Corporate Social Responsibility

1. Corporate Social Responsibility Is it new to India? Legal requirements & its implications 11 June 14 CA S Rajeshwari

2. What is CSR? “Corporate social responsibilityis 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

3. Early definitions of CSR…..

4. CSR defined by EU

5. What CSR means today • CSR goes beyondphilanthropy • Holisticandintegratedapproach for sustainable development to all stakeholders • CSR is a process that creates self-reliantcommunities • It is a process of taking everybody together to have asustainable society

6. CSR In India How CSR has grown in India over the years…

7. CSR is certainly not new to India

8. Swami Vivekananda • Do you know Swami was behind the Rockefeller foundationwhich 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’

9. Tatas and CSR • “In a free enterprise, thecommunityis not just another stakeholder in business but is in fact the very purpose of its existence." • JamsetjiNusserwanji 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, GayatriNegi, VipulMishra, ShraddhaPandey

10. Four Phases of CSR in India Source: Wikipedia

11. 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. Phase 2 • During Independence movement • “Trusteeship” concept of Mahatma Gandhi • Thrust was towards nation building and socio economic development

12. Phase 3 • Mixed economy- Setting up of PSU’s • Limited effectiveness • Shift of expectation to private sector Phase 4 • Globalization and Economic Liberalization • CSR directed towards sustainable business strategy • Companies more willing to participate

13. Now…. • Let us proceed to the new law…

14. 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

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

16. Introduction Estimated amount of CSR post Companies Act 2013… • Upto Rs.18,000 crores may be spent on CSR by Indian Corporates… • Deccan Herald 30, Sep 13 • 16400 companies • Around 14000 will contribute less than Rs 1cr. • Estimates vary but huge amount going to be spent

17. Introduction Comparison of current vs. possible CSR- PSU’s (Rs. Crores) Source: Deccan Herald – 30th September 2013

18. Introduction Comparison of current vs. possible CSR- PSU’s (Rs. Crores) Source: Deccan Herald – 30th September 2013

19. 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)

20. 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.

21. 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

22. 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

23. 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

24. Role of the Board - Governance 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

25. Role 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

26. Disclosure in company’s website • Rule 9 requires disclosure in co website , if any, of contents of: • CSR policy

27. 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?

28. 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))

29. Net profit under section 198

30. 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.

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

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

33. 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)

34. 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?

35. 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?

36. 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

37. 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.

38. 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.

39. 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

40. 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

41. 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!

42. 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.

43. 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

44. 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

45. Managing CSR well • 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)

46. 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

47. 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.

48. CSR in India

49. CSR in India

50. CSR by Corporate Foundations