The Companies Act, 2013 makes it compulsory for a company with an annual income of INR 1000 crores, or a net worth of INR 500 crores, or net profit of INR 5 crores to spend at least 2% of the average net profits during the three immediately preceding financial years towards Corporate Social Responsibility. The Act was lauded for the flexibility it provided to the companies with respect to how they could carry out their CSR activities. More about CSR here

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CSR activities can be undertaken through a third party non profit organizations which may be a registered society or trust or a Section 8 company under the Companies Act (Section 25 company under the 1956 Act).The implication of this rule is that requirements for CSR have been liberalised so as to utilise the participation of a third party to undertake CSR activities on behalf of the Company. Also, such outsourcing is desirable as it allows for non profits organizations who are specialised in carrying out a particular kind of activity, to undertake it for other companies as well. Such an entity would have to follow the specifications and modalities regarding utilization of funds, monitoring and reporting requirements as provided by the spending company. The Annexure to the Rules on CSR notified by the MCA has a prescribed format for reporting on CSR Activities by the Board. It must be ensured that the third party entity is able to keep track of provide all details to be detailed in the report format.

Further, the rules mandate that the third party entity being utilized for such services must have an established track record of a minimum of 3 years in conducting similar programs or projects.

FCRA restrictions

However, the intent to provide flexibility is scuttled by the some of the archaic provisions of the Foreign Contribution Regulation Act (FCRA). Under the FCRA, non-profit organizations (“NPO”) can only accept contributions from a foreign source once they register with or obtain prior permission from the Central Government. Without FCRA approval, grantee organizations in India may not legally receive foreign contributions from any donor.  The FCRA deems an Indian subsidiary of a foreign company to be a foreign company, and consequently, a foreign source. Further, Indian companies with foreign ownership of more than 50% are also treated as foreign sources.

 Hence, in case of an Indian subsidiary of a foreign company, or an Indian company which have foreign ownership of more than 50% need to ensure that in case they utilise the services of a non-profit entity to carry out their CSR activities, such entity must have obtained prior permission from the Central Government. It is noteworthy that the process of obtaining prior permission of the Central Government under the FCRA is a long and difficult process, and available to only organizations which are at least 3 years old. The permission, when granted, would apply to only a specific project and specific amount, which means that the NPO cannot use contribution for a different project or for any additional funding for the same project.

 The new Companies Act is an extensive and ambitious legislation. However, for it to be able to achieve its ends, it is important other laws are aligned with the intent of the Companies Act, as well. The FCRA restrictions, which are no longer relevant in an environment with liberalised flow of FDI in the country, pose a significant issue in companies being able to outsource their CSR spends.

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