PROJECT ON

CORPORATE SOCIAL RESPONSIBILITY UNDER COMPANIES ACT 2013

SUBMITTED

TO

Mr. SHAYAMTANU PAUL (FACULTY OF Corporate law)

SUBMITTED BY – NILESH KUMAR BAGHEL

ROLL NO. – 81

SEMESTER – VI

SECTION – ‘C’

Submitted on: 5.04.2014

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR

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ACKNOWLEDGMENT

I, NILESH KUMAR BAGHEL, feel myself highly elated, as it gives me tremendous

pleasure to come out with work on the topic

First and foremost, I take this opportunity to thank Mr, SSHYAMTANUHYAMTANU P PAULAUL , Faculty,

Corporate Law, HNLU, for allotting me such topic to work on. She has been very kind in

providing inputs for this work, by way of lectures and suggestions.

I would also like to thank my dear colleagues and friends in the University, who have

helped me with ideas about this work. Last, but not the least I thank the University

Administration for equipping the University with such good library and I.T. facilities, without

which, no doubt this work would not have taken this shape in correct time.

NILESH KUMAR BAGHEL

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METHODOLOGY

Methodology used in this project work is both Doctrinal and Secondary electronic research. This

project work contains extensive research work on CORPORATE SOCIAL RESPONSIBILITY

UNDER COMPANIES ACT 2013This project is based on theoretical study as well.

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TABLE OF CONTENTS

ACKNOWLEDGEMENTS 2

LIST OF ABBREVIATIONS 3

METHODOLOGY 4

INTRODUCTION:

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WHAT IS CORPORATE SOCIAL RESPONSIBILITY (CSR)? 6-7

CSR IN INDIA 8-9

ANALYSIS OF THE SECTION 10-14

CONCLUSION 15

REFRENCES 16

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INTRODUCTION:

This research paper analyses the fist statutory provision relating to Corporate Social

Responsibility in the world. India is the first country to implement CSR through statutory

provisions. The basic idea behind CSR is that the company should also return something to the

society from which it makes its profit. Earlier this was guided by philanthropic views but with

the passage of time, the concept of CSR has evolved and a new meaning is provided to CSR.

Section 135 of the New Companies Act 2013 deals with the CSR. This section gives the

applicability of CSR provision to various companies and also the amount which needs to spent

on CSR. For this purpose, A CSR Committee need be formed which will function to

recommend and provide the Board with the proposals. The paper further deals with the eligibility

of the fund to spend on some specified areas as provided under Schedule VII of the Companies

Act 2013. The main focus of the companies should be on the local areas as well on the places

where they operate their business. The paper then focuses on the problems associated with the

provision of Section 135. The paper then concluded by providing some insights into the problem.

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WHAT IS CORPORATE SOCIAL RESPONSIBILITY (CSR)?

There exists no universal definition of CSR. But every definition that exists now underpins the

impact that businesses have on society at large and also on individuals. The idea of CSR was

originally based on philanthropic views like charity, donations etc. but with the change of times,

the concept of CSR has evolved and has now broadened to include various aspects of business

that in one way or other is linked to the society. Beyond making profits, companies are

responsible for the totality of their impact on people and the planet.1 “People” constitute the

company’s stakeholders: its employees, customers, business partners, investors, suppliers and

vendors, the government, and the community. This is evident in some of the definitions

presented below:

The European Commission12 defines CSR as “the responsibility of enterprises for their impacts

on society”. To completely meet their social responsibility, enterprises “should have in place a

process to integrate social, environmental, ethical human rights and consumer concerns into their

business operations and core strategy in close collaboration with their stakeholders”

The World Business Council for Sustainable Development defines CSR as3 “the continuing

commitment by business to contribute to economic development while improving the quality of

life of the workforce and their families as well as of the community and society at large.”

