Corporate Social Responsibility – Company Law Important Questions

Corporate Social Responsibility – Company Law Important Questions

Question 1.
Write a note on Corporate Social Responsibility. (June 2016) (4 marks)
Answer:
1. As per section 135 of the Companies Act, 2013, the CSR provision is ap¬plicable to companies that fulfill any of the following criteria during the immediately preceding financial year:

  1. Companies having a net worth of rupees five hundred crores or more,
    or
  2. Companies having turnover of rupees one thousand crores or more
    or
  3. Companies having a net profit of rupees five crores or more

2. The CSR Rules have widened the ambit for compliance obligations to include the holding and subsidiary companies as well as foreign compa¬nies whose branches or project offices in India which fulfill the criteria specified above.

3. According to the CSR Rules, the CSR provision will also be applicable to every company including its holding or subsidiary, and a foreign company having its branch office or project office in India having a net worth of rupees five hundred crores (500 Crore) or more, or turnover of rupees one thousand crores (1000 crore) or more or a net profit of rupees five crores (5 Crore) or more during any financial year

4. Cessation of CSR Applicability:
The CSR Rules specify that a company that does not satisfy the specified criteria for a consecutive period of three financial years is not required to comply with the CSR obligations, implying that a company not satisfying any of the specified criteria in a subsequent financial year would still need to undertake CSR activities unless it ceases to satisfy the specified criteria for a continuous period of three years.

5. Every Company fulfilling criteria as specified in Section 135(1) of the Companies Act, 2013, shall constitute the CSR Committee of the Board consisting of 3 or more directors, out of which one director shall be an independent director.

Question 2.
Referring to the provisions of Companies Act, 2013 relating to ‘cor¬porate social responsibility (CSR), answer the following:
(I) Which activity would not qualify as CSR?
Answer:
Referring to the provisions of Companies Act, 2013 relating to ‘corporate social responsibility (CSR):
Activities not qualified as Corporate Social Responsibility:

  • CSR projects or programs or activities that benefit only the employees of the company and their families.
  • One-off events such as marathons/awards/charitable contribution/ advertisement/sponsorships of TV programmes etc.
  • Expenses incurred by companies for the fulfillment of any other Act/Statute of Regulations (such as Labour Laws, Land Acquisition Act, 2013, Apprentice Act, 1961, etc.)
  • Contribution of any amount directly or indirectly to any political party
  • Projects or programs or activities are undertaken outside India.

(II) Whether the average net profit criteria for CSR is before tax or after-tax? (December 2016) (4 marks)
Answer:
Average net profit criteria for CSR:
Computation of Net Profit for Section 135 of the Companies Act, 2013 is as per Section 198 of the Companies Act, 2013 which is primarily Profit before Tax (PBT).

Question 3.
Brave Limited is listed on the Bombay Stock Exchange and has a net worth of over INR 600 crore. The company has constituted a corporate social responsibility (CSR) Committee with Jay and Vijay as its members. Both Jay and Vijay are directors of the company, Jay being an independent director. Explaining the provisions of the Companies Act, 2013 relating to ‘corporate social responsibility, examine whether the company has complied with the provisions of the Act in this regard. (June 2015) (4 marks)
Answer:
1. As per section 135 of the Companies Act 2013, the CSR provision is applicable to companies that fulfill any of the following criteria during the immediately preceding financial year:

  • Companies having a net worth of rupees five hundred crores or more,
    or
  • Companies having turnover of rupees one thousand crores or more
    or
  • Companies having a net profit of rupees five crores or more

2. Every Company fulfilling criteria as specified in Section 135(1) of the Companies Act, 2013, shall constitute the CSR Committee of the Board consisting of 3 or more directors, out of which one director shall be an independent director.

3. As per proviso to Section 135(1): Where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.

4. In the given case, Brave Limited is listed on the Bombay Stock Exchange and has a net worth of over INR 600 crore. The company has constituted a corporate social responsibility (CSR) committee with Jay and Vijay as its members. Both Jay and Vijay are directors of the company, Jay being an independent director.

