Presentation on corporate social responsibility new rules

CS Jatin Jalundhwala1


What is CSR ?

The global context

The CSR approach is holistic and integrated with the corebusiness strategy for addressing social and environmentalimpacts of businesses.

CSR needs to address the well-being of all stakeholders and not just the company’s shareholders.

Philanthropic activities are only a part of CSR, which otherwiseconstitutes a much larger set of activities entailing strategicbusiness benefits.

The EC1 defines CSR as “the responsibility of enterprises fortheir impacts on society.”1 http://ec.europa.eu/enterprise/policies/sustainablebusiness/ corporate-social-responsibility/index_en.htm

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CS Jatin Jalundhwala

What is CSR ?

oCountries like Sweden, Norway, Netherlands, France and

Australia mandated CSR reporting.

o India has walked the extra mile and legislated mandatory CSR

activities as well as reporting.

o Looks like India is the first country to mandate CSR through

legislation.

o This is the first step and it is likely that the law will develop further

when CSR spend does not happen.

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CSR in India


What is CSR ?

CSR in India

CSR in India has traditionally been seen as a philanthropicactivity.

CSR activities have moved from institutional building(educational, research and culture) to community developmentthrough various projects.

The Companies Act, 2013 has introduced the idea of CSR tothe forefront and through its disclosure-or-explain mandate,is promoting greater transparency and disclosure.

Schedule VII of the Act, which lists out the CSR activities,suggests communities to be the focal point.

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CSR and sustainability

Corporate Sustainability is derived from the concept ofsustainable development. It refers to the role that companies canplay in meeting the agenda of sustainable development andentails a balanced approach to economic progress, socialprogress and environment stewardship.

CSR in India tends to focus on what is done with profits afterthey are made.

On the other hand, sustainability is about factoring the social andenvironmental impacts of conducting business, that is, howprofits are made.

Hence, much of the Indian practice of CSR is an importantcomponent of sustainability or responsible business, which is alarger idea, a fact that is evident from various sustainabilityframeworks.

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Benefits of a robust CSR programme

Communities provide the license to operate :In India, community is the important stakeholder and many companieshave started realising that the “license to operate” is no longer given bygovernments alone, but communities that are impacted by a company’sbusiness operations.

Attracting and retaining employees :CSR increases employee morale and a sense of belonging to theCompany.

Communities as suppliersCSR ensures adequate and secure supply chain for its requirements.

Enhancing corporate reputationCSR generates goodwill, positive impact and branding benefits.

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CSR provisions in the Companies Act, 2013

Mandatory CSR obligations

Section 166(2) (duties of directors)

Universally applicable to all

companies

Applicable to specified companies

Section 135 (mandatory

minimum spends on specified CSR

activities every year)

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Section 166(2) of the Companies Act, 2013

Section 166(2) of the Companies Act, 2013 requires adirector of a Company :o To act in good faith to promote the objects of the Company.

o for the benefit of its members as a whole and

o in the best interests of

• the Company

• its employees

• its shareholders

• the community and

• for the protection of environment

Section 166(2) dealing with the duties of directors applies universally todirectors of all companies.

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CSR – Section 135 of Companies Act, 2013

9

Listed Company

If 1 of 3 Conditions

Met

Unlisted Public

Private Company

Of the Top 1000 Listed Companies, 874 Covered

Of the Top 300 Unlisted Companies, 296 Covered

CSR Mandatory

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Net worth >Rs. 500 Cr.

Turnover >Rs. 1000 Cr.

Net Profit >Rs. 5 Cr.

CSR Criteria

Any one Condition during any Financial Year

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CSR – Section 135 of Companies Act, 2013


Foreign Companies are covered

Criteria for applicability of CSR to foreign company

Foreign company has branch office or project office in India

Foreign Company fulfils criteria in Section 135(1)

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Mandatory CSR obligations on Companies covered u/s. 135(1)of the Companies Act, 2013.

Mandatory CSR obligations under

Section 135

Constitute CSR

Committee of directors

Formulate CSR

Policy

Undertake CSR

activities as per CSR Policy

Undertake CSR

spends of at least 2% of average net profit

Disclosures in BOD report &

Company’s website

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Provisions for mandatory minimum CSR spends by Companies

CSR Spending @ 2% of Average Net Profits of Co. in Preceding 3 FYs.

Here NP is NPBT

“Net Profit” means the net profit of a company as per its financialstatement prepared in accordance with the provisions of the Act, butshall not include the following, namely :-

o Any profit arising from any overseas branch or branches of thecompany, whether operated as separate company or otherwise and

o any dividend received from other companies in India, which arecovered under and complying with the provisions of Section 135 ofthe Act.

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Once under CSR always under CSR ?