According to the United Nations Industrial Development Organisation4, “Corporate social

responsibility is a management concept whereby companies integrate social and environmental

concerns in their business operations and interactions with their stakeholders. CSR is generally

understood as being the way through which a company achieves a balance of economic,

1 Sir Geoffrey Chandler, Defining Corporate Social Responsibility, ETHICAL PERFORMANCE BEST PRACTICE, FALL 2001.2Corporate Social Responsibility, EUROPEN UNION COMMISSION, http://ec.europa.eu/enterprise/policies/sustainablebusiness/corporate-social-responsibility/index_en.htm3Corporate Social Responsibility, WORLD BUSINESS COUNCIL FOR SUSTAINABLE DEVELOPMENT, http://www.wbcsd.org/work-program/businessrole/previous-work/corporate-social-responsibility.aspx4 What is Corporate Social Responsibility, UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANISATION http://www.unido.org/what-we-do/trade/csr/what-is-csr.html#pp1[g1]/0/

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environmental and social imperatives (Triple-Bottom-Line Approach), while at the same time

addressing the expectations of shareholders and stakeholders. In this sense it is important to draw

a distinction between CSR, which can be a strategic business management concept, and charity,

sponsorships or philanthropy. Even though the latter can also make a valuable contribution to

poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the

concept of CSR clearly goes beyond that.”

From the above definitions, it is clear that5:

· 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.

5 Handbook on Corporate Social Responsibility in India, CONFEDERATION OF INDIAN INDUSTRY.

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CSR IN INDIA

Previously, in India there was no mandatory concept of CSR. Although Corporate Social

Responsibility Voluntary Guidelines 2009 was available to assist the businesses to adopt

responsible governance practices and also focuses on some of the core elements that businesses

need to focus on while conducting their affairs. These guidelines have been prepared after taking

into account the governance challenges faced in our country as well as the expectations of the

society.6

Now, the concept of CSR is governed by the provision of Sec 135 of the Companies Act 2013.

When the President of India gave assent to the Companies Bill, 2013, India became the first

country to mandate spend on CSR activities through a statutory provision. In India, while many

corporate houses have been traditionally engaged in doing CSR activities voluntarily, the new

CSR provisions put formal and greater responsibility on companies to set out clear framework

and process to ensure strict compliance.7

Sec 135 of the Companies Act 2013 provided that

(1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees

one thousand crore or more or a net profit of rupees five crore or more during any financial year

shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or

more directors, out of which at least one director shall be an independent director.

(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the

Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall,—

6 Corporate Social Responsibility, LOK SABHA SECRETARIAT PARLIAMENT LIBRARY AND REFERENCE, RESEARCH, DOCUMENTATION AND INFORMATION SERVICE (LARRDIS) MEMBERS’ REFERENCE SERVICE, REFERENCE NOTE NO. 11 /RN/REF./20137 Ibid at note 5

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(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy

which shall indicate the activities to be undertaken by the company as specified in

Schedule VII;

(b) recommend the amount of expenditure to be incurred on the activities referred to in

clause (a); and

(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall,—

(a) after taking into account the recommendations made by the Corporate Social

Responsibility Committee, approve the Corporate Social Responsibility Policy for the

company and disclose contents of such Policy in its report and also place it on the

company's website, if any, in such manner as may be prescribed; and

(b) ensure that the activities as are included in Corporate Social Responsibility Policy of

the company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company

spends, in every financial year, at least two per cent. of the average net profits of the company

made during the three immediately preceding financial years, in pursuance of its Corporate

Social Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it

operates, for spending the amount earmarked for Corporate Social Responsibility activities:

Provided further that if the company fails to spend such amount, the Board shall, in its report

made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the

amount.

Explanation.—For the purposes of this section “average net profit” shall be calculated in

accordance with the provisions of section 198.

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ANALYSIS OF THE SECTION

1. APPLICABILITY

An analysis of this section tells us that this provision is applicable to any company, during any

fiscal year, with (1) a net worth of rupees 500 crore (about U.S. $90 million) or more; (2) a

turnover of rupees 1,000 crore (about U.S. $180 million) or more; or (3) a net profit of rupees 5

crore (about U.S. $900,000) or more. Any company not falling under any of the above three

categories is not mandatorily required to follow the provisions of Section 135.

The CSR Clause will only apply to some of the over 800,000 companies in India, including over

8,000 publicly listed companies and multinational companies. The accounting firm Ernst &

Young estimates that the law would cover over 2,500 companies in India and generate over U.S.

$2 billion of CSR spending in local communities.8 Under the CSR rules, net profit is defined to

mean ‘net profit before tax’ as per books of accounts and shall not include profits arising from

branches outside India.9

2. CSR COMMITTEE

The CSR Clause requires a targeted company to make changes within its board of directors and

to form a Corporate Social Responsibility Committee (“CSR committee”) within the board of

directors that will devise, recommend, and monitor CSR activities, and the amounts spent on

such activities, to the rest of the Board.10 The Act lists out a set of activities eligible under CSR.

Companies may implement these activities taking into account the local conditions after seeking

8 The 2% CSR Clause: New Requirements for Companies in India, KORDANT PHILANTHROPY ADVISOR, http://www.kordant.com/assets/2-Percent-India-CSR-Report.pdf9 Corporate Social Responsibility, New Companies Act, 2013 – Insight Series – Volume IV, 13 September 2013, KPMG FLASH NEWS, KPMG IN INDIA10 Id.

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board approval. The indicative activities which can be undertaken by a company under CSR

have been specified under Schedule VII of the Act.11

Every qualifying company needs to constitute a CSR committee of the Board consisting of 3 or

more directors, one of whom must be an independent director as defined under section 149(6) of

the Companies Act 213. However in respect of number of directors in a CSR committee, the

question that crops is with relation to the qualifying private companies (which requires minimum

two directors only) would be required to appoint one more director only to constitute CSR

committee and comply with the CSR provisions.12

The functions of the Board will be threefold:13

· To formulate and recommend a CSR policy to the Board;

· To recommend amount of expenditure to be incurred on CSR activities;

· To monitor the CSR policy of the company from time to time.

3. RESPONSIBILITY OF THE BOARD

The Board of every qualifying company is required to hold following responsibilities:14

· To approve the CSR policy recommended by the CSR committee and disclose the

contents of such policy in its report and place it on company’s website;

· To ensure the CSR activities are undertaken by the company;

· To ensure 2 percent spending on CSR activities;

· To report CSR activities in Board’s report and disclose non-compliance (if any) with the

CSR provisions.

· The draft CSR rules provide the format in which all qualifying companies shall report

the details of their CSR initiatives in the Director’s report and in the company’s website.

4. CSR SPENDING

This Act also stipulates where the approved money will be spent. This is clearly provided under

Schedule VII of the Act. The bare wordings of schedule VII are as: 11 Ibid at note 512 Ibid at note 913 Id.14 Id.

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Activities which may be included by companies in their Corporate Social Responsibility Policies

Activities relating to:—

(i) eradicating extreme hunger and poverty;

(ii) promotion of education;

(iii) promoting gender equality and empowering women;

(iv) reducing child mortlity and improving maternal health;

(v) combating human immunodeficiency virus, acquired immune deficiency

syndrome, malaria and other diseases;

(vi) ensuring environmental sustainability;

(vii) employment enhancing vocational skills;

(viii) social business projects;

(ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by

the Central Government or the State Governments for socio-economic development and

relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other

backward classes, minorities and women; and

(x) such other matters as may be prescribed.

It is clear that the companies need to focus on the local areas as well as the areas where they

operate their business. The draft CSR rules further provide following guidelines / manner in

which the company can undertake CSR activities and incur CSR spend:15

· The company can set-up a not-for-profit organisation in the form of trust, society or non-

profit company to facilitate implementation of its CSR activities. However, the

contributing company shall specify projects / programs to be undertaken by such an

organisation and the company shall establish a monitoring mechanism to ensure that the

allocation to such organisation is spent for intended purpose only.

15 Ibid at Note 9.

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· A company may also implement its CSR programs through not-for-profit organisations

that are not set up by the company itself.

· Such spends may be included as part of company’s prescribed CSR spend only if such

organisations have an established track record of at least 3 years in carrying on activities

in related areas.

· Companies may also collaborate or pool resources with other companies to undertake

CSR activities.

· Only CSR activities undertaken in India would be considered as eligible CSR activities.

· CSR activities may generally be conducted as projects or programmes (either new or

ongoing), however, excluding activities undertaken in pursuance of the normal course of

business of a company.

· CSR projects / programs may also focus on integrating business models with social and

environmental priorities and processes in order to create shared value.

· CSR activities shall not include activities exclusively for the benefit of employees and

their family members.

There are many issues that still need to be resolved with regards to Schedule VII of the Act.

Such as:16

· The concepts of ‘business process integration’ and ‘shared value’ are not defined in the

Act / draft CSR rules.

· While the draft CSR rules specify that CSR activities shall not be exclusively for the

benefit of employees / their families, it does not provide any objective criteria of certain

benefits (not exclusive) given to employees / their families that could be regarded as CSR

activities.

· Whether the list of activities specified under Schedule VII of the Act is exhaustive?

