Presentation on corporate social responsibility new rules

CS Jatin Jalundhwala
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 What is CSR ?
 The global context
 The CSR approach is holistic and integrated with the core
business strategy for addressing social and environmental
impacts 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 otherwise
constitutes a much larger set of activities entailing strategic
business benefits.
 The EC1 defines CSR as “the responsibility of enterprises for
their impacts on society.”
1 http://ec.europa.eu/enterprise/policies/sustainablebusiness/ corporate-social-responsibility/index_en.htm
9th May, 2014

What is CSR ?
o Countries 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

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 What is CSR ?
 CSR in India
 CSR in India has traditionally been seen as a philanthropic
activity.
 CSR activities have moved from institutional building
(educational, research and culture) to community development
through various projects.
 The Companies Act, 2013 has introduced the idea of CSR to
the 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 of
sustainable development. It refers to the role that companies can
play in meeting the agenda of sustainable development and
entails a balanced approach to economic progress, social
progress and environment stewardship.
 CSR in India tends to focus on what is done with profits after
they are made.
 On the other hand, sustainability is about factoring the social and
environmental impacts of conducting business, that is, how
profits are made.
 Hence, much of the Indian practice of CSR is an important
component of sustainability or responsible business, which is a
larger idea, a fact that is evident from various sustainability
frameworks.
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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 companies
have started realising that the “license to operate” is no longer given by
governments alone, but communities that are impacted by a company’s
business operations.
 Attracting and retaining employees :
CSR increases employee morale and a sense of belonging to the
Company.
 Communities as suppliers
CSR ensures adequate and secure supply chain for its requirements.
 Enhancing corporate reputation
CSR 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 a
director 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 to
directors of all companies.
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CSR – Section 135 of Companies Act, 2013
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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

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 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 financial
statement prepared in accordance with the provisions of the Act, but
shall not include the following, namely :-
o Any profit arising from any overseas branch or branches of the
company, whether operated as separate company or otherwise and
o any dividend received from other companies in India, which are
covered under and complying with the provisions of Section 135 of
the Act.
9th May, 2014

Once under CSR always under CSR ?
Conjoint reading of sub-sections (1) and (5) of Section 135 seems to
suggest that if covered under sub-section (1) “during any financial
year”, the minimum spends of 2% of average net profits will have to
be ensured “in every financial year” irrespective of whether
Section 135(1) is fulfilled or not.
o This is of course subject only to the condition that the average of
net profits is a positive figure.
o Rule 3(2) provides that once a company is covered by section
135(1), it will be out of the purview of CSR only if it ceases to be
covered 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

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 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 Company
Minimum 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 within
Sch – VII.
CSR expenditure will not include any expenditure not in conformity
or not in line with activities of Schedule VII.
o modalities of execution of such projects.
o implementation schedule.
o monitoring process, excluding activities under normal course of
business.
o To ensure that activities under CSR Policy are included in
Schedule – VII.
o Display contents of CSR policy on the company’s web, if any.
o CSR activities can be undertaken through a registered trust.
o Disclosure in Board Report and AR for FY 2014-15.
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CSR Activities - Schedule VII
The following activities have been included in Schedule VII:
1. Eradicating hunger, poverty and malnutrition, promoting preventive
health care and sanitation and making available safe drinking water.
2. Promoting education, including special education and employment
enhancing vocation skills especially among children, women, elderly
and the differently abled and livelihood enhancement projects;
3. Promoting gender equality, empowering women, setting up homes and
hostels for women and orphans; setting up old age homes, day care
centres and such other facilities for senior citizens and measures for
reducing inequalities faced by socially and economically backward
groups;
4. Ensuring environmental sustainability, ecological balance, protection of
flaura, fauna, animal welfare, agroforestry, conservation of natural
resources and maintaining quality of soil, air and water.
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5. Protection of national heritage, art and culture including restoration of
buildings and sites of historical importance and works of art; setting up
public libraries; promotion and development of traditional arts and
handicrafts;
6. Measures for the benefit of armed forces veterans, war widows and
their 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 other
fund set up by the Central Government for socio-economic
development and relief and welfare of the scheduled castes, the
Scheduled Tribes, other backward classes, minorities and woman;
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9. Contributions or funds provided to technology incubators located within
academic 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. – No
Distribution of used articles / scraps it does not deal in - Yes
2. Activities undertaken only for the benefit of the employees
and 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 development
Due deligence of the
implementation partner
Finalising the arrangement with the
implementing agency
Project approval
Project implementation
Progress monitoring and reporting
Report consolidation and
communication
Impact 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.
9th May, 2014

FAQs on CSR
Q. In case of a group company comprising a holding company and its
subsidiaries, what if individual members of the groups haven’t
achieved targeted CSR spends of 2% of ANP but the CSR spends of
the 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 net
consolidated profit of the group as a whole.
Q. Is pooling of CSR spends by two or more companies allowed ? It
so will 2% of ANP be computed company-wise or in the aggregate for
pooling companies ?
A. Pooling is allowed. However, 2% of ANP to be worked out company-
wise.
9th May, 2014

Penalties & Punishments
Punishment for contravention of Section 166 (Duties of
Directors)
o Section 166 (7) provides that if a director contravenes the
provisions of Section 166 such director shall be punishable with
fine which shall not be less than one lakh rupees but which may
extend 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/- and
o Every officer who is in default shall be punishable with
imprisonment for a term which may extend to 3 years or with fine
which shall not be less than Rs. 50,000/- but which may extend to
Rs. 5,00,000/- or with both – Section 134(8).
9th May, 2014

Penalties & Punishments
Punishment for contravention of Section 135
o There is no specific punishment provided for defaulting on CSR
spends obligations.
o So, 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 which
contravention 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.
o Allowed as Deduction from Book Profits
o S. 80G available only to Trusts / Co. – 50%
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Issues……
o Hard earned money goes for community development which is the
responsibility of the State.
o Companies 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.
o By making the companies incur CSR through law, can it be
perceived as an indirect levy ?
o Mandatory 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 ?
9th May, 2014

Conclusion ……
o Corporates are already engaged in CSR.
o Mandated CSR creates issues of perfunctory compliance as
against dedicated CSR.
o Controls and costs
o Judgemental errors
o Misuse by local groups
o Local politics
o Misuse by corporate sector
9th May, 2014

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