Conjoint reading of sub-sections (1) and (5) of Section 135 seems tosuggest that if covered under sub-section (1) “during any financialyear”, the minimum spends of 2% of average net profits will have tobe ensured “in every financial year” irrespective of whetherSection 135(1) is fulfilled or not.

o This is of course subject only to the condition that the average ofnet profits is a positive figure.

oRule 3(2) provides that once a company is covered by section135(1), it will be out of the purview of CSR only if it ceases to becovered by section 135(1) for three consecutive financial years.

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Once under CSR always under CSR ?

SN Year Whether either of the three criteria are met u/s. 135(1)

CSR obligations to spend 2% of Avg. NP

1. 2014-15 Yes Yes

2. 2015-16 No Yes

3. 2016-17 No Yes

4. 2017-18 No Yes

5. 2018-19 No No

Example -

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CSR Criteria : One way street ?

Year Net Profit

Turnover Networth 3 Yrs Avg. Covered ?

2014-15 5 50 100 4 Yes 8 Lakhs

2015-16 (4) 20 101 4.66 Yes 9 Lakhs

2016-17 (3) 20 98 2.00 Yes 4 Lakhs

2017-18 (2) 10 96 (0.66) No – 3 FY

2018-19 (1) 9 95 (3.00) No – 3 FY

2019-20 6 50 101 (2.00) No – Avg loss

2020-21 7 60 108 1.00 Yes 2 Lakhs

Rs. In Crores


CSR Spending by Top Indian Companies

Estimates Rs. 10,000 – 15,000 cr. / year

o 2013 - Top 1,000 Listed Cos * 2% = Rs. 6,826 cr.

o 2013 - of Top 200 Unlisted Cos * 2% = Rs. 720 cr.

oTotal CSR based on this = Rs. 7,546 cr.

oAdd CSR from Private Cos = Rs. 2,000 cr.

oCSR is 2% of Avg. NPBT

# Rs. 15,000 cr. / year a more likely estimate

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Constitution of CSR Committee

Listed CompanyMinimum 3 Directors out of which AT LEAST 1 should be an Independent Directors (ID).

Unlisted Public Company • Minimum 3 Directors, one ID required if any one of the following criteria under Section 149(4) of the Act are fulfilled -»Paid up share capital Rs. 10 Crore or more or»Turnover of Rs. 100 Crore or more or »Outstanding loans or borrowings or debentures or deposits, exceeding Rs. 50 Crore.

Private companies having only 2 Directors, committee of these two directors only.

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Role of CSR Committee -

Formulate CSR Policy

out of Specified Activities

Recommend Expense on

CSR Activities

Monitor CSR Policy of Co.

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CSR Policy :

o Projects or programmes which a company plans to undertake withinSch – VII.

CSR expenditure will not include any expenditure not in conformityor not in line with activities of Schedule VII.

omodalities of execution of such projects.

o implementation schedule.

omonitoring process, excluding activities under normal course ofbusiness.

o To ensure that activities under CSR Policy are included inSchedule – VII.

oDisplay contents of CSR policy on the company’s web, if any.

oCSR activities can be undertaken through a registered trust.

oDisclosure in Board Report and AR for FY 2014-15.

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CSR Activities - Schedule VIIThe following activities have been included in Schedule VII:

1. Eradicating hunger, poverty and malnutrition, promoting preventivehealth care and sanitation and making available safe drinking water.

2. Promoting education, including special education and employmentenhancing vocation skills especially among children, women, elderlyand the differently abled and livelihood enhancement projects;

3. Promoting gender equality, empowering women, setting up homes andhostels for women and orphans; setting up old age homes, day carecentres and such other facilities for senior citizens and measures forreducing inequalities faced by socially and economically backwardgroups;

4. Ensuring environmental sustainability, ecological balance, protection offlaura, fauna, animal welfare, agroforestry, conservation of naturalresources and maintaining quality of soil, air and water.

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CSR Activities - Schedule VIIThe following activities have been included in Schedule VII:

5. Protection of national heritage, art and culture including restoration ofbuildings and sites of historical importance and works of art; setting uppublic libraries; promotion and development of traditional arts andhandicrafts;

6. Measures for the benefit of armed forces veterans, war widows andtheir dependents;

7. Training to promote rural sports, nationally recognized sports,paralympic sports and olympic sports;

8. Contribution to the Prime Minister’s National Relief Fund or any otherfund set up by the Central Government for socio-economicdevelopment and relief and welfare of the scheduled castes, theScheduled Tribes, other backward classes, minorities and woman;

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CSR Activities - Schedule VII

The following activities have been included in Schedule VII:

9. Contributions or funds provided to technology incubators located withinacademic institutions which are approved by the Central Government.

10. Rural development projects.

*****************

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Activities not included in CSR

Schedule VII lists the various areas to be covered in the implementation of CSR activities.

Following activities are not included in CSR activities –1. Activities undertaken in normal course of business.

