CORPORATE SOCIAL RESPONSIBILITY Is it new to India? Legal requirements & its implications 1 CA S Ramakrishnan
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CORPORATE SOCIAL RESPONSIBILITYIs it new to India? Legal requirements & its implications
1
CA S Ramakrishnan
WHAT IS CSR?
“Corporate social responsibility is the continuingp p y gcommitment by business to behave ethically andcontribute to economic development whileimproving the quality of life of the workforce andimproving the quality of life of the workforce andtheir families as well as of the local community andsociety at large.”
http://www.wbcsd.org/DocRoot/RGk80O49q8ErwmWXIwtF/CSRmeeting.pdf
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IS CSR NEW TO INDIA?3
CSR IS CERTAINLY NOT NEW TO INDIA
All religions have some form of CSR in built gIslam has its ZakatSikhism has its Kar sevaChristianity-some forms- require the faithful to contribute- Jesus identifies himself with the hungry, the sick and the stranger in the Holy Biblethe sick, and the stranger in the Holy BibleHinduism- has its Poortha Karma and Pancha Maha Yagna
And these can be traced from times immemorial
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IN VEDIC DAYS IN INDIA
Poortha KarmaDigging wellsFeeding the poorB ildi t lBuilding templesLaying out garden
Pancha Maha YangnaPancha Maha YangnaEducationRespect for family/eldersE i tEnvironmentPlants and animalsGood to societyy
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KAUTILYA DAYS -4TH CENTURY BC
In Arthasastra Kautilya states :yin the happiness of his subject lies the happiness of the king; and in their welfare his welfare; the King h ll t id d l th t hi h lshall not consider as good only that which pleases
him but treat as beneficial to him whatever pleases his subjects– the welfare of the many and the happiness of the many.
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VALLUVAR -2ND CENTURY BC
The great Tamil poet ThiruvalluvarThe great Tamil poet Thiruvalluvar says:the king who administers justice andthe king who administers justice and protects his people will be considered of divine qualityof divine quality.
Some more gems…
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Background and Overview
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RECOMMENDED READING
THE DUTY AND ACTION FOR CORPORATE SOCIAL RESPONSIBILITY (CSR) FROM THE PERSPECTIVES OF VEDANTA
Dr Balakrishnan MuniapanDr. Balakrishnan Muniapan
Is a very detailed research paper if you are interested in the subject of CSR in ancient India.
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SWAMI VIVEKANANDA
Do you know Swami was behind the Rockefeller yfoundation which is one of the largest charitable foundations ever in the globe?Hi f d “ h d ’t id l iHis 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’bigger than Bill Gates
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TATAS AND CSR
“In a free enterprise, the community is not just p , y janother stakeholder in business but is in fact the very purpose of its existence."
Jamsetji Nusserwanji Tata Founder Tata Group- 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 p p y yvarious social causes.
Refer to Corporate Social Responsibility: A Case Study Of TATA Group by Amit Kumar Srivastava1, Gayatri Negi2, Vipul p y y g pMishra3, Shraddha Pandey4
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MAHATMA GANDHI AND CSR
The Industry should regard themselves as trustees y gand servants of the poor said the Mahatma
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NOW….
Let us proceed to the new law…p
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ESTIMATED AMOUNT OF CSR POSTIntroduction
COMPANIES ACT 2013…Upto Rs.18,000 crores may be spent on CSR by p , y p yIndian Corporates…
Deccan Herald 30, Sep 1316400 i16400 companiesAround 14000 will contribute less than Rs 1cr.
