India – Legal Opinion On Corporate Social Responsibility.

We have been requested to opine on:

 

a. Whether the Querist falls under the criteria as mentioned under Section 135(1) of the Companies Act, 2013 for the financial years ranging from 2014-15 to 2018-19?

 

Analysis on the query:

 

1. Section 135 of the Companies Act, 2013 provides that a company will be required to constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director, if the company is having, during any financial year:

   1. a net worth of Rs. 500 crores (Rupees five hundred crore) or more; OR

   2. turnover of Rs. 1000 crores (Rupees One Thousand Crore) or more; OR

   3. a net profit of Rs. 5 Crores (Rupees five crore) or more.

2. Subsequently, the Ministry of Corporate Affairs vide General Circular No. 01/2016 clarified that “any financial year” referred to under sub-section (1) of the Section 135 of the Companies Act, 2013 read with Rules 3(2) of the Companies CSR Rules 2014 implies ‘any of the three-preceding financial year’.

3. In lieu thereof, a company which meets the net worth or turnover or net profit criteria in any of the preceding three (3) financial years, but which does not meet the criteria in the relevant financial year, will still need to constitute a CSR Committee and comply with the provisions of Section 135(2) to (5) read with the CSR Rules.

4. Further, as per the explanation for the purpose of the Section 135, the “average net profit” shall be calculated in accordance with the provisions of Section 198 of the Companies Act, 2013 which provides for the method for the calculation of the net profit. However, sub-clause (d) of Section 198(3) provides that the profits from the sale of any immovable property or fixed assets of a capital nature will not be computed as credit unless it is the very business of the Entity.

5. A bare reading of the Section 135 sub-section 5 of the Companies Act, 2013 clearly depicts that the Company falling under the criteria as mentioned under Section 135 (1) of the Companies Act, 2013 have to spend 2% of the average net profits (calculated as per Section 198 of the Companies Act, 2013) for the 3 (three) immediate preceding financial years. Further, the annual reports and financial statements of the Querist was perused to understand the net profit, turnover and the net worth of the Company from 2011- 2012 to 2018-19.

6. In view of the above findings, it is opined that the Querist was to comply with the provision under Section 135 of the Companies Act read with Companies (Corporate Social Responsibility Policy) Rules, 2014 for the previous Financial Year 2014-2015 and thereupon is liable under Section 135(5) to undertake CSR activities, i.e. formation of the CSR Committee and spend 2% of the average net profit of the Querist made during the three-immediate preceding financial years. Further, for the purpose of spending 2 % of the average net profit, the average net profit shall be calculated as per the provision under Section 198 of the Companies Act, 2013.

 

Moreover, for the purpose of the reaming Financial Year ranging from 2015- 16 till 2018-19 since the Querist the qualifies the criteria laid under Section 135(1) of the Companies Act, 2013, the Querist had to comply with the formation of the CSR committee. However, since the average net profits calculated as per Section 198 of the Companies Act, 2013 for the purpose of Section 135(5) of the Companies Act is in negative, therefore, as per the second proviso provided under Section 135(5) of the Companies Act, 2013, the Querist had to mention the reason for not spending the statutory 2% of the average net profits for the 3 (three) immediate preceding financial years in the report made under clause (o) of Section 134 of the Companies Act, 2013. 

 

 

For further information, please contact:

 

Manoj Kumar, Partner, Hammurabi & Solomon

Manoj.kumar@hammurabisolomon.com