Often people ask this question if the new section 135 introduced in the Companies Act, 2013 – mandating certain class of companies to spend 2% of the profits on CSR – is applicable to Foreign companies / MNCs operating in India. The answer is YES – as explained below by the compilation of relevant sections of the Companies Act, 2013 as well as the Companies (Corporate Social Responsibility Policy) Rules, 2014.
Clause 3 (1) of CSR Rules: Corporate Social Responsibility
Every company including its holding or subsidiary, and a foreign company defined under Section 2 (clause 42) of the Act having its branch office or project office in India which fulfills the criteria specified in section 135 (1) of the Act shall comply with the provisions of section 135 of the Act and these rules.
Section 2 (clause 42) of the Indian Companies Act, 2013
“Foreign company” means any company or body corporate incorporated outside India which —
- has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
- conducts any business activity in India in any other manner.
Section 135 of the Indian Companies Act, 2013
(1) Every company having 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 shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
- formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
- recommend the amount of expenditure to be incurred on the said activities, and
- monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
- after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
- ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
- Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
- Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
- Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
Source: SandeepKejriwal.com