Corporate Social ResponsibilityIs it new to India? Legal requirements & its implications11 June 14CA S Rajeshwari

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What is CSR?

“Corporate social responsibility is the

continuing commitmentcontinuing commitment by business to

behave ethicallyethically and contribute to economic

development while improving the improving the

quality of life quality of life of the workforce and their

families as well as of the local community and

society at large.”

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Source: http://www.wbcsd.org/DocRoot/RGk80O49q8ErwmWXIwtF/CSRmeeting.pdf

Early definitions of CSR…..

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CSR defined by EU

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What CSR means today CSR goes beyond philanthropyphilanthropy

HolisticHolistic and integratedintegrated approach for sustainable

development to all stakeholders

CSR is a process that creates self-reliantself-reliant communities

It is a process of taking everybody together to have a

sustainable societysustainable society

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CSR In IndiaHow CSR has grown in India over the years…

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CSR is certainly not new to India

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Swami Vivekananda Do you know Swami was behind the

Rockefeller foundation which is one of the largest charitable foundations ever in the globe?

His famous words “why don’t you consider leaving some of your money for other people?” led to the first major donation by John D Rockefeller who was at one time the richest man on mother earth and his wealth measured as % of GDP was even bigger than Bill Gates’

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Tatas and CSR “In a free enterprise, the communitycommunity is not just

another stakeholder in business but is in fact the very

purpose of its existence."

Jamsetji Nusserwanji Tata, Founder, Tata Group.

Tata Sons Ltd. is said to utilize on average between 8 to

14 percent of its net profit every year for various social social

causescauses.

Refer to Corporate Social Responsibility: A Case Study Of TATA

Group by Amit Kumar Srivastava1, Gayatri Negi, Vipul Mishra,

Shraddha Pandey

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Four Phases of CSR in IndiaSource: Wikipedia

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Phase 1 Charity and philanthropy were the main drivers

Culture, religion, family values and tradition were

main influences

Influence of caste groups and political objectives.

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Phase 2 During Independence movement

“Trusteeship” concept of Mahatma Gandhi

Thrust was towards nation building and socio

economic development

Phase 3 Mixed economy- Setting up of PSU’s

Limited effectiveness

Shift of expectation to private sector

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Phase 4

Globalization and Economic Liberalization

CSR directed towards sustainable business

strategy

Companies more willing to participate

Now…. Let us proceed to the new law…

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Background to CSR

Government has been mulling over Corporate Social

Responsibility and ways and means of making this a

way of corporate life

Globally, there are no legal mandates for CSR

spends…

India, has pioneered this through a provision in

Companies Act, 2013

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S 293(1)(e) and S 181 vs S 135

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Estimated amount of CSR post Companies Act 2013…

Upto Rs.18,000 crores Rs.18,000 crores may be spent on

CSR by Indian Corporates…

Deccan Herald 30, Sep 13

1640016400 companies

Around 1400014000 will contribute less than Rs 1cr.

Estimates vary but huge amount going to be spent

16 Introduction

Comparison of current vs. possible CSR- PSU’s (Rs. Crores)

PSU Actual 2% of PAT % gap

ONGC 121 473 74.42

Coal India 119 235 49.36

IOC 83 156 46.79

SBI 71 261 72.80

SAIL 61 103 40.78

GAIL 54 78 30.77

NTPC 49 187 73.80

BHEL 37 116 68.10

HPCL 27 22 -22.73

BPCL 8 29 72.41

17 Introduction

Source: Deccan Herald – 30th September 2013

Private sector Actual 2% of PAT % gap

RIL 288 423 31.91

Tata Motors 146 78 -87.18

Bharti Airtel 33 130 74.62

L&T 70 96 27.08

M&M 22 59 62.71

TCS 51 179 71.51

Hindalco 28 72 61.11

ICICI bank 24 127 81.10

Infy 26 143 81.82

Maruti Suzuki 12 43 72.09

18 Introduction

Comparison of current vs. possible CSR- PSU’s (Rs. Crores)

Source: Deccan Herald – 30th September 2013

Applicability {Sec 135 (1)} Every Company having (in any financial year)

Networth of at least Rs.500 crores OR

Turnover of at least Rs.1,000 crores OR

Net profit of Rs. 5 crores

Thus, even private companies are covered, if they are of this size

These companies will have to form a CSR Committee (including one

independent director at least, subject to exemptions)

Applicable from Financial Year 2014-15 (Rule 1( 2) of CSR rules 27 Feb 14)

It applies to company , its holding and subsidiary also(rule 3) if they

fulfill criteria specified in S 135(1)-

Also applies to foreign co having branch, project office in India (rule

3)

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Issues in Applicability {Sec

135 (1)} Even if in the current year, company ends up

meeting the criteria, the company ought to have

a CSR committee for the year

Rules now have removed the difficulty related

to Independent director

Rule 5 clarifies that independent director is

required only where applicable and

Private company with 2 directors can have both in

the CSR committee.

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Issues on applicability How can the CSR be extended to foreign cos as this is

not contemplated in act?

For a company to get out of the requirement it has to

cease to be covered under S 135(1) for 3 consecutive

years!(rule 3(2))

Thus it looks like a company which has less networth

and turnover than prescribed but made a profit of Rs 6

cr in one year and hence is covered, if in next year it

makes a profit less than Rs 5 cr , it will have to continue

till 3 consecutive years of inapplicability is reached

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CSR Committee {Sec 135

(3)}

Formulate and recommend to board CSR

policy, which shall indicate the activities to be

undertaken by the Company

Recommend the amount to be spent on the

activities

Monitor compliance with the CSR policy from

time to time

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CSR Policy {Rule 6}

The CSR policy of a company shall include:

A list of CSR projects or programs that

company plans to undertake

Within the purview of schedule VII

Specify modalities of execution and

implementation

The monitoring process

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Board Responsibilities {Sec 135 (4)}

Approve the CSR policy

Place the CSR policy on the company’s website

Ensure that CSR activities as per policy are

undertaken

Ensure that the company spends at least 2% of

the average net profits of the company made

during the three immediately preceding financial

years

Give preference to the local area and areas

around it where it operates

24Role of the Board -

Governance

Board Report {Sec 135 (2) - (5) and

134 (3) (o)}

To contain:

Composition of the CSR Committee

Disclose the contents of the CSR policy

Details of amount spent and the 2% of

net profit as computed

Reasons for not spending the

amount on CSR, if such amounts are not

spent Rule 8 and Annexure

25Role of the Board -

Governance

Disclosure in company’s website

Rule 9 requires disclosure in co website ,

if any, of contents of:

CSR policy

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Consequences of not spending

No specific penalties prescribed

Reasons for not spending to be provided

as stated already

Will general penalties in Chapter XXIX

apply?

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CSR Spends Spends in every year,

2% of

The average net profits

Made during the three immediately preceding financial years

Explanation also states, that average net profits shall be

calculated in accordance with section 198

Rule 2 (f) provides that net profit shall not include a) profits

arising from branches outside India b) dividend received from

companies in India covered under and complying with the

provisions of S 135

Surplus shall not form part of business profit of co. (rule 6(2))

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Net profit under section 198

Description Amounts

Profit as per books

Add:

Income tax

Loss on sale of items of a capital nature including sale undertakings

Provision for doubtful debts /advances (-reversals thereof)

Less:

Profits of a capital nature including profit from sale of the undertaking

Profit on sale of fixed assets to the extent it is more than the original cost

Adjustment for fair value measurements directly effected in reserves

Profit under section 198

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Non recalculation of profits Rule 2 (f) states:

Net profit in respect of a financial year for which relevant

financial statements were prepared in accordance with

the provisions of the Companies act, 1956 shall not be

required to be re-calculated in accordance with

provisions of this act

This can be interpreted to say that if calculation of net

profit has been done u/s 349 of 1956 act, that need not

be recalculated. It could also mean that exclusion of

foreign branch income and dividends from applicable

companies should not be done.

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What can you spend on? (Notification dated 27 Feb 14)

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What can you spend on? Contd. (Notification dated 27 Feb 14)

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What can you spend on?

Expenditure only in India (rule 4(4))

Give preference to local area/areas where it operates ( S 135(5))

Not to benefit only employees and families (as it says only, it can

extend to them also)(rule 4(5))

Recent demand by the Labor Union of a Company- CSR funds shall be

utilised for educating their children!

