Companies Act 2013 – Corporate Social Responsibility in Indian and further Global Context

The concept of Corporate Social Responsibility is mainly concerned with the responsibility of the corporates towards the welfare of the society& environment. Companies should contribute towards the welfare of the society because it utilizes resources for its utilization from the society such as raw material, Human Resources etc. Ministry of Corporate Affairs has implemented the concept of Corporate Social Responsibility under section 135 of the Companies Act 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014 with the object of promoting CSR activities. Its scope has endured major changes from considering it as a charitable activity in comparison with the obligation of companies towards society. 

Corporate Social Responsibility under Companies Act in Global Context

In simple words, corporate social responsibility is mainly the responsibility of corporates for their impact on society. Corporates should make a proper plan and core strategy in collaboration with their stakeholders to integrate ethical, social, and environmental concerns.

Corporate Social Responsibility is defined as per United National Industrial Development Corporation (UNIDO) as it is a management concept whereby companies integrate social and environmental concerns in their operations and interactions with their stakeholders.

The concept of Corporate Social Responsibility has been introduced all over the world. Different Countries have different ways of application of CSR. The very common thing among all the countries is that they use LBG model to measure the real value and effect of community investment to society. In comparison to European companies, in USA corporate community contributions by the companies are ten times in a comparison of their British counterparts, US companies disclose their CSR activities on their website such as provisions regarding combating climate change, or providing better health care to the society.

The context of CSR activities in contraries such as Japan, South Korea, and Taiwan is similar to that of European Continent.

Multinational companies in developing contraries are the major driving force for CSR activities in these developing nations.

For Example in case of campaigns against Nike’s labor practices in Asian supply chains and Shell’s role in Nigeria had made substantial changes towards the contribution in CSR practices.

Domestic Companies in developing countries contributed towards CSR activity in relation to education, health, and transport etc.

Corporate Social Responsibility in India

The concept of CSR is not new in India. There are companies who are actively involved in CSR activities but still, the number is relatively few.

In our country, CSR activity is more like a voluntary spend rather than a statutory obligation. In Indian Heritage, at that time there was three type of charitable activities which were traditionally practiced namely Dana, Dakshina, and Diksha.

Dakshina was the one which was given in exchange for something, whereas, Diksha was given for your own enlightenment and Dana was the one which was considered as the purest form of charity which was given without expecting anything in return. This was an activity which was voluntarily performed without any consideration.

In India, it is a statutory compliance requirement for the companies to comply with the CSR activities whereas in other countries such as the UK, France Germany etc. there are voluntary guidelines.

The government of India has notified Section 135 of Companies Act 2013 for the CSR activities. It promotes greater disclosure & transparency. The provision related to CSR includes that companies which meet criteria will have to spend minimum 2% of their average profits of last three years towards CSR activities. In case companies are unable to comply with the provisions of CSR then they are required to provide explanation or reason for the noncompliance in the board report. This provision includes the approach of “Comply or explain’. In case they fail to provide a reason for non-compliance then they will attract the penalty provisions.

CSR Provisions & Applicability

Provisions related to CSR is applicable on private limited companies and public limited companies as well as holding and Subsidiaries Company and foreign companies having offices in India and meets any of the following criteria mentioned below:

  • Company having Net Worth of INR 500 crore or more;
  • Company having turnover of INR 1000 crore or more;
  • The company having a Net profit of INR 5 Crore or more.CSR CommitteeComputation of Net profitIndian CompanyForeign CompanyActivities under CSRHere are the following activities that can be done by the company:
  • A wide range of activities which may be undertaken by the corporates is provided under Schedule VII of the Companies Act 2013. The government may also prescribe any other activity which it feels proper to be included within the ambit of CSR.
  • Net profits of a foreign company incorporated in India shall be determined in conformity with the financial statements of a foreign Company and shall be computed in accordance with the section 381(1)(a) read with Section 198 of the Companies Act.
  • The computation of net profit is done according to CSR rules. For the purpose of contributing to CSR activities, 2% of the average net profits of the company of three financial years is computed according to sec 198 of the Companies Act 2013, which is mainly net profit before tax.
  • It is required for every company to report its net profit accrued for the purpose of ascertaining the criteria specified under section 135 of the companies act 2013. There are different rules in respect of Indian company and foreign company.
  • Every company fall into the criteria specified under the CSR provisions have to constitute CSR committee consisting 3 or more directors including at least one independent director. Unlisted company and a private company, where there is no requirement of appointing an independent director, shall constitute CSR committee without an independent director. A private company having only two directors are required to constitute CSR committee with only two directors. In the case of foreign company CSR committee with only two directors out of which one shall be Indian resident. CSR policy of the company shall specify the CSR activities to be undertaken by the company. The policy also recommends the amount of expenditure to be incurred on the CSR activities. The board of directors of the company shall consider the suggestions made by CSR committee and will approve the CSR policy of a company.
  • Companies who fall under this criteria have to spend at least 2% of average net profits of previous three financial years on CSR activities.
  • Eradicating hunger & Poverty;
  • Promotion activities related to education;
  • Promoting gender equality;
  • reducing child mortality and improving maternal health;
  • combating human immunodeficiency virus, immune deficiency syndrome, malaria, and other diseases
  • Ensuring Environmental sustainability;
  • Social Business projects;
  • Contribution towards Prime Minister’s National Relief Fund or any other fund set up by the Governments for a development of the society.
  • Other matters prescribed by the government of India.Here are the following ways through which activities defined under Schedule VII can be executed:
  • Implementation of CSR
  • It must be carried out at the local areas within India and the area where the company operates;
  • It can only be performed as CSR activities or projects;
  • It can also be carried out with the aid of registered trust or society or charitable company in India, which is established by parent company, subsidiary or associate company or which is not established by any of these companies if it has proven a track record of undertaking similar activities for at least three years.
  • Each eligible company is required to report on its CSR activities individually but these activities can be conducted in association with other companies.
  • 5% of CSR can also be used for the purpose of giving training to its own employees/personnel for implementation of CSR activities.

Reporting

  • It is required for the companies to publish a report on its CSR activities on their website annually. It is required for the board of directors of the company to prepare an annual report on CSR activities in a prescribed format. Its report must contain the brief overview of CSR policy and the composition of CSR committee with the average net profit of the preceding three financial years. The amount of expenditure spent on CSR activities. In case the company fails to spend its net profit on CSR activities the company has to give a reason for the noncompliance in Board report.

Penalty

  • Board of Directors of the company has to disclose all the information regarding its CSR policy and about its implementation on annual basis. In case the company fails to comply with the CSR provisions, the company shall be liable to fine which shall not be less than Rs. 50,000 and which may extend to Rs. 25,00,000. Further Officer in Default shall be punishable with the fine which shall not be of less than Rs. 50,000 which may extend to Rs. 5,00,000 or Imprisonment of up to 3 years or both. Act provides penalty in case of non- disclosure of information regarding CSR activities but does not hold them liable for not undertaking CSR activities.

Conclusion

  • Corporate Social Responsibility is a noble initiative and it helps to fill the gap of socio economic inequality and helps in addressing the problems faced by the society. In many countries, CSR activities are voluntary obligation whereas in India it is a mandatory statutory compliance requirement under section 135 of the Companies Act 2013.

Companies Act 2013 for Merger Amalgamation

In relation to merger and acquisitions (M&A), Companies Act, 2013 has replaced the 1956 Act. The new Act enhanced disclosure norms and providing protection to investors and minorities thereby making M&A smooth and efficient. It helps in the overall process of acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers and acquisitions.

Under the Companies Act 2013, the concept of merger & amalgamation is fully explained whereas under companies Act 1956, the term ‘merger’ is not defined and also under the Income Tax Act, 1961.

The merger is a combination of two or more entities into one, it is not just the accumulation of assets and liabilities of the distinct entities, but the organization of entity into one business.

Central Government issued notification for enforcement of sections related to merger & amalgamation on 7th November 2016.Vide notification dated 14th December 2016 of Ministry of Corporate Affairs issued rules regarding Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016.

Even though substantial changes have been incorporated in the new act but still there are certain provisions which remain unchanged such as pre-condition to merger & amalgamation of accepting scheme by three-fourth of shareholders is still a pre-condition under the new act. Central government still has the power to order merger & amalgamation in the interest of the nation. There is also an obligation to maintain records of merger & amalgamation under section 239. There are some other provisions which remain unaltered related to convening meetings, obtaining the permission of regulatory authorities and central government.

Application filed in relation to the reconstruction of the company under section 230 for compromise & arrangement or which involves merger or amalgamation of two or more companies have to specify the purpose of the scheme.

Reason for Merger & Amalgamation

  • Expansion and Diversification
  • Optimum Economic Benefit
  • Risk Strategy
  • Scaling up operations for competitive advantages
  • Increase the Market capitalization
  • Reducing overheads for cost reduction
  • Increasing the efficiencies of operations
  • Tax Benefits
  • Access Foreign Markets
  • Amalgamation
  • Demerger
  • Reconstruction
  • Arrangement

Who can File Application for Merger & Amalgamation?

Joint Application

But if registered office of the Companies is in different states then, in that case, there will be two tribunals having jurisdiction hence separate petition is required to be filed.Companies should have the power in the object clause of their Memorandum of Association for amalgamation.

Format of Application

  • An Application is required to be filed with the tribunal for Merger & Amalgamation and this application will be submitted in form NCLT-1 along with following documents:

Scheme of amalgamation shall be drafted for the purpose of getting it approved in a Board meeting of the company.

Process

  • In the case where more than one company is involved than at the discretion of such companies, an application may be filed as a joint-application.
  • An application is required to be a file with Tribunal (NCLT). An application shall be made by both the transferor and the transferee company in the form of a petition to the tribunal for the purpose of sanctioning the scheme of amalgamation.
  • It includes all modes of reorganizing share capital.
  • Under this, there is re-organization of share capital, varying the rights of shareholders.
  • There is a transfer of an undertaking of a company into another company.
  • It is a combination of two or more businesses into a single business enterprise.

Terms

  • Notice of admission in Form NCLT-2.
  • Affidavit in form NCLT-6.
  • Copy of Scheme of Compromise & Arrangement / Merger & Amalgamation.
  • Following Disclosure in form of affidavit:
  • Material facts relating to the company, such as
  1. Latest Information related to the financial position of the company.
  2. Latest auditor’s report of the company
  3. Information related to investigation or proceedings against the company
  • Reduction of the share capital of the company.
  • Consent of the secured creditors have been obtained by not less than 75% in relation to scheme of Corporate Debt Restructuring
  1. Creditor’s Responsibility statement in form CAA-1.
  2. For the protection of secured and unsecured creditors, Safeguards.
  3. Auditor’s Report that the fund requirements of the company after the corporate debt restructuring is approved.
  4. The statement in relation to company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India.
  5. Valuation report by a registered valuer in respect of the shares, property, and assets, whether tangible and intangible/ movable and immovable/ of the company.
  • It is required for an applicant to disclose to the tribunal, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme in the application. On the application Tribunal shall unless it thinks necessary to dismiss the application, will provide such directions in respect of the meeting of the creditors or class of creditors, or of the members or class of members to be called or held and conducted in such manner as prescribed.

Calling of Meeting by Tribunal

  1. Fix the time and place of the meeting.
  2. Appoint a Chairperson and scrutinized for the meeting and fix the term of the appointment and remuneration;
  3. Fix the quorum and procedure to be followed at the meeting including voting in person or by proxy or by postal ballot or by voting through electronic means.
  4. Determine the values of the creditors or the members, whose meeting is required to be held.
  5. Notice to be given of the meeting with the advertisement of such notice.
  6. Notice to be given to authorities required under sub-section (5) of section 230.
  7. The time period within which the chairperson of the meeting is required to report the result of the meeting to the Tribunal.
  8. Such other matters as the Tribunal may deem necessary.

Notice of Meeting

Who is entitled to receive the notice?Who is authorized to send the notice?

  1. It is required to be sent to each Creditor/Member and debenture-holders at the registered address with the company.
  2. Notice of the meeting after the order of tribunal is required to be given in Form No.

CAA-2.

  1. Chairman of the Company.
  2. In case Tribunal direct than either by the Company or its liquidator or by any other person.

Modes of Sending of notice

  1. Registered post, or by Speed post/ courier
  2. E-mail or by hand delivery
  3. By any other mode as directed by the tribunal, It is required to send a notice of meeting along with the Copy of Scheme of compromise & arrangement.
  4. Following details of compromise & arrangement is required to be mentioned:

Documents required to be sent along with notice

  • All the required details of the Tribunal’s order regarding the calling, convening and conducting of the meeting:-
  1. Date of the Order;
  2. Date, time and place of the meeting.
  • Following Details of the company:
  1. Corporate Identification Number (CIN) / Global Location Number (GLN)
  2. Permanent Account Number (PAN);
  3. Name of the company;
  4. Date of incorporation;
  5. Type of the company (public or private or one person company);
  6. Registered office address of the company and e-mail address;
  7. Main object as per the memorandum of association.
  8. Details regarding the name change of the company registered office details and objects of the company during the last five years;
  9. Details of the stock exchange where securities of the company are listed;
  10. Details of the capital structure of the company such as authorized capital, issued capital, subscribed capital and paid up share capital;
  11. Names of the promoters and directors along with their addresses. In case scheme of compromise or arrangement is related to more than one company then the details of the relationship between such companies who are parties to such scheme including holding, subsidiary or associate companies.

Combined Application

  • Disclosure of the effect of M&A on material interests of directors, Key Managerial Personnel (KMP) and debenture trustees.

Board Meeting Details:

  • Date on which the scheme was approved in the board meeting of the board of directors.
  • Name of the directors voted in favor of the resolution.
  • Name of the directors who voted against the resolution.
  • Name of the directors who did not vote or participate in such resolution.

Explanatory Statement disclosing following details of the scheme of compromise or arrangement:

  1. Parties in compromise or arrangement;
  2. Appointed date, effective date, share exchange ratio (if applicable);
  3. Summary of valuation report including basis of valuation and opinion of the registered valuer with the declaration that the valuation report is available for inspection at the registered office of the company;
  4. Capital details or details of debt restructuring;
  5. Rationale for the compromise or arrangement;
  6. Rationale for the compromise or arrangement;
  7. Benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors, and others (as applicable);
  8. Benefits of the compromise or arrangement as perceived by the Board of directors to the company, members, creditors, and others (as applicable);
  9. Amount due to unsecured creditors.

Disclosure regarding the effect of the Merger & Amalgamation on the following:

  1. Key Managerial Personnel;
  2. Directors;
  3. Promoters;
  4. Non-Promoter Members;
  5. Depositors;
  6. Creditors;
  7. Debenture holders;
  8. Deposit trustee and debenture trustee;
  9. Employees;
  • A report on explaining the effect of compromise on each class of shareholders, key managerial personnel, promoters and non-promoter shareholders adopted by the directors of the merging companies.
  • Following details required to be mentioned:
  1. Investigation or any proceedings pending against the company.
  2. Details of approvals, sanctions or no-objection from regulatory authorities which is received or pending for the proposed scheme of compromise or arrangement
  3. The statement in relation to the persons to whom the notice is sent may vote at the meeting either in person or by proxies or by voting through electronic means.
  4. A copy of the evaluation report, if any. Details of the following documents for inspection by the members and creditors, namely

Details of availability of documents:

  1. Latest audited financial statements of the company (including consolidated financial statements).
  2. Copy of the order of Tribunal in relation to which the meeting is to be convened or has been dispensed with.
  3. copy of scheme of Merger & Amalgamation;
  4. Contracts or agreements material to the Merger & Amalgamation;
  5. Certificate issued by Auditor of the company in relation to accounting treatment.
  6. Proposed scheme of Merger & Amalgamation is in conformity with the Accounting Standards prescribed under Section 133 of the Companies Act, 2013.
  7. Such other necessary information or document relevant to making a decision in favor or against the scheme.
  • Other Documents: Order made by the Tribunal under section 232(1) for merging companies or the companies in respect of which a division is proposed, shall also be required to circulate the following:
  1. Drafting of the proposed terms of the scheme adopted by the directors of the merging company;
  2. Confirmation that a copy of the draft scheme has been filed with the Registrar of Companies;
  3. Valuation Report (if any).