Thus, Brave Limited has a net worth of over INR 500 crore then the constitution of the CSR Committee is mandatory for it. Further, every listed company is required to appoint an independent director under sub-section (4) of section 149.

But as per Section 135 of the Companies Act, 2013, the CSR Committee of the Board consists of 3 or more directors, out of which one director shall be an independent director. The provisions of the Companies Act, 2013 relating to ‘corporate social responsibility have not complied regarding the constitution of the CSR Committee. To comply the Company needs to appoint one more director to CSR Committee.

Question 4.
From the following information in respect of two companies Viz. ZYX Limited and CBA Private Limited, compute the amount the companies are required to spend on account of Corporate Social Responsibility (CSR): (4 marks)
table-1
Answer:
1. As per section 135(1) of the Companies Act, 2013, the CSR provision is applicable to companies that fulfill any of the following criteria during the immediately preceding financial year:

  • Companies having a net worth of rupees five hundred crores or more,
    or
  • Companies having turnover of rupees one thousand crores or more,
    or
  • Companies having a net profit of rupees five crores or more.

2. Every Company fulfilling criteria as specified in Section 135(1) of the Companies Act, 2013, shall constitute the CSR Committee of the Board consisting of 3 or more directors, out of which one director shall be an independent director.

3. As per Section 135(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 percent of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years. since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Inserted by Companies (Amendment) Act, 2019.

Thus, keeping in view the above provisions:
XYZ Ltd: Since XYZ Ltd. has yet to complete its first three years after incorporation, the company spends in pursuance of its Corporate Social Responsibility Policy.

CBA Private Ltd:
Average Net Profit of the Company is INR 1, 00,00,000.
= 296 of INR 1,00,00,000 = INR 2,00,000
Thus, INR 2,00,000 has to spend on CSR activities.

Question 5.
RS Limited has incurred INR 5,00,000 for the fulfillment of Labour Law, Land Acquisition Act, and Food Safety and Standards Act in the month of May 2018. The company has accounted for this INR 5,00,000 as Corporate Social Responsibility (CSR) expenditure. Explaining the provision of the Companies Act, 2013 discuss whether the company has rightly accounted for the amount in CSR. (June 2018) (4 marks)
Answer:
1. As per Section 135(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 percent of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.

Inserted by Companies (Amendment) Act, 2019.

2. Further, the Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

3. Furthermore, activities that may be included by companies in their Corporate Social Responsibility Policies activities are specified in Schedule VII of the Companies Act, 2013.

4. If the company spends an amount in excess of the requirements, such company may set off such excess amount against the requirement to spend for a such number of succeeding financial years and in such manner as may be prescribed.

5. In the given case, RS Limited has incurred INR 5,00,000 for the fulfillment of Labour Law, Land Acquisition Act, and Food Safety and Standards Act in the month of May 2018 not covered in Schedule VII of the Companies Act, 2013.

Thus, the Company has defaulted in provisions relating to Corporate Social
Responsibility.

Question 6.
Any expenditure incurred for the benefit of society will be considered as expenditure in the pursuance of corporate social responsibility policy. Comment with reference to the provisions of the Companies Act, 2013. (December 2018) (3 marks)
Answer:

  1. Expenditure incurred on specified activities that are carried out in India only will qualify as CSR expenditure. Such expenditure includes a contribution to the corpus or on projects or programs relating to CSR activities.
  2. The Board of Directors shall ensure that activities included by a company in its Corporate Social Responsibility Policy are related to the areas or subjects specified in Schedule VII of the Companies Act, 2013.
  3. Expenditure incurred in undertaking a normal course of business will not form a part of the CSR expenditure. Companies would need to clearly distinguish those activities which are undertaken specifically in pursuance of the normal course of business and those that are done incrementally as part of the CSR initiatives.
  4. Some activities are specified in Schedule VII as the activities which may be included in their Corporate Social Responsibility Policies.

The entries in the said Schedule VII must be interpreted literally so as to capture the essence of the subjects enumerated in the said schedule.

Thus; the given statement is not correct.

CS Executive Company Law Questions and Answers

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