Estimates vary but huge amount going to be spentEstimates vary but huge amount going to be spent
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COMPARISON OF CURRENT VS. POSSIBLEIntroduction
CSR- PSU’S (RS. CRORES)
PSU Actual 2% of PAT % gap
ONGC 121 473 74 42ONGC 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 73HPCL 27 22 ‐22.73
BPCL 8 29 72.4115
COMPARISON OF CURRENT VS. POSSIBLEIntroduction
CSR- PRIVATE SECTOR (RS. CRORES)
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 08L&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 82Infy 26 143 81.82
Maruti Suzuki 12 43 72.0916
Background and Overview
BACKGROUND TO CSR
Government has been mulling over Corporate g pSocial Responsibility and ways and means of making this a way of corporate lifeGl b ll th l l d t f CSRGlobally, there are no legal mandates for CSR spends…India, has pioneered this through a provision inIndia, has pioneered this through a provision in Companies Act, 2013
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Company Structure and CSR Spend
APPLICABILITY {SEC 135 (1)}Every Company having (in any financial year)
N t th f t l t R 500 ORNetworth of at least Rs.500 crores ORTurnover of at least Rs.1,000 crores ORNet profit of Rs. 5 crores
‘’Any financial year’’ implies ‘any of the 3 preceding financialAny financial year implies any of the 3 preceding financial years’- clarification issued on 18’june2014Thus, 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 27Applicable 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)-Al li t f i h i b h j t ffi i I diAlso applies to foreign co having branch, project office in India (rule 3)
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Company Structure and CSR Spend
ISSUES IN APPLICABILITY {SEC 135 (1)}
Even if in the current year, company ends up y , p y pmeeting the criteria, the company ought to have a CSR committee and start the CSR activities for the yearyearRules 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 thePrivate 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 gthis is not contemplated in act?For a company to get into CSR it needs to meet the
it i i f th 3 di b t tcriteria in any one of the 3 preceding years but 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 6and 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 reachedtill 3 consecutive years of inapplicability is reached
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Role of the Board -Governance
CSR COMMITTEE {SEC 135 (3)}
Formulate and recommend to board CSR policy, p y,which shall indicate the activities to be undertaken by the CompanyR d th t t b t thRecommend the amount to be spent on the activitiesMonitor compliance with the CSR policy from timeMonitor compliance with the CSR policy from time to time
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Role of the Board -Governance
BOARD RESPONSIBILITIES {SEC 135 (4)}
Approve the CSR policypp p yPlace the CSR policy on the company’s 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 theaverage 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
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Role of the Board -Governance
BOARD REPORT {SEC 135 (2) - (5) AND 134 (3) (O)}
To containComposition of the CSR CommitteeDisclose the contents of the CSR policyD t il f t t d th 2% f t fitDetails of amount spent and the 2% of net profit as computedReasons for not spending the amount on CSR, if such amounts are not spent
Rule 8 and Annexure
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DISCLOSURE IN CO. WEBSITE
Rule 9 requires disclosure in co website , if any, of q , y,contents of
CSR policy
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Role of the Board -Governance
CONSEQUENCES OF NOT SPENDING
No specific penalties prescribedp p pReasons for not spending to be provided as stated alreadyWill general penalties in Chapter XXIX apply?
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Calculation of Net Profits and CSR Spends
CSR SPENDS
Spends in every year,p y y2% ofThe average net profitsMade during the three immediately preceding financial yearsMade during the three immediately preceding financial years
Explanation also states, that average net profits shall be calculated in accordance with section 198
(f) f )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 135Surplus shall not form part of business profit of co. (rule 6(2))( ))
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Calculation of Net Profits and CSR Spends
NET PROFIT UNDER SECTION 198
Description AmountsDescription 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 bethe 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 profitThis 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 h ld t b dshould not be done.
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WHAT CAN YOU SPEND ON? 29
(NOTIFICATION DATED 27 FEB 14 )
Eradication of hunger, poverty, malnutrition and promoting preventive health care
Promotion of educationPromotion of education
Promotion of gender equality
Ensure environment sustainability
Protection of natural heritage
Measures benefiting armed forces
W ? C
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WHAT CAN YOU SPEND ON? CONTD. (NOTIFICATION DATED 27 FEB 14 )
Training to promote rural and nationally recognized sports
Contribution to the Prime Minister's National Relief Fund
Contributions or funds provided to technology incubators
Rural development projects
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Specific Activities covered under CSR
RECENT CIRCULAR ISSUED BY MCA ON 18TH
JUNE 2014 CLARIFYING THE TYPE OF
p
JUNE 2014 CLARIFYING THE TYPE OFACTIVITIES THAT COULD BE UNDERTAKEN
URGES ‘LIBERAL INTERPRETATION’ OF ENTRIES IN SCH VII SO AS TO CAPTURE THE
ESSENCE OF THE SUBJECTS ENUMERATED IN THE SCH.
