#154 – How will India’s New CSR Law- Influence and Impact the C Suite?

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Introduction:

Corporate Social Responsibility is not a new concept in India, the Ministry of Corporate Affairs, Government of India has recently notified the Section 135 of the Companies Act, 2013 along with Companies (Corporate Social Responsibility Policy) Rules, 2014 “hereinafter CSR Rules” and other notifications related thereto which makes it mandatory (with effect from 1st April, 2014) for certain companies who fulfill the criteria as mentioned under Sub Section 1 of Section 135 to comply with the provisions relevant to Corporate Social Responsibility.

What is CSR?

The term “Corporate Social Responsibility (CSR)” can be referred as corporate initiative to assess and take responsibility for the company’s effects on the environment and impact on social welfare. The term generally applies to companies efforts that go beyond what may be required by regulators or environmental protection groups.

Corporate social responsibility may also be referred to as “corporate citizenship” and can involve incurring short-term costs that do not provide an immediate financial benefit to the company, but instead promote positive social and environmental change.
While proposing the Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013, the Chairman of the CSR Committee mentioned the Guiding Principle as follows:
  • “CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies.
  • Thus CSR is not charity or mere donations.
  • CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits.
  • They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth .”
India is the first country to mandate a minimum spend on corporate social responsibility initiatives. In a country facing multiple socio-economic challenges – can it work?
Building a better future: the Indian government has brought into Effect new CSR guidelines requiring companies to spend 2% of their net profit on social development. On 1 April this year, the government of India implemented new CSR guidelines requiring companies to spend 2% of their net profit on social development.

For whom Applicable?

The companies on whom the provisions of the CSR shall be applicable are contained in Sub Section 1 of Section 135 of the Companies Act, 2013. As per the said section, the companies having Networth of INR 500 crore or more; or Turnover of INR 1000 crore or more; or Net Profit of INR 5 crore or more during any financial year shall be required to constitute a Corporate Social Responsibility Committee of the Board “hereinafter CSR Committee” with effect from 1st April, 2014. The pictorial representation below gives the representation of Section 135 (1).

The above provision requires every company having such prescribed
  1. Networth or
  2. Turnover or
  3. Net Profit
shall be covered within the ambit of CSR provisions. The section has used the word “companies” which connotes a wider meaning and shall include the foreign companies having branch or project offices in India.

What to do when CSR is applicable?

Once a company is covered under the ambit of the CSR, it shall be required to comply with the provisions of the CSR. The companies covered under the Sub section 1 of Section 135 shall be required to do the following activities:

1. As provided under Section 135(1) itself, the companies shall be required to Constitute Corporate Social Responsibility Committee of the Board “hereinafter CSR Committee”. The CSR Committee shall be comprised of 3 or more directors, out of which at least one director shall be an independent director.
2. The Board’s report shall disclose the compositions of the CSR Committee.
3. All such companies shall spend, 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. It has been clarified that the average net profits shall be calculated in accordance with the provisions of Section 198 of the Companies Act, 2013. Also, proviso to the Rule provide 3(1) of the CSR Rules that the net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Companies Act, 2013.
What constitutes CSR under Companies Act 2013:
Recently notified Companies (Corporate Social Responsibility Policy) Rules, 2014 has defined the term “Corporate Social Responsibility (CSR)” as follows:
“Corporate Social Responsibility (CSR)” means and includes but is not limited to :
i. Projects or programs relating to activities specified in Schedule VII to the Act; or
ii. Projects or programs relating to activities undertaken by the board of directors of a company (Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act.
Meaning thereby, conducting all those activities which are either specