The Ministry of Corporate Affairs (MCA) has amended the provisions governing Corporate Social Responsibility

By virtue of Section 37 of the Companies (Amendment) Act, 2017,  the MCA has brought about changes to Section 135 of the Companies Act, 2013 (Principal Act) as follows:

1. Section 135 (Corporate Social Responsibility) earlier stated that every company which fulfils the criteria of having a net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during “any financial year” then it will be required to constitute a CSR Committee. Section 37 of the Companies (Amendment) Act, 2017 amending Section 135 of the Principal Act, substitutes the words “any financial year” with the words “the immediately preceding financial year”. This has brought in clarity in interpreting this provision as it clearly specifies that upon satisfying the prescribed criteria (mentioned above) in the immediately preceding financial year, a company will be required to constitute a CSR committee.
2. A new proviso under Section 135(1) to allows companies which are not required to appoint an Independent Director to constitute a CSR Committee with two or more directors. This again is a change in the right direction bringing in more clarity.
3. To bring in clarity, instead of providing that the CSR Committee has to formulate a policy which has to indicate the activities to be undertaken by the company as specified in Schedule VII, it should indicate the activities to be undertaken in areas or subjects specified in Schedule VII.
4. The CSR Rules defines the term, ‘net profit‘. However, the explanation presently given in Section 135(5) in the Act provides that for the purpose of this provision, the ‘average net profit’ shall be calculated in accordance with Section 198. As such, there exists a disharmony between the Act and the Rules. In an attempt to bring about harmony in the provisions of the Act and the Rules, the explanation given in the Act has been amended to bring it in sync with the explanation given in the CSR rules.

Consequent to the Amendments in the Act (explained above), the MCA has recently rolled out the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2018  (Rules) which brings about changes in line with those in the provisions of the Act:

Snapshot of a few changes proposed in the Rules are as follows:

In rule 5, in clause (i) of sub rule (1), for the words” an unlisted public company or a private company”, the words “a company” is substituted. This is consequent to the proviso which is being inserted in Section 135(1). By virtue of this change, for companies which are not required to appoint Independent Directors as per Rule 5(1), it was not clear as to how many minimum directors are required in CSR Committee. The amendment in the Act, clarifies that in case of such companies, the CSR Committee may be formed with two or more Directors.

To bring in more clarity, in all provisions in the rules where ‘activities included in Schedule VII’ is mentioned, the words ‘areas or subjects specified in Schedule VII’ has been substituted.

Source: Ministry of Corporate Affairs

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