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PROMOTING EDUCATION
Educating the masses and Promoting the road safety awarenessg g y
Safety traffic engineering and awareness through print, audio & visual media
Setting up Applied Research Training and Innovation Centre (ARTIC) at Nasikg p pp g ( )
Consumer Education Awareness – Viz., Protecting rights, Consumer
grievance redressal mechanism
Donations to IIM – Ahmedabad
Non-Academic Technopark Technology Business Incubators
Research and Studies
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PROMOTING HEALTH CARE INCL. PREVENTIVEHEALTH CARE
Social Business Projects such as giving medical and legal aid to road
accident victims
Provision of aids and appliances to the differently abled persons
Medial aid provided as disaster relief measure
Trauma care around Highways
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VOCATIONAL SKILLSDrivers’ training etc.,
Capacity building for farmers covering best sustainable farm management
practices*
Training agricultural labour on skill development*
* - to predominantly benefit rural farming community
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ERADICATING HUNGER, POVERTY ANDMALNUTRITION
Food supply as a disaster relief measure
Supplementing Government Schemes like Mid-day Meal Scheme
Ecological balanceOwn research for individual crops to identify the most cost optimum and agri-
ecological sustainable farm practices
Research with a focus on Water Management
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CONSERVATION OF NATURAL RESOURCES
Product life cycle analysis from the perspective of soil conservation
Environmental Sustainability EcologicalEnvironmental Sustainability, Ecological balance and Conservation of natural resources
Renewable Energy Products
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EXAMPLES OF ACTIVITIES NOT CONSIDERED ASCSRTraining to Enforcement Personnel
Capacity of building of Government Officials and Elected Representatives in
the area of Public, Private Partnerships and Urban infrastructure
Sustainable Urban Development and Urban public transport systems
Programme providing professional exchange of physicians between India and
United States
WHAT CAN YOU SPEND ON? Expenditure only in India (rule 4(4))p y ( ( ))
Give preference to local area/areas where it operates ( S 135(5))
Not to benefit only employees and families (as itNot 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!CSR funds shall be utilised for educating their children!
CSR activities to be only in project/programmemode, and one off events such as marathons/awards/charitablemarathons/awards/charitable contribution/asvertisement/sponsorship of TV programs etc not to be considered as CSR expenditure ( 18 jun 14 clarification)expenditure ( 18 jun 14 clarification) 38
WHAT CAN YOU SPEND ON?
Can be given as corpus for projects/programs if g p p j p gwithin the purview of Sch vii (Rule 7)However contributions to corpus will qualify as CSR
dit l if th T t/ i t / 8expenditure only if the Trust/society/sec 8 company to whom it is made is created exclusively for undertaking CSR or The corpus is created exclusively for a purpose directly relatable to a subject covered by schvii (clarification of 18 jun 14)vii.(clarification of 18 jun 14)Not as direct or indirect contribution to a political party (rule 4(7))p y ( ( ))
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LIMIT ON OWN PERSONNEL
Rule 4(6) sets a very low limit of 5% on CSR ( ) ycapacities of own personnel or their implementing agencies through established track record of 3 yearsyears
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?However salaries –direct and indirect can be included in CSR project cost as per clarification dated 18 june14j j
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ACTIVITIES IN THE NORMAL COURSE OFBUSINESS NOT ALLOWED
See rule 2(e), 4(1), Proviso to 6(1) ( ), ( ), ( )Expenses incurred for the fulfilment of any Act/statute/regulations (Labour laws, land
i iti A t t ) t t d CSRacquisition Act etc) not counted as CSR expenditure, as per 18 jun14 clarification
Does this mean Company cannot do any activities p y ywhich 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 ?would not qualify… etc ?
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ACTIVITIES IN THE NORMAL COURSE OFBUSINESS NOT ALLOWED
A distance education pioneer may be best suited to p yprovide 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 itemswould 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) oreducation (students can read in the night) or sustainability.
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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 Th l t i d i th h t l ti fThese people are trained in the hotel operations for 6-8 weeks.Part of the stipend is reimbursed by IHM but hotelPart of the stipend is reimbursed by IHM but hotel incurs expenses on stipend, food, uniform etc.This expenditure may not qualify as this is in the
l f b i th h it i inormal 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-p j pcondition that some social investment shall be done e.g building a school, arranging drinking water supply building a bridge etcsupply, building a bridge etc
Such activities would not qualify as they are in the course of business.
Is it possible a Company can provide a product it manufactures free of cost to the needy –like a Pharma co providing free medicines or hotelPharma co providing free medicines or hotel company providing free food and treat the costthereof as CSR? this needs clarification.
