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Corporate Social Responsibility. Is it new to India? Legal requirements & its implications 11 June 14 CA S Rajeshwari. What is CSR?. - PowerPoint PPT Presentation
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Corporate Social ResponsibilityIs it new to India? Legal requirements & its implications11 June 14CA S Rajeshwari
1
What is CSR?
“Corporate social responsibility is the
continuing commitmentcontinuing commitment by business to
behave ethicallyethically and contribute to economic
development while improving the improving the
quality of life quality of life of the workforce and their
families as well as of the local community and
society at large.”
2
Source: http://www.wbcsd.org/DocRoot/RGk80O49q8ErwmWXIwtF/CSRmeeting.pdf
Early definitions of CSR…..
3
CSR defined by EU
4
What CSR means today CSR goes beyond philanthropyphilanthropy
HolisticHolistic and integratedintegrated approach for sustainable
development to all stakeholders
CSR is a process that creates self-reliantself-reliant communities
It is a process of taking everybody together to have a
sustainable societysustainable society
5
CSR In IndiaHow CSR has grown in India over the years…
6
CSR is certainly not new to India
7
Swami Vivekananda Do you know Swami was behind the
Rockefeller foundation which 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’
8
Tatas and CSR “In a free enterprise, the communitycommunity 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 social
causescauses.
Refer to Corporate Social Responsibility: A Case Study Of TATA
Group by Amit Kumar Srivastava1, Gayatri Negi, Vipul Mishra,
Shraddha Pandey
9
Four Phases of CSR in IndiaSource: Wikipedia
10
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.
11
Phase 2 During Independence movement
“Trusteeship” concept of Mahatma Gandhi
Thrust was towards nation building and socio
economic development
Phase 3 Mixed economy- Setting up of PSU’s
Limited effectiveness
Shift of expectation to private sector
12
Phase 4
Globalization and Economic Liberalization
CSR directed towards sustainable business
strategy
Companies more willing to participate
Now…. Let us proceed to the new law…
13
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
14
S 293(1)(e) and S 181 vs S 135
15
Estimated amount of CSR post Companies Act 2013…
Upto Rs.18,000 crores Rs.18,000 crores may be spent on
CSR by Indian Corporates…
Deccan Herald 30, Sep 13
1640016400 companies
Around 1400014000 will contribute less than Rs 1cr.
Estimates vary but huge amount going to be spent
16 Introduction
Comparison of current vs. possible CSR- PSU’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
17 Introduction
Source: Deccan Herald – 30th September 2013
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
18 Introduction
Comparison of current vs. possible CSR- PSU’s (Rs. Crores)
Source: Deccan Herald – 30th September 2013
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)
19
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.
20
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
21
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
22
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
23
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
24Role 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
25Role of the Board -
Governance
Disclosure in company’s website
Rule 9 requires disclosure in co website ,
if any, of contents of:
CSR policy
26
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?
27
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))
28
Net profit under section 198
Description 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
29
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.
30
What can you spend on? (Notification dated 27 Feb 14)
31
What can you spend on? Contd. (Notification dated 27 Feb 14)
32
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)
33
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?
34
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?
35
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
36
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.
37
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.
38
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
39
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
40
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!
41
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.
42
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
43
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
44
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)
45
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
46
Managing CSR well
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.
47
CSR in India
48
CSR in India
49
CSR by Corporate Foundations
50
CSR Internationally
51
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
52
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.
53
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
54
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
55
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.
56
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.
57
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
58
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-success-
nonprofit-before-it-starts/#sthash.f9yf1Qjz.dpuf
59
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.
60
Thank You!
61
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