Impact of ‘Companies (Amendment) Bill, 2017’ on CSR and related Compliance

The Companies (Amendment) Bill, 2017 was passed by Lok Sabha on 27^th July 2017 and Rajya Sabha on 19^th 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. 

But, 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.

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.

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.”

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]

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.”

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.

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.

Section 135(3)(b)

The 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."

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).

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.

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.

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.”

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.

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.

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.

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

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”.

This 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.

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.

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”.

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.

Section 92(3) Requirement to file 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.

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.

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.

Section 173(2) Participation by video 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.

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.

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.

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.