Continuing its last spree of reforms before the code of conduct for the General Elections kicks in, the government on Thursday notified the much-awaited provisions mandating companies to plough back at least 2 per cent of their net profit on upliftment of the society.
The ministry of corporate affairs (MCA) has notified Section 135 and Schedule VII of the Companies Act, 2013, which relate to corporate social responsibility (CSR) that will be effective from April 1, as part of the new Companies Act. The norms will apply to companies with at least Rs 5 crore net profit or Rs 1,000 crore turnover or Rs 500 crore net worth.
These companies will have to spend 2 per cent of their three-year average annual net profit on CSR activities in each financial year, starting from FY15. “The rules have been finalised after extensive consultations with all stakeholders and provide for the manner in which CSR committee shall formulate and monitor the CSR policy, manner of undertaking CSR activities, role of the board of directors therein and format of disclosure of such activities in the board’s report,” said an official statement by Sachin Pilot, minister of corporate affairs.
According to the norms, the CSR activities will have to be within India, but will apply to foreign companies registered in the country.
The ministry, which has also listed out permissible activities, said companies will need to take approval from their board for CSR activities in accordance with its CSR policy and the decision of its CSR committee.
While activities such as donating funds to political parties or spends to benefit own employees and their families will not be counted as a company’s CSR, the government said that activities such as promoting preventive health care and sanitation, setting up homes and hostels for women and orphans and livelihood enhancement projects would qualify.
To decide if a company is eligible for mandatory CSR spending, its profit from overseas branches and dividend received from other companies in India will be excluded from the net profit criteria.
A company can also carry out CSR works through a registered trust or society or a separate company, but they can only spend up to 5 per cent of total CSR expenditure on manpower in a single financial year. This would be applicable for own personnel as well as those of their implementing agencies.
The ministry had, late last year, issued draft rules for CSR activities by India Inc and had sought public comments. Welcoming the final norms, experts said that companies will now have to gear up to implement their CSR programmes under the final rules that will be effective in just a month.
“The CSR rules released today have answered many questions. The time taken for release of the rules is justified by the clarity the norms have brought out in comparison to the draft rules,” said Santhosh Jayaram, technical director, Sustainability and Climate Change, KPMG.
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