Corporate Social Responsibility and One Person Company BARODA CPE STUDY CIRCLE • CA (Dr.) ALOK SHAH • Partner • Contractor, Nayak & Kishnadwala
CORPORATE SOCIAL RESPONSIBILITY • CSR is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. • CSR is understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders.
CSR is a process with the aim- • To embrace responsibility for the company's actions and • Encourage a positive impact through its activities on the environment, consumers, employees, communities, shareholders and all other members of the public sphere who may also be considered as stakeholders. • The term “Corporate Social Responsibility" became popular in the 1960s.
SECTION 135 • On the 2nd Board Meeting of FY • i.e. in July/Aug Approval of CSR Policy
Section – 135 Of The Companies Act, 2013 QUALIFYING COMPANIES • The CSR Clause of the Companies Act, 2014 is applicable to any company with: • A Net Worth of Rs. 500 crores or more, or • A Turnover of Rs. 1000 crores or more, or • A Net Profit of Rs. 5 crores or more during any financial year. • CSR Rules 3 (2) • A Company which ceases to be covered under above criteria for 3 consecutive Financial years are not required to comply with, till such time it meets with the criteria again.
CSR Committee “CSR Committee” means the Corporate Social Responsibility Of the Board referred to in section 135 of the Companies Act 2013.
COMPLIANCES FOR QUALIFYING COMPANIES • The Corporate Social Responsibility Committee shall, • Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII; • Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and • Monitor the Corporate Social Responsibility Policy of the company from time to time.
The Board of every company, • After taking into account the recommendations made by the Corporate Social Responsibility Committee, approve and disclose contents of Corporate Social Responsibility Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed; and • Ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
CSR Activities Under Schedule-VII • Eradicating extreme hunger and poverty. • Promoting education including social education and employment enhancing vocational skills. • Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups. • Ensuring environmental sustainability, ecological balance. • Protection of national heritage, art and culture. • Measures for the benefit of armed forces veterans, war widows and their dependents.
Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports. • Contribution to the Prime Ministers National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the scheduled castes, Scheduled tribes, other backward classes, minorities and women. • Contributions or fund provided to technology incubators. • Rural development projects.
CSR Activities through different Entities • A Company can carry out CSR activities through following entities: • Registered trust or • Registered Society or • Section 8 Company (Section 25 as per 1956 Act) • If above entity is not established by company or holding company or subsidiary company or associate company then it should have established track record of 3 years to undertake similar projects/ programs.
CSR Expenditure • The Board of every company shall ensure that the company spends, in every financial year, at least 2%of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy. • Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities. • Provided further that if the company fails to spend such amount, the Board shall, in its report made specify the reasons for not spending the amount.
CSR Expenditure • If the Company fails to spend 2% or any part thereof - provide reasons for not spending the amount. • A statement of CSR committee that the implementation and monitoring of CSR policy is as per CSR objectives and Policy of the Company. • Above reporting to be signed by CEO/MD/Director and Chairman of CSR Committee. • As per CSR Rules Net profit shall not include following: • Any profits arising from any overseas branch(es) of the Company whether operated as separate company or other form. • Any dividend received from other companies in India which comply with CSR requirements.
CSR Reporting • Reporting will be done on an annual basis commencing from FY 2014-15. • Board of Directors considering recommendations of CSR committee approve CSR policy and disclose its content in Board Report and on its website. • The Board Report (Directors Report) shall disclose the following; • CSR Policy and brief of proposed projects/ programs, • Composition of CSR Committee, • Average Net profit of last 3 years and required (2%) CSR expenditure.
The CSR Committee shall provide for the CSR Policy which shall include the following: • Specify the projects and programmes to be undertaken. • Prepare a list of CSR projects/programmes which a company • plans to undertake during the implementation year, specifying • modalities of execution in the areas/sectors chosen. CSR Policy
Surplus arising out of the CSR activity will not be part of business profits of a company. • Would specify that the corpus would include 2 percent of the average net profits. • Companies may collaborate or pool resources with other companies to undertake CSR activities. • Only such CSR activities will be taken into consideration as are undertaken within India. Other CSR Rules
Only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity. • Companies shall report, in the prescribed format, the details of their CSR initiatives in the Directors’ Report and in the company’s website. • Tax treatment of CSR spend will be in accordance with the IT Act as may be notified by the Central Board of Direct Taxes (CBDT).
India’s top companies are ranked 1-10 based on Net Sales for the Financial Year 2012 and their spending on CSR
NOTABLE WORK BY COMPANIES Bharat Petroleum Corporation Its rain water harvesting project “Boond”, in association with the Oil Industries Development Board, selects draught-stricken villages to turn them from “water-scarce to water-positive”. Some of BPCL‟s other social programmes include adoption of villages, prevention and care for HIV/AIDS and rural health care. Hindalco Industries Its CSR activities are concentrated in 692 villages and 12 urban slums, where it reaches out to about 26 lakh people. It has constructed check dams, ponds and bore wells to provide safe drinking water. In education, it awards scholarships to students from the rural schools it support. Its other interests include women's empowerment and health care, in which it treats patients in hospitals, runs medical camps and operates rural mobile medical van services.
Indian Oil Corporation It runs the Indian Oil Foundation (IOF), a non-profit trust, which works for the preservation and promotion of the country's heritage. IOCL also offers 150 sports scholarships every year to promising youngsters. Some of its other initiatives lie in the domains of clean drinking water, education, hospitals and health care. Tata Steel It comes out with the Human Development Index (HDI), a composite index of health, education and income levels, to assess the impact of its work in rural areas. Health care is one of its main concerns. The Tata Steel Rural Development Society aims to improve agricultural productivity and raise farmers‟ standard of living.
CSR which has largely been a voluntary contribution by corporates has now been included in law. It is not clear what all constitutes CSR activities as the list specified under Schedule VII of the Act seems like an inclusive list and not exhaustive. There is a debate as to whether any penal consequences will emanate on failure to spend, or an explanation in the directors’ report on the reasons therefore are only warranted. Applicability of Sec. 135, if the company does not meet the criteria in any one of the three consecutive years. Calculation of Net Profits for applicability of Sec. 135 and Calculation for the purpose of Contribution and Spending. Analysis And Areas Requiring Clarifications
NEED • With increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. • To facilitate this the law should recognize the formation of a single person economic entity in the form of ‘One Person Company’. • Such an entity may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.
Definition of OPC One Person Company (OPC) Means “a company which has only ONE person as a member”
Characteristics of OPC • Person incorporating a One Person Company should be a natural person, Indian citizen and resident in India • OPC may be registered as a private company with one member and at least one director; • Letters ‘OPC’ to be suffixed with the name of OPCs to distinguish it from other companies. • No person shall be eligible to incorporate more than five One Person Companies (OPC)- [Rule 2.1(2)] • Adequate safeguards in case of death/disability of the sole person should be provided through appointment of another individual as nominee director. • Member in One Person Company becomes a member in another One Person Company by virtue of his being a nominee in that One Person Company, he/she shall meet the eligibility criteria of not more than five OPC.
Incorporation – Section 3(1)(c) An OPC may be formed for any lawful purpose by one person. Salient features in relation to incorporation include: The memorandum of an OPC shall indicate the name of another person, with his prior written consent, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company. The written consent of such person shall also be filed with the registrar of companies at the time of incorporation of the OPC along with its memorandum and articles. The person incorporating an OPC must be an Indian citizen who has stayed in India for at least 182 days during the immediately preceding one financial year. [Rule 2.1(1)]
Nomination by the subscriber or member of OPC The subscriber to the memorandum of an OPC shall nominate a person, after obtaining his/her prior written consent, who shall, in the event of the subscriber’s death or his incapacity to contract, become the member of that OPC. [Rule 2.2(1)] 2. The member of OPC may at any time change the name of such nominee by giving notice as prescribed. [Section 3(1)] Any change in the name of nominee shall not be deemed to be an alteration of the memorandum. [Section 3(1)] 4. Only a natural person who has stayed in India for a period of not less than 182 days during the immediately preceding one financial year is entitled to be a nominee for the sole member of an OPC. [Rule 2.1(1)]
OPC- Compliance OPC has to comply with provisions applicable to Private Limited company as The definition of “private company” under section 2(68) of the 2013 Act includes OPC.
Exemption to OPC • OPC is not required to prepare cash flow statement as a part of financial statement. [Section 2(40)] • An OPC is not required to hold an annual general meeting. [Section 96(1)] • The minimum number of directors in the case of an OPC has been limited to one. [Section 149(1)(a)] • In case an OPC does not have a company secretary, the annual return can be signed by the director of the company. [Proviso to section 92(1)] • An OPC must conduct at least one meeting of the board of directors in each half of a calendar year with a gap of at least 90 days between two meetings. [Section 173(5)]
OPC not required to follow • Following Sections not apply to OPC • Section 98: Power of Tribunal to call meetings of members, etc. • Section 100: Calling of extraordinary general meeting • Section 101: Notice of meeting • Section 102: Statement to be annexed to notice • Section 103: Quorum for meetings • Section 104: Chairman of meetings • Section 105: Proxies • Section 106: Restriction on voting rights • Section 107: Voting by show of hands • Section 108: Voting through electronic means • Section 109: Demand for poll • Section 110: Postal ballot • Section 111: Circulation of members’ resolution • Section 173: Meeting of Board (in case where OPC has only one director) • Section 174: Quorum for meetings of board (in case where OPC has only • one director)
Conversion of OPC into private or public company • OPC can get itself converted into a private or public company • After increasing the minimum number of members and directors to 2 or minimum of 7 members and 3 directors as the case may be • By maintaining the minimum paid-up capital as per requirements of the 2013 Act for such class of company and by making due compliance of section 18 of the 2013 Act for conversion. [Rule 6]
Where the paid up share capital of an OPC exceeds 50 lakh rupees or Its average annual turnover during the period of immediately preceding 3 consecutive financial years exceeds 2 crore rupees, Such OPC shall be required to convert itself into either a private company or a public company in accordance with the provisions of section 18 of the 2013 Act: Within 6 months of the date on which its paid up share capital is increased beyond 50 lakh rupees; or The last day of the period immediately preceding three consecutive financial years during which its average annual turnover exceeded 2 crore rupees; or The close of the financial year during which its balance sheet total exceeded 1 crore rupees, as the case may be.
Benefits to OPC • An OPC gives the advantage of limited liability, the liability of the member will be limited to the unpaid subscription money. • An OPC being an incorporated entity will also have the feature of perpetual succession. • It will make easier for entrepreneurs to raise capital for business. • It will have lesser compliance burden compared to private companies.
Analysis and Areas Requiring Clarification • While the idea of an OPC looks promising, doing business in OPC structure may effectively result in higher tax implications on the businesses as the rate of taxation on companies is higher. • Also, since a company is a separate legal entity, the distribution of dividend by an OPC may attract dividend distribution tax. • Sole proprietors, on the other hand are taxed at the rates applicable to individuals, i.e., differential rates for different slabs of income. • OPC has an edge over sole proprietorship as it helps to de-risk. • Contract with the member by OPC.