Impact of ‘Companies (Amendment) Bill, 2017’ on CSR and related Compliance
The Companies
(Amendment) Bill, 2017 was passed by Lok
Sabha on 27th July 2017 and Rajya
Sabha on 19th December 2017. It shall come into force on receiving
the President of India’s assent.
(Amendment) Bill, 2017 was passed by Lok
Sabha on 27th July 2017 and Rajya
Sabha on 19th December 2017. It shall come into force on receiving
the President of India’s assent.
The
amendments under the Companies (Amendment) Bill, 2017, are broadly aimed at addressing
difficulties in implementation owing to stringent compliance requirements, facilitating
ease of doing business in order to promote growth with employment and synchronise with accounting standards, the Securities and Exchange Board of India Act, 1992
and the regulations made there-under as also the Reserve Bank of India Act, 1934
and the regulations made there-under.
amendments under the Companies (Amendment) Bill, 2017, are broadly aimed at addressing
difficulties in implementation owing to stringent compliance requirements, facilitating
ease of doing business in order to promote growth with employment and synchronise with accounting standards, the Securities and Exchange Board of India Act, 1992
and the regulations made there-under as also the Reserve Bank of India Act, 1934
and the regulations made there-under.
But,
over and above all this, in order to rectify omissions and inconsistencies in
the Act.
over and above all this, in order to rectify omissions and inconsistencies in
the Act.
Section 135
The
provisions relating to Corporate Social Responsibility (CSR) u/s 135 of the
Indian Companies Act 2013 are amended to bring more clarity in the existing
provisions. Accordingly, sub-sections (1), (3a) and (5) of Section 135 have
been suitably amended.
provisions relating to Corporate Social Responsibility (CSR) u/s 135 of the
Indian Companies Act 2013 are amended to bring more clarity in the existing
provisions. Accordingly, sub-sections (1), (3a) and (5) of Section 135 have
been suitably amended.
Section
135 is applicable to companies which fall within the threshold of the specified
net worth or turnover or net profit and are required to constitute CSR
Committee in any financial year.
135 is applicable to companies which fall within the threshold of the specified
net worth or turnover or net profit and are required to constitute CSR
Committee in any financial year.
Revised Section 135(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 the immediately
preceding financial year shall
constitute a Corporate Social Responsibility (CSR) Committee of the Board
consisting of three or more directors, out of which at least one director shall
be an independent director. Provided that where a company is not required to
appoint an independent director under subsection (4) of section 149, it shall
have in its Corporate Social Responsibility Committee two or more directors.”
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 the immediately
preceding financial year shall
constitute a Corporate Social Responsibility (CSR) Committee of the Board
consisting of three or more directors, out of which at least one director shall
be an independent director. Provided that where a company is not required to
appoint an independent director under subsection (4) of section 149, it shall
have in its Corporate Social Responsibility Committee two or more directors.”
The
words “any financial year” are now replaced with the words: “during the immediately preceding financial
year”. This has now cleared the existing ambiguity regarding “any financial
year” implying “any of the three
preceding financial years” [as per General Circular No. 21/2014 (No. 05/01/2014
– CSR) Dated: 18th June, 2014]
words “any financial year” are now replaced with the words: “during the immediately preceding financial
year”. This has now cleared the existing ambiguity regarding “any financial
year” implying “any of the three
preceding financial years” [as per General Circular No. 21/2014 (No. 05/01/2014
– CSR) Dated: 18th June, 2014]
Revised Section 135(3)(a)
“Formulate
and recommend to the Board, a Corporate Social Responsibility Policy which
shall indicate the activities to be undertaken by the company in areas or subject, specified in
Schedule VII.”
and recommend to the Board, a Corporate Social Responsibility Policy which
shall indicate the activities to be undertaken by the company in areas or subject, specified in
Schedule VII.”
By
adding the words “in areas or subject” the amendment upholds the existing
principle that while activities
undertaken in pursuance of the CSR policy must be related to Schedule VII of
the Companies Act 2013, the entries in the said Schedule VII must be interpreted
liberally so as to capture the essence of the subjects enumerated in the said Schedule.
adding the words “in areas or subject” the amendment upholds the existing
principle that while activities
undertaken in pursuance of the CSR policy must be related to Schedule VII of
the Companies Act 2013, the entries in the said Schedule VII must be interpreted
liberally so as to capture the essence of the subjects enumerated in the said Schedule.
To reiterate, Schedule VII indicates the broad areas
of activities for spending as CSR. Accordingly, for liberal interpretation and
to bring more clarity, instead of providing that CSR policy 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.
of activities for spending as CSR. Accordingly, for liberal interpretation and
to bring more clarity, instead of providing that CSR policy 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.
Section 135(3)(b)
The
following new proviso shall be inserted, namely:
following new proviso shall be inserted, namely:
“Provided
that 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.”
that 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.”
This
allows composition of CSR committee with two or more directors in case the
company is not required to appoint Independent Director under section 149(4).
allows composition of CSR committee with two or more directors in case the
company is not required to appoint Independent Director under section 149(4).
Rule
5(1) of CSR Policy Rules, 2014, permits unlisted companies to have the
Committee without Independent Directors, where they are not required to appoint
Independent Directors. Likewise, this rule provides for some relaxation for
private companies and foreign companies.
5(1) of CSR Policy Rules, 2014, permits unlisted companies to have the
Committee without Independent Directors, where they are not required to appoint
Independent Directors. Likewise, this rule provides for some relaxation for
private companies and foreign companies.
Hence,
in case of companies where Independent Directors are not required to be
appointed as per Rule 5(1), it was not clear with regard to the minimum
directors required in the CSR Committee. With this amendment, it is now quite clear
that in case of such companies, the CSR Committee may be formed with two or
more Directors.
in case of companies where Independent Directors are not required to be
appointed as per Rule 5(1), it was not clear with regard to the minimum
directors required in the CSR Committee. With this amendment, it is now quite clear
that in case of such companies, the CSR Committee may be formed with two or
more Directors.
Revised Explanation to Section 135(5)
“For
the purposes of this section “net
profit” shall not include such sums as may be prescribed, and shall be
calculated in accordance with the provisions of section 198.”
the purposes of this section “net
profit” shall not include such sums as may be prescribed, and shall be
calculated in accordance with the provisions of section 198.”
CSR
Rules define the term, ‘net profit’. The Rules also provide for calculation of
net profit for the purposes of foreign company. However, explanation to Section
135(5) provides that for the purpose of this provision, the ‘average net
profit’ shall be calculated in accordance with Section 198. Accordingly, there
was a disconnect between the Act and the Rules.
Rules define the term, ‘net profit’. The Rules also provide for calculation of
net profit for the purposes of foreign company. However, explanation to Section
135(5) provides that for the purpose of this provision, the ‘average net
profit’ shall be calculated in accordance with Section 198. Accordingly, there
was a disconnect between the Act and the Rules.
The
High-Level CSR Committee had also recommended in para 4.16 of the Report that
for the term “average net profit” as provided in Explanation below Section
135(5) to be replaced with the words “net profit”, to bring harmony.
High-Level CSR Committee had also recommended in para 4.16 of the Report that
for the term “average net profit” as provided in Explanation below Section
135(5) to be replaced with the words “net profit”, to bring harmony.
Further,
the manner of calculation of ‘net profits’ of a foreign company, is provided
under the CSR Rules, while referring to Section 381. As it is substantive
issue, it should form part of the Act. Accordingly, the explanation is
substituted to address both the issues.
the manner of calculation of ‘net profits’ of a foreign company, is provided
under the CSR Rules, while referring to Section 381. As it is substantive
issue, it should form part of the Act. Accordingly, the explanation is
substituted to address both the issues.
Section 2(57) Net Worth
“Net worth” means the aggregate value of
the paid-up share capital and all reserves created out of the profits,
securities premium account and debit or
credit balance of profit and loss account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation
the paid-up share capital and all reserves created out of the profits,
securities premium account and debit or
credit balance of profit and loss account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation
Section 2(91) Turn over
“Turnover means the gross amount of
revenue recognised in the profit and loss account from the sale, supply, or
distribution of goods or on account of services rendered, or both, by a company
during a financial year”.
revenue recognised in the profit and loss account from the sale, supply, or
distribution of goods or on account of services rendered, or both, by a company
during a financial year”.
This
amendment will now replace value realisation of sales etc. with revenue recognised in the profit & loss account.
amendment will now replace value realisation of sales etc. with revenue recognised in the profit & loss account.
Amendment to Section 134(1)
Chief
Executive Officer whether appointed as director or not shall sign the financial
statement. Before amendment, provisions of section 134 required that, amongst
others, the financial statement shall be signed by the Chief Executive Officer,
if he is a director in the company.
Executive Officer whether appointed as director or not shall sign the financial
statement. Before amendment, provisions of section 134 required that, amongst
others, the financial statement shall be signed by the Chief Executive Officer,
if he is a director in the company.
The
amendment provides that the Chief Executive Officer shall sign the financial
statements irrespective of whether he is a director or not because Chief
Executive Officer is a Key Managerial Personnel, and is responsible for the
overall management of the company.
amendment provides that the Chief Executive Officer shall sign the financial
statements irrespective of whether he is a director or not because Chief
Executive Officer is a Key Managerial Personnel, and is responsible for the
overall management of the company.
Further,
since the appointment of a managing director is not mandatory for all
companies, it is proposed to insert the words “if any”, after the words
“managing director”.
since the appointment of a managing director is not mandatory for all
companies, it is proposed to insert the words “if any”, after the words
“managing director”.
The
Requirement of having extract of Annual return (Form MGT-9) has also been done
away with by placing the copy of annual return on website of the company (if
any) and the web address/ link disclosed in the Board’s Report.
Requirement of having extract of Annual return (Form MGT-9) has also been done
away with by placing the copy of annual return on website of the company (if
any) and the web address/ link disclosed in the Board’s Report.
Section 92(3) Requirement to file
extract of Annual Return is omitted
extract of Annual Return is omitted
Section
92(3) mandated the filing of an extract of the annual return as a part of the
Board’s report. Most of the information in the extract is also required to be
specified in financial statement or is available on the website of the company
leading to duplication of information being reported to the shareholders.
Accordingly, this requirement is omitted.
92(3) mandated the filing of an extract of the annual return as a part of the
Board’s report. Most of the information in the extract is also required to be
specified in financial statement or is available on the website of the company
leading to duplication of information being reported to the shareholders.
Accordingly, this requirement is omitted.
It
is also provided that web address/web-link of the information may be provided in
the Board’s Report. In case the disclosures as required under section 134 (3)
are appearing elsewhere in financial statement, instead of repeating the same,
it is provided that reference of such disclosure may be given. This will reduce
the burden of companies in preparing bulky Board’s Report and the amount of
paper work.
is also provided that web address/web-link of the information may be provided in
the Board’s Report. In case the disclosures as required under section 134 (3)
are appearing elsewhere in financial statement, instead of repeating the same,
it is provided that reference of such disclosure may be given. This will reduce
the burden of companies in preparing bulky Board’s Report and the amount of
paper work.
Similarly,
it is also provided that the policies of companies (including CSR Policy) if
uploaded on the websites, instead of providing the complete policy, only its
salient features and web address/web-link be given.
it is also provided that the policies of companies (including CSR Policy) if
uploaded on the websites, instead of providing the complete policy, only its
salient features and web address/web-link be given.
Section 173(2) Participation by video
conferencing
conferencing
The
directors are allowed to participate on certain items which were restricted at
Board meetings through video conferencing (VC) or other audio-visual means if
there is quorum through physical presence of directors.
directors are allowed to participate on certain items which were restricted at
Board meetings through video conferencing (VC) or other audio-visual means if
there is quorum through physical presence of directors.
Rule
4 of the Companies (Meetings of Board and its Powers) Rules, 2014 specifies
matters which shall not be dealt with in any meeting held through video
conferencing or other audio-visual means. This requirement completely banned
participation in these specified matters of the Board meetings through video
conferencing, which unnecessarily restricts wider participation even if the
necessary quorum as specified in Section 174 is physically present.
4 of the Companies (Meetings of Board and its Powers) Rules, 2014 specifies
matters which shall not be dealt with in any meeting held through video
conferencing or other audio-visual means. This requirement completely banned
participation in these specified matters of the Board meetings through video
conferencing, which unnecessarily restricts wider participation even if the
necessary quorum as specified in Section 174 is physically present.
Accordingly,
flexibility is provided to allow participation of Directors through video
conferencing, subject to such participation not being counted for the purpose
of quorum. The difference between holding of meeting through VC and
participation of directors in a meeting through VC is clearly identified
through this proposal.
flexibility is provided to allow participation of Directors through video
conferencing, subject to such participation not being counted for the purpose
of quorum. The difference between holding of meeting through VC and
participation of directors in a meeting through VC is clearly identified
through this proposal.
In
respect of participation of director through VC in a Board meeting considering
the specified business, clarity is proposed to be provided that if the physical
quorum is present, then the other directors may participate through VC. This
will provide relief to non-resident directors to participate in the discussion
and voting on important matters like approval of financial statements etc.
without traveling to the place of meeting.
respect of participation of director through VC in a Board meeting considering
the specified business, clarity is proposed to be provided that if the physical
quorum is present, then the other directors may participate through VC. This
will provide relief to non-resident directors to participate in the discussion
and voting on important matters like approval of financial statements etc.
without traveling to the place of meeting.