· While the draft CSR rules suggest that tax treatment of CSR spend will be in accordance

with the Income-tax Act, 1961 as may be notified by Central Board of Direct Taxes

(CBDT), one will have to wait and watch for notification from CBDT and whether the

same provides adequate certainty on tax treatment of CSR spend .

All these areas require more clarification.

16 Ibid at Note 9.

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5. FAILURE TO COMPLY

While a company is not subject to liability for failing to spend on CSR, a company and its

officers are subject to liability for not explaining such a failure in the annual report of the board

of directors. There is currently no guidance as to what constitutes a sufficient or statutorily valid

explanation for failure to spend in the board report. In addition, a company and its directors are

liable even if they fail to report on CSR activities that actually were conducted.

Failure to explain is punishable by a fine on the company of not less than 50,000 rupees (about

U.S. $900) and up to 25 lakh rupees (about U.S. $46,000). Further, officers who default on the

reporting provision could be subject to up to three years in prison and/or fines of not less than

50,000 rupees (about U.S. $900) and as high as 5 lakh rupees (about U.S. $9,200).17

6. SOME CLARIFICATION BY DRAFT RULES.

The draft rules (as of September 2013) provide a number of clarifications and while these are

awaiting public comment before notification, some the highlights are as follows:18

· Surplus arising out of CSR activities will have to be reinvested into CSR initiatives, and

this will be over and above the 2% figure

· The company can implement its CSR activities through the following methods:

-- Directly on its own

-- Through its own non-profit foundation set- up so as to facilitate this initiative.

-- Through independently registered non-profit organisations that have a record of at least

three years in similar such related activities

-- Collaborating or pooling their resources with other companies

· Only CSR activities undertaken in India will be taken into consideration

· Activities meant exclusively for employees and their families will not qualify

· A format for the board report on CSR has been provided which includes amongst others,

activity-wise , reasons for spends under 2% of the average net profits of the previous

17 Ibid at Note 918 Id.

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three years and a responsibility statement that the CSR policy, implementation and

monitoring process is in compliance with the CSR objectives, in letter and in spirit. This

has to be signed by either the CEO, or the MD or a director of the company

CONCLUSION

Amid various practical difficulties which may have to be encountered at least in the initial phases

of implementation of the new CSR provisions, the initiative of the government is no doubt

appreciable. The new provisions may be viewed as the result of the changing corporate

philosophy in India and worldwide which entrusts the responsibilities on giant corporates

towards social welfare of the population which comprise of their present or prospective

employees, customers or other stakeholders in varied roles. In order to ensure meeting the true

spirits of the new CSR law, a well organized, professionally capable and independent team needs

to be formed. It is possible only when companies come forward and join together for this

common good goal. Building an expert and trained team of professionals is needed for managing

funds earmarked for CSR purposes is required. One step forward has been put forward by Indian

Institute of Corporate Affairs (IICA) in this regard. The Institute is planning to initiate a

certificate programme on Corporate Social Responsibilities activities for working executives. As

the thousands of giant corporates may be involved with funds amounting to thousands of crores

of rupees, it will a better idea for the government that rather than fixing responsibility of

spending by individual companies, the government should encourage making a common corpus

to be managed collectively by experienced professionals to be nominated by the participating

corporates. The funds of the corpus may be invested in risk free securities and the income from

such investments may be used for gigantic social welfare projects which are capable of covering

a large number of populations by raising their income and standards of living who in turn would

become the part of growth story of varied industries in India. The new CSR law, being a ‘Rule

Ruled by Rules’ (called so because section 135on CSR spending require detailed and

comprehensive guidelines towards implementation of new CSR law), since the rules are under

finalisation, once the rules are in place, we hope to have a better picture of the various aspects of

new CSR provisions.

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REFRENCES

Books Referred:

1. Majumdar, A.K; Dr. Kapoor, G.K; Company Law and Practice; Taxmann Publication,

17th Edn., 2012.

2. Singh, Avtar, Company Law, Eastern Book Company, 15th Edn., 2007.

3. Palmer's Company Law: Annotated Guide to the Companies Act 2006; Sweet Maxwell

2007 Publication.

Websites Referred:

1. www.pwc.in/.../handbook-on- corporate - social - responsibility-in-india .

2. 164.100.47.134/intranet/CorporateSociaResponsbility.

3. www. indiacsr .in/en/?tag= corporate - social - responsibility

4. http://timesofindia.indiatimes.com/business/india-business/Corporate-Social-

Responsibility-rules-soon-will-include-10-major-areas/articleshow/30822317.cms

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