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

What is CSR?Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. *Source: http://www.wbcsd.org/DocRoot/RGk80O49q8ErwmWXIwtF/CSRmeeting.pdf

Early definitions of CSR..*

CSR defined by EU*

What CSR means todayCSR goes beyond philanthropyHolistic and integrated approach for sustainable development to all stakeholdersCSR is a process that creates self-reliant communities It is a process of taking everybody together to have a sustainable society*

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

CSR is certainly not new to India*

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 dont 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*

Tatas and CSRIn a free enterprise, the community 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 causes. Refer to Corporate Social Responsibility: A Case Study Of TATA Group by Amit Kumar Srivastava1, Gayatri Negi, Vipul Mishra, Shraddha Pandey*

Four Phases of CSR in IndiaSource: Wikipedia*

Phase 1Charity and philanthropy were the main driversCulture, religion, family values and tradition were main influencesInfluence of caste groups and political objectives.*Phase 2During Independence movementTrusteeship concept of Mahatma GandhiThrust was towards nation building and socio economic development

Phase 3Mixed economy- Setting up of PSUsLimited effectivenessShift of expectation to private sector*Phase 4Globalization and Economic LiberalizationCSR directed towards sustainable business strategyCompanies more willing to participate

Now.Let us proceed to the new law*

Background to CSRGovernment has been mulling over Corporate Social Responsibility and ways and means of making this a way of corporate lifeGlobally, there are no legal mandates for CSR spendsIndia, has pioneered this through a provision in Companies Act, 2013

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

Estimated amount of CSR post Companies Act 2013Upto Rs.18,000 crores may be spent on CSR by Indian CorporatesDeccan Herald 30, Sep 1316400 companiesAround 14000 will contribute less than Rs 1cr.Estimates vary but huge amount going to be spent*Introduction

Comparison of current vs. possible CSR- PSUs (Rs. Crores)*Introduction Source: Deccan Herald 30th September 2013

PSUActual2% of PAT% gapONGC12147374.42Coal India11923549.36IOC8315646.79SBI7126172.80SAIL6110340.78GAIL547830.77NTPC4918773.80BHEL3711668.10HPCL2722-22.73BPCL82972.41

*IntroductionComparison of current vs. possible CSR- PSUs (Rs. Crores) Source: Deccan Herald 30th September 2013

Private sectorActual2% of PAT% gapRIL28842331.91Tata Motors14678-87.18Bharti Airtel3313074.62L&T709627.08M&M225962.71TCS5117971.51Hindalco287261.11ICICI bank2412781.10Infy2614381.82Maruti Suzuki124372.09

Applicability {Sec 135 (1)}Every Company having (in any financial year)Networth of at least Rs.500 crores ORTurnover of at least Rs.1,000 crores ORNet profit of Rs. 5 croresThus, even private companies are covered, if they are of this sizeThese 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)*

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 yearRules now have removed the difficulty related to Independent directorRule 5 clarifies that independent director is required only where applicable and Private company with 2 directors can have both in the CSR committee.*

Issues on applicabilityHow 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*

CSR Committee {Sec 135 (3)}Formulate and recommend to board CSR policy, which shall indicate the activities to be undertaken by the CompanyRecommend the amount to be spent on the activitiesMonitor compliance with the CSR policy from time to time*

CSR Policy {Rule 6}The CSR policy of a company shall include:A list of CSR projects or programs that company plans to undertakeWithin the purview of schedule VIISpecify modalities of execution and implementationThe monitoring process*

Board Responsibilities {Sec 135 (4)}Approve the CSR policyPlace the CSR policy on the companys websiteEnsure that CSR activities as per policy are undertakenEnsure that the company spends at least 2% of the average net profits of the company made during the three immediately preceding financial yearsGive preference to the local area and areas around it where it operates*Role of the Board - Governance

Board Report {Sec 135 (2) - (5) and 134 (3) (o)}To contain:Composition of the CSR CommitteeDisclose the contents of the CSR policyDetails of amount spent and the 2% of net profit as computedReasons for not spending the amount on CSR, if such amounts are not spentRule 8 and Annexure *Role of the Board - Governance

Disclosure in companys websiteRule 9 requires disclosure in co website , if any, of contents of:CSR policy

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Consequences of not spending No specific penalties prescribedReasons for not spending to be provided as stated alreadyWill general penalties in Chapter XXIX apply?*

CSR SpendsSpends in every year,2% ofThe average net profitsMade during the three immediately preceding financial yearsExplanation also states, that average net profits shall be calculated in accordance with section 198Rule 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 135Surplus shall not form part of business profit of co. (rule 6(2))*

Net profit under section 198*

DescriptionAmountsProfit as per booksAdd: Income taxLoss on sale of items of a capital nature including sale undertakingsProvision for doubtful debts /advances (-reversals thereof)Less:Profits of a capital nature including profit from sale of the undertakingProfit on sale of fixed assets to the extent it is more than the original costAdjustment for fair value measurements directly effected in reservesProfit under section 198

Non recalculation of profitsRule 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 actThis 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.*

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

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

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)*

Limit on own personnelRule 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 allAlso what is meant by the clause is not clear - should mean CTC of employees?*

Activities in the normal course of business not allowedSee 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 cant 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?*

Normal course of business an exampleHotels 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 *

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.*

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 itemsCase 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. *

Co-operative efforts possibleRule 4(2) allows undertaking CSR throughOutside Regd trustOutside Regd societyIf above have established track record of 3 years in similar programs/projectsOr co u/s 8/trust/society established by Holding, subsidiary or associate coOr otherwiseIf co has specified projects etc and modalities of fund utilization and monitoring and reporting mechanismOr 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*

CSR and Income Tax actSocial and welfare community expenses deductible as expenditure for business.Madras HC inCIT V Madras refineries Ltd (2004) 266 ITR 170Cheran 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 matterOne view is that provision is required under AS 29The 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 reasonsThe act is not an obligating event see for instance: Smoke filter example in AS 29There 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 madeEven when Government Companies are mandated to spend by DPE , no such provision is createdThough 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 projectGail has paid Rs 5cr to same NGO- Padho aur BadhoGovt has set up dedicated cell NFCSR (National foundation for CSR) as an arm of IICASambhavana Society rolling out portal showcasing work of NGOs to help corporates select NGOs in their areas of interest.Ecotimes 19 Apr 14*

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 likeOECD Guidelines Global Reporting InitiativeIISO 26000 Voluntary Principles UN Global Compact Equator PrinciplesIFC Performance Standards Extractive Industries Transparency Initiative UN Principles for Responsible InvestmentTrace (anti-bribery compliance, tools, support, standards)

*Managing CSR well

Stop equating CSR with corporate philanthropyTake a holistic view of the impacts of business on society and environmentDevelop CSR strategies with potential for large scale social and economic impactIdentify select areas of effective and measurable actionIdentify and hire or partner with professionalsDo not feel pressured to take on the operational responsibility of every initiative undertakenCollaborate wherever possible

*Managing CSR well

CSR in IndiaIn 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 CSRThe 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.*

CSR in India*

CSR in India*

CSR by Corporate Foundations*

CSR Internationally*

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*

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 accountsCan a related party incur CSR expenditure?There seems to be no bar esp. as collaboration is allowed- subject to suitable disclosures*

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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ConclusionUnder CSR organizations consider the interests of society by taking responsibility for the impact of their activities on :CustomersSuppliersEmployeesShareholdersCommunitiesOther stakeholders andThe 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.*

Thank You!*

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