Corporate
Social
Responsibility
Is it new to India?
Legal requirements & its
implications
11 June 14
CA S Rajeshwari
1
2
What is CSR?
“Corporate social responsibility is the
commitment
continuing
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…..
Howard R. Bowen -1950’S
• ‘the obligations of businessmen to pursue
those policies, to make those decisions, or
to follow those lines of action which are
desirable in terms of the objectives and
values of our society”
Joseph . W . Mcguire
• “The idea of social responsibilities supposes
that the corporation has not only
economic and legal obligations but also
certain responsibilities to society which
extend beyond these obligations”
4
CSR defined by EU
Original Definition
• “a
concept
whereby
companies
integrate social and environmental
concerns in their business operations and
in their interaction with their stakeholders
on a voluntary basis”
Modified Definition
• “the responsibility of enterprises for their
impacts on society”.
5
What CSR means today

CSR goes beyond philanthropy
 Holistic and
integrated approach for sustainable
development to all stakeholders

CSR is a process that creates self-reliant communities

It is a process of taking everybody together to have a
sustainable society
6
CSR In India
How CSR has grown in India over the years…
7
CSR is certainly not new to India
• Sikhism
has its Kar
seva
• Has its
Zakat
• Require
the
faithful to
contribute
.
Islam
Sikhism
Christianity
Hinduism
•has its Poortha
Karma and
Pancha Maha
Yagna
8
Swami Vivekananda
 Do
was behind the
Rockefeller foundation which is one of
the largest charitable foundations ever in the
globe?
 His
you
know
Swami
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, 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 India
Source: Wikipedia
10
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
S 293(1)(e)
ad S 181
S 135
What is
allowed?
What is
mandated?
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
Introduction
17
Comparison of current vs. possible CSRPSU’s (Rs. Crores)
PSU
Actual
2% of PAT
% gap
ONGC
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
-22.73
BPCL
8
29
72.41
Source: Deccan Herald – 30th September 2013
Introduction
18
Comparison of current vs. possible CSRPSU’s (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
27.08
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
81.82
Maruti Suzuki
12
43
72.09
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
implementation

The monitoring process
of
execution
and
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
 Disclose

of the CSR Committee
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
provisions of S 135

Surplus shall not form part of business profit of co. (rule 6(2))
the
29
Net profit under section 198
Description
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
Amounts
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)
Eradication of hunger, poverty, preventive health care and malnutrition
Promotion of education
Promotion of gender equality
Ensure environment sustainability
Protection of natural heritage
Measures benefiting armed forces
32
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
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
purview of Sch
corpus for projects/programs
VIII (Rule 7)
if within the
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 underprivileged 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 businesscontd.

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
shareholding
companies
exceeding
50%
with
and
overseas
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
Corporate
their
project
Social
activity.
 NEWS
ITEM 14 MAR 14
cost
Responsibility
towards
(CSR)
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,
environment, and women's empowerment.
health,
48
CSR in India
ITC
• ITC has made farmer development a vital part of its
business strategy, and made major efforts to improve the
livelihood standards of rural communities
Unilever
• Unilever is using micro enterprises to strategically augment
the penetration of consumer products in rural markets
TCS and Wipro
• IT companies like TCS and Wipro have developed software
to help teachers and children in schools across India to
further the cause of education. The adult literacy software
has been a significant factor in reducing illiteracy in remote
communities.
49
CSR in India
Banks
•Banks and insurance companies are targeting migrant labourers
and street vendors to help them through micro-credits and related
schemes.
GlaxoSmithKline
•CSR
programs
of
corporations
like
GlaxoSmithKline
Pharmaceuticals focus on the health aspect of the community.
•They set up health camps in tribal villages which offer medical
check-ups and treatment and undertake health awareness
programs.
BP and Maruthi Udyog
•In another study undertaken by automotive research company,
TNS Automotive, India has been ranked second in global
corporate social responsibility. State-owned Bharat Petroleum and
Maruti Udyog were ranked as the best companies in India.
50
CSR by Corporate Foundations
Bill & Melinda Gates Foundation
•The Bill & Melinda Gates Foundation, a benchmark for a focused
socially-relevant enterprise, chose just two areas of effective and
measurable action: education and healthcare. The foundation then
made worldwide eradication of polio akin to a business goal and is
confident of achieving it in the next six years.
Azim Premji Foundation
•In India, the Azim Premji Foundation chose to focus on improving the
quality of primary education, and has maintained this effort for over 12
years
Piramal Foundation
•The Piramal Foundation operates its healthcare initiatives internally
SAP
•SAP India in partnership with HOPE in Bangalore has done a lot of work
to rebuild the lives of the tsunami affected victims
51
CSR Internationally
CISCO
• Cisco’s CSR strategy is to use their expertise,
technology, and partnerships for social,
environmental, and business impact.
Microsoft
• Microsoft has concentrated on the following
areas for their CSR
• Education and digital inclusion
• Internet safety and policy leadership
• Responsible Business practices
• Economic Opportunities
52
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
53
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.
54
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
55
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
56
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.
57
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.
58
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
accounts

Can a related party incur CSR expenditure?

There seems to be no bar –esp. as collaboration is
allowed- subject to suitable disclosures
59
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-successnonprofit-before-it-starts/#sthash.f9yf1Qjz.dpuf
60
Conclusion

Under CSR organizations consider the interests of society by taking
responsibility for the impact of their activities on :


Customers

Suppliers

Employees

Shareholders

Communities

Other stakeholders and

The 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!
61