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CO-OPERATIVE EFFORTS POSSIBLE
Rule 4(2) allows undertaking CSR through( ) g gOutside Regd trust(clarified that ‘Trust’ includes those registered u/income tax act in those states where registration of Trust not mandatory)Outside Regd society
If above have established track record of 3 years in similar programs/projects
O / 8/t t/ i t t bli h d bOr co u/s 8/trust/society established by Holding, subsidiary or associate co
Or otherwisef f f fIf 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 andthat respective cos can report on the projects and programs 45
CONSEQUENCES OF NON DISCLOSURE
Failure to make disclosure as per Rules will be ppunishable by a fine of between Rs50,000 and Rs250,000. F th ffi th t i i d f lt ill bFurther, every officer that is in default will be punished with imprisonment of up to three years or with a fine of up to Rs250,000
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CSR AND FCRA (FOREIGN CONTRIBUTIONREGULATION ACT 2010)
Indian companies with overseas shareholding p gexceeding 50% and foreign companies require registration under FCRA as donations received from them is considered as receipt from ‘foreign sources’p gExpenditure incurred by f.holding co for CSR in indiarouted through its indian subsidiary which is covered by sec 135 will qualify as CSR spend (18 june 14sec 135 will qualify as CSR spend (18 june 14 clarification) and such co’s will also get covered under FCRA.Thi ld b i di t t CSR t ib ti bThis would be an impediment to CSR contributions by such cos.For foreign companies RBI approval may also be g p pp yrequired under FEMA 47
CSR AND INCOME TAX ACT
The Finance Bill 2014 has clarified-Any Expenditure incurred by an assesses on the CSR activities shall not be deemed to be
dit i d b th A f thanexpenditure incurred by the Assesses for the Purpose of Business or profession.It means that CSR Expenditure is appropriation ofIt means that CSR Expenditure is appropriation of the Reserve/Profit and is not allowed as Expenditure.
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IS A PROVISION REQUIRED IN ACCOUNTS?We should wait for ICAI Guidance on this matterM l i i i i i i t i d d AS 29My personal opinion is a provision is not required under AS 29The question is :Is there a realistic alternative to not spending the money?My answer is yes- as there is a provision for not spending and explaining reasons
An example is Company has not spent money and next year the business is wiped off and they have to decide between payment of TDS or salary and CSR
The act is not an obligating event –see for instance: Smoke filterThe 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 paymentProvision will however be needed when orders have been placed andProvision 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 created
Though I am told there is a ICAI EAC opinion stating a reserve shall be g p gcreated as an appropriation for unspent amount. 49
RECENT DEVELOPMENTS
Rural electrification corporation has decided to pcontribute Rs 2cr to a Literacy projectGail has paid Rs 5cr to same NGO- Padho aur B dhBadhoGovt has set up dedicated cell NFCSR (National foundation for CSR) as an arm of IICAfoundation for CSR) as an arm of IICASambhavana Society rolling out portal showcasing work of NGO’s to help corporates select NGO’s in th i f i t ttheir areas of interest.
Ecotimes 19 Apr 14
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RECENT DEVELOPMENTS CONTD.
The Andhra Pradesh High Court (APHC) in its g ( )recent order has stayed the Andhra Pradesh Pollution Control Board (APPCB)’s directive to all industries including pharma and bulk drugs toindustries 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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MANAGING CSR WELL
Implement global standards likep gOECD Guidelines Global Reporting InitiativeIISO 26000IISO 26000 Voluntary Principles UN Global Compact pEquator PrinciplesIFC Performance Standards Extractive Industries Transparency InitiativeExtractive Industries Transparency Initiative UN Principles for Responsible InvestmentTrace (anti-bribery compliance, tools, support, standards) 52
HOW TO CHOOSE A CHARITY?
See this Ted.com talkhttp://blog.ted.com/2013/03/11/how-to-pick-the-charity-thats-right-for-you/
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WHAT IF YOU COULD PREDICT THE OUTCOMEOF YOUR CSR ACTIVITY?
“Measuring how much it costs toMeasuring how much it costs to produce a single ‘unit’ of impact, called ‘cost per outcome,’ can tell with a phigh probability whether a nonprofit program will work.”
Perry Yeatman of Mission Measurement, - See more at: htt // k t f d / dihttp://www.marketsforgood.org/predict-success-nonprofit-before-it-starts/#sthash f9yf1Qjz dpufstarts/#sthash.f9yf1Qjz.dpuf 54
FINAL WORD- CSR COULD BE A BUSINESSOPPORTUNITY FOR SOME
If your company is in any of the areas prescribed y p y y pfor CSR this could be a great business opportunity you should grab!B i St d d tl i d ti l th tBusiness 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 p y p ybecause of restructuring of loans in one of the years and otherwise it is a loss and company with negative networth , what p y g ,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 y ylosses 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 yearsdeducted from the profit of other years. 56
FAQ ON CSR RULES CONTD.
What about cases of merger of companies?g pThe treatment would depend on whether HC approval has been received; if received, the
t d fi ld h b dj t d freported figs 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 p y y yyears 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 yearof 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 3would 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 consideredThe 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 toand 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% i t d f 2% h l ?instead of 2% help?
It would seem that complying would mean fully complying with and certificates may have to be obtained from the investee coinvestee co.
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FAQ ON CSR CONTD.
Will fixed assets created be recognised as CSR gexpenditure?
Yes. When Company has control over the assets they should be capitalised in the books of accountsshould 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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