Not as direct or indirect contribution to a political party (rule 4(7))

Can be given as corpus for projects/programs if within the

purview of Sch VIII (Rule 7)

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Limit on own personnel

Rule 4(6) sets a very low limit of 5% on

CSR capacities of own personnel or their

implementing agencies through

established track record of 3 years

This limit is so low it may be not useful at all

Also what is meant by the clause is not clear

- should mean CTC of employees?

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Activities in the normal course of business not allowed

See rule 2(e), 4(1), Proviso to 6(1)

This would mean Company cannot do any activities

which are in the normal course of business.

Thus a company which is the business of distance

education cannot do CSR in education; a water purifier

company can’t supply its product free or at low cost; a

soap manufacturing company cannot distribute free

soap for hygiene; hospital cannot provide healthcare;

priority sector lending by a bank would not qualify… etc

Is this the intention?

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Normal course of business –an example Hotels which are star rated need to train some under-

privileged people under Hunar Se Rajgar scheme

These people are trained in the hotel operations for 6-

8 weeks.

Part of the stipend is reimbursed by IHM but hotel

incurs expenses on balance stipend, food, uniform etc.

This expenditure may not qualify as this is in the

normal course of business, though it is coming under

Sch viii

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Normal course of business-contd.

When new projects are started there is a pre-condition that

some social investment shall be done e.g building a school,

arranging drinking water supply, building a bridge etc

Such activities would not qualify as they are in the course

of business.

It is possible a Company can provide a product it

manufactures free of cost to the needy –like a Pharma co

providing free medicines or hotel company providing free food

and treating the cost thereof as CSR- this needs clarification.

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Is this required? A distance education pioneer may be best suited

to provide better education to masses.

Is it right to take the experts out of their business?

Also since the list is to be followed strictly some

companies may find it necessary to fit what they

would like to do into one of the listed items

Case in point is Supplying solar lanterns to

villages- while it is not directly mentioned one can

fit it into education (students can read in the night)

or sustainability.

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Co-operative efforts possible

Rule 4(2) allows undertaking CSR through

Outside Regd trust

Outside Regd society

If above have established track record of 3 years in similar

programs/projects

Or co u/s 8/trust/society established by

Holding, subsidiary or associate co

Or otherwise

If co has specified projects etc and modalities of fund utilization

and monitoring and reporting mechanism

Or collaborate with other companies in such manner that

respective cos can report on the projects and programs

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CSR and FCRA (Foreign contribution regulation act 2010)

When Indian companies with overseas

shareholding exceeding 50% and foreign

companies give donations it is considered as

receipt from ‘foreign sources’ and the recipient

requires registration under FCRA

This would be an impediment to CSR

contributions by such cos.

For foreign companies RBI approval may also be

required under FEMA

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CSR and Income Tax act Social and welfare community expenses

deductible as expenditure for business.

Madras HC in

CIT V Madras refineries Ltd (2004) 266 ITR 170

Cheran engg corporation Ltd V CIT (1999) 238

ITR 892

In (2009) 313 ITR 334 Supreme court has remitted

back a similar case of Madras refineries to Tribunal

Waters need to be tested!

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Is a provision required in accounts? We do not have any Guidance yet on this matter One view is that provision is required under AS 29 The question is :Is there a realistic alternative to not spending

the money? The answer could be yes- as there is a provision for not

spending and explaining reasons The act is not an obligating event –see for instance: Smoke

filter example in AS 29 There is not even a penalty for not spending (which is there

in smoke filter example); not even linked to dividend payment etc.

Provision will however be needed when orders have been placed and commitment has been made

Even when Government Companies are mandated to spend by DPE , no such provision is created Though there is a ICAI EAC opinion stating a reserve shall

be created as an appropriation for unspent amount.

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Recent developments Rural electrification corporation has decided to

contribute Rs 2cr to a Literacy project

Gail has paid Rs 5cr to same NGO- Padho aur

Badho

Govt has set up dedicated cell NFCSR (National

foundation for CSR) as an arm of IICA

Sambhavana Society rolling out portal showcasing

work of NGO’s to help corporates select NGO’s in

their areas of interest.

Ecotimes 19 Apr 14

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Recent developments contd.

The Andhra Pradesh High Court (APHC) in

its recent order has stayed the Andhra

Pradesh Pollution Control Board (APPCB)’s

directive to all industries including

pharma and bulk drugs to allocate at

least one per cent of their project cost

towards Corporate Social Responsibility

(CSR) activity.

NEWS ITEM 14 MAR 14

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Implement global standards like OECD Guidelines Global Reporting Initiative IISO 26000 Voluntary Principles UN Global Compact Equator Principles IFC Performance Standards Extractive Industries Transparency Initiative UN Principles for Responsible Investment Trace (anti-bribery compliance, tools,

support, standards)

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Managing CSR well

Stop equating CSR with corporate philanthropy

Take a holistic view of the impacts of business on society and environment

Develop CSR strategies with potential for large scale social and economic impact

Identify select areas of effective and measurable action

Identify and hire or partner with professionals Do not feel pressured to take on the

operational responsibility of every initiative undertaken

Collaborate wherever possible

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Managing CSR well

CSR in India In June 2008, a survey was carried out by TNS

India (a research organization) and the Times

Foundation with the aim of providing an

understanding of the role of corporations in CSR

The findings revealed that over 90 per cent of all

major Indian organizations surveyed were

involved in CSR initiatives.

The leading areas that corporations were involved

in were livelihood promotion, education, health,

environment, and women's empowerment.

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CSR in India

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CSR in India

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CSR by Corporate Foundations

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CSR Internationally

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Final word- CSR could be a business opportunity for some

If your company is in any of the areas

prescribed for CSR this could be a great

business opportunity you should grab!

Business Standard recently carried an article

that Sintex is looking at CSR as a growth area

for their businesses.

They are in biogas, environment products, and

wastewater treatment systems

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FAQ on CSR rules If in a sick company there is a profit only because of

restructuring of loans in one of the years and

otherwise it is a loss and company with negative

networth , what should be done?

The profit arising because of such write backs shall be considered.

How are losses in any of the three years to be

treated? Also accumulated losses? If before three

years the company has accumulated losses should

that be adjusted?

There is no provision to adjust accumulated losses. However if in one

or more of the years there is a loss, then that shall be deducted from

the profit of other years.

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FAQ on CSR rules contd.

What about cases of merger of

companies?

The treatment would depend on whether

HC approval has been received; if received,

the reported figures would have been

adjusted for merger and that should be

taken; if no approval has come and no

adjustment has been made in books, the

merger shall be ignored

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FAQ on CSR rules contd.

If Company is in existence for only say 2

years what should be done? Should two year

profits be divided by 3 or 2? If financial year

of a company is less than 12 months or year

end has been changed in between what

should be done?

The average profit will arise only in such companies,

which have been in existence for 3 years. The years

would include any financial year whether 12 months or

more or less. Thus it would not apply to companies in

existence for less than 3 years

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FAQ on CSR rules contd.

If SEBI or other authorities have ordered

revision of financial statements, which figure

should be taken?

The revised figures shall be considered.

For arriving at profits should qualifications of

auditors to the extent quantified be adjusted?

No.

If branch outside India has only expenses and

no revenue, should it be deducted to arrive at

profits?

No.

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FAQ on CSR rules contd. If dividend is declared by investee company covered

under and complying with S 135 from out of its past

reserves whether that would still be entitled to

exemption?

It would seem so.

Will dividend received from a foreign subsidiary etc be

exempt?

It should logically be though it is not clear from the law

Would ‘complying with’ by investee co. (rule 2f) mean

fully complying with? Would spending 1% instead of 2%

help?

It would seem that complying would mean fully complying with and

certificates may have to be obtained from the investee co.

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FAQ on CSR rules contd. Will fixed assets created be recognised as

CSR expenditure?

Yes. When Company has control over the assets

they should be capitalised in the books of

accounts

Can a related party incur CSR

expenditure?

There seems to be no bar –esp. as collaboration

is allowed- subject to suitable disclosures

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What if you could predict the outcome of your CSR activity?

 “Measuring how much it costs to produce a single

‘unit’ of impact, called ‘cost per outcome,’ can tell

with a high probability whether a nonprofit program

will work.”

Perry Yeatman of Mission Measurement, - See more

at: http://www.marketsforgood.org/predict-success-

nonprofit-before-it-starts/#sthash.f9yf1Qjz.dpuf

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Conclusion

Under CSR organizations consider the interests of society by

taking responsibility for the impact of their activities on :

Customers

Suppliers

Employees

Shareholders

Communities

Other stakeholders and

The environment.

It should not be seen just a statutory obligation and compliance

with legislation but should be undertaken as a way of life and

commitment to society at large.

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Thank You!

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