New Delhi, Feb. 27: The government appears to have diluted a key provision of oversight in the rules governing corporate social responsibility (CSR) that were released today.
The Companies Act passed in August last year had clearly laid out that companies that fell within the ambit of CSR would have to set up a committee “consisting of three or more directors, of which at least one director shall be an independent director”.
Unlisted public or private companies will no longer have to appoint an independent director to the CSR committee, the rules said.
“A private company having only two directors on its board shall set up its CSR committee with two such directors,” the rules added.
“This is the biggest deviation from the provision of the Companies Act,” said Parul Soni of Ernst and Young.
The CSR committee of foreign companies will have at least one director who has been directly nominated by the overseas entity and another who is resident in India and authorised to accept “on behalf of the company service of process and any notices or documents required to be served on the company”.
The rules said the CSR committee would have to institute a transparent monitoring mechanism to implement CSR projects or programmes undertaken by the companies.
The law requires companies with a net worth of over Rs 500 crore, turnover of over Rs 1,000 crore, or net profit
of more than Rs 5 crore to spend at least 2 per cent of
the average net profit in the immediate three preceding years on CSR activity.
Two elements have been left out of the computation of net profit: First, any profit arising from any overseas branch of the company, whether this is operated as a separate company or not; and second, any dividend received from other companies that are required to comply with the CSR rules.
The company can opt to carry out its CSR activity through a registered trust, or a registered society or a company established by the corporate entity. It can also carry out CSR through an unrelated entity. But there’s a rider: The unrelated company should have a three-year track record in undertaking similar projects.
The rules say that CSR activities carried out in India will be treated as valid expenditure and refrain from labelling projects that only benefit the employees of the company and their relatives as CSR projects.
Companies can build CSR capacities of their personnel and those of implementing agencies but such expenditure should not exceed 5 per cent of the total CSR expenditure in any financial year.
The government has also widened the ambit of the programmes that will be considered as CSR activity.
Schedule VII of the Companies Act had put out a very short list of CSR-compliant projects that included those designed to eradicate hunger, poverty and malnutrition, promote education, empower women, reduce child mortality, ensure environment stability, social business projects and contribution to the PM’s relief fund.
The rules have amplified the list to include homes and hostels for women and orphans, old age homes, day-care centres for senior citizens, protection of national heritage, art and culture including restoration of building and sites of historical importance, public libraries, and measures to benefit armed forces veterans, war widows and their dependents.
This list also covers rural development projects and contributions or funds to technology incubators located within academic institutions approved by the Centre.