Distribution of books by paper manufacturing co. – NoDistribution of used articles / scraps it does not deal in - Yes

2. Activities undertaken only for the benefit of the employeesand their families.Gym, Library, subsidized food etc not for general public

3. Contribution directly or indirectly to Political Party.Advertising in a convention program of a political party.

4. Activities undertaken outside India.

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How to spend

Donate to any NGO

Donate to PM / Other CG Funds

Collaborate with other

Cos.

Carry out Activities on its

own

Set up own Foundation

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Board’s Duty

CSR Policy in BoD Report & on Website, if

any

CSR Committee in BoD Report

Ensure CSR Policy

implemented

Give preference to local areas

Reasons in Report if less than 2% spent

Ensure CSR @ 2% of Avg. NP

in 3 FYs

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Annual Report

7 Disclosures in Board of Directors’ Report :

1. Outline of CSR Policy + Projects proposed

2. CSR Committee Composition

3. Avg. NP for Last 3 FYs

4. CSR Exp. @ 2% of Avg. NP

5. CSR Spent during FY (as per prescribed format)

6. If Failure – then why failed in BoD Report

7. Responsibility – Implementation as per CSR policy of co.

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CSR Processes

Operationalising the institutional meachanism

Developing a CSR Strategy and policy

Project developmentDue deligence of the implementation partner

Finalising the arrangement with the implementing agency

Project approval

Project implementation

Progress monitoring and reporting

Report consolidation and communicationImpact measurement

1

2

3

4

5

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FAQs on CSR

Q. What is the date from which the CSR obligations under Section 135 become effective ?

A. The CSR obligations become effective from April 1, 2014. The CSR obligations come into force from FY 2014-15.

Q. Will a loss-making company get “CSR credits” based on “average net losses of past 3 years” which it can “carry forward” and set off against its future years CSR obligations when it turns positive again ?

A. No

Q. If Company has made CSR spend of 3% of average net profits in its present financial year, can it make CSR spend of only 1% of average net profits in next financial year ?

A. There is no provision for set-off of excess spend in one year against shortfall in spend in the next financial year.

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FAQs on CSR

Q. In case of a group company comprising a holding company and itssubsidiaries, what if individual members of the groups haven’tachieved targeted CSR spends of 2% of ANP but the CSR spends ofthe group as a whole meets 2% of average net consolidated profits ?

A. There is no provision to compute the 2% target as 2% of average of netconsolidated profit of the group as a whole.

Q. Is pooling of CSR spends by two or more companies allowed ? Itso will 2% of ANP be computed company-wise or in the aggregate forpooling companies ?

A. Pooling is allowed. However, 2% of ANP to be worked out company-wise.

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Penalties & Punishments

Punishment for contravention of Section 166 (Duties of

Directors)oSection 166 (7) provides that if a director contravenes the

provisions of Section 166 such director shall be punishable withfine which shall not be less than one lakh rupees but which mayextend to five lakh rupees.

Punishment for contravention of Section 134(3)(o) regarding

CSR disclosures in Board’s report.o Fine which shall not be less than Rs. 50,000/- but which may

extend to Rs. 25,00,000/- andoEvery officer who is in default shall be punishable with

imprisonment for a term which may extend to 3 years or with finewhich shall not be less than Rs. 50,000/- but which may extend toRs. 5,00,000/- or with both – Section 134(8).

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Penalties & Punishments

Punishment for contravention of Section 135o There is no specific punishment provided for defaulting on CSR

spends obligations.

oSo, such defaults attracts punishment under Section 450 titled“Punishment where no specific penalty or punishment is provided”which provides for - fine which may extend to Rs. 10,000/- and Where contravention is a continuing one, with a further fine

which may extend to Rs. 1,000/- for every day during whichcontravention continues.

There is no provision empowering the Central Government to

take coercive recovery steps to recover shortfall in CSR from

defaulting companies.

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Tax Benefits of CSR ?

o New Draft of DTC code issued on 31st March, 2014 by CBDT :

The CSR expenditure cannot be allowed as a business deduction

as it is an application of income.

oAllowed as Deduction from Book Profits

o S. 80G available only to Trusts / Co. – 50%

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Issues……

oHard earned money goes for community development which is the

responsibility of the State.

oCompanies are already paying huge taxes by way of Income Tax,

Excise, CST, VAT, Service Tax, Customs Duty, Entry Tax apart

from various fees and levies.

oBy making the companies incur CSR through law, can it be

perceived as an indirect levy ?

oMandatory 2% to be spent on social welfare activities through law

– can it be seen as a tax on profits and if so can it be through the

Companies Act ?

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Conclusion ……

oCorporates are already engaged in CSR.

oMandated CSR creates issues of perfunctory compliance as

against dedicated CSR.

oControls and costs

o Judgemental errors

oMisuse by local groups

o Local politics

oMisuse by corporate sector

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Law

Presentation on corporate social responsibility new rules