Section 135 but not these Rules framed there under.
Duties under CSR Law:
According to Sub – section (3) of Section 135, Duties of the CSR committee shall be:
- Formulate and recommend a corporate social responsibility policy;
- Recommend amount to spend; and
- Monitor this CSR policy.
According to sub – section (4), the Board of Directors has duty to approve corporate social responsibility policy formulated and recommended by the CSR Committee. This duly approved corporate social responsibility policy is public document and required to disclose in (i) Board’s Report, (ii) company website in prescribed manner.
Rule 4 of these rules give power to the Board of a company that it may decide to undertake its CSR activities approved by the CSR committee, through:
(i) a registered trust; or
(ii) a registered society; or
(iii) a company established under Section 8 of the Act; or
established by the company or its holding or subsidiary or associate company.
The Term ‘may’ convey that the Board may decide to undertake such CSR activities directly using own resources of the company.
This is not compulsory for a company to establish a trust or society or section 8 company for undertaking CSR activities. Any trust or society or Section 8 company with a track record of three years in undertaking similar programs or projects may also be utilised. In such case, the company shall specify the project or programs to be undertaken through these entities, the modalities of utilisation of funds on such projects and programs and the monitoring and reporting mechanism.
These three different approaches has different level of involvement and monitoring mechanism.
In Direct Approach; the company shall have decide, undertake, monitor and report CSR activities through its own approach. The Company shall have details of all activities in its Board’s report.
In Captive Approach; the company shall convey its policy and transfer its CSR fund to an captive Trust or society or company established within the group. There will be a simple reporting of this fact in the Board’s report of the company.
In Outsourcing Approach; the company shall convey its policy and transfer its CSR fund to an outside Trust or society or company. This will be duty of company to decide a monitoring and reporting mechanism. There will be a reporting of this fact of policy, fund transfer and derails results achieved by the outsourcing agency, in the Board’s report of the company. This is a good formula for high impact joint efforts by many companies across wide spectrum. This is most suitable approach where existing non – government organisations may market themselves. Sub – rules (3) of Rule 4, prepare base for this approach.
A company may collaborate with other companies for undertaking projects or programs or CSR activities in such manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.
Rules 8 has detailed framework for CSR Reporting. In case of a company CSR reporting shall be part of the Board’s Report. In case of a foreign company; CSR reporting shall be an Annexure to the balance sheet. The policy and the Report shall also be displayed on the website of the company.
The CSR report in Annexure to these Rules has following components:
- A brief Outline of the CSR Policy (Details on website of the company);
- The Composition of the CSR committee;
- Average net profit of the company for last three financial years (for the purpose of CSR);
- Prescribed CSR Expenditure;
- Details of CSR spent during the financial year;
- Reason for not spending the amount;
- A responsibility statement of the CSR committee about implementation and monitoring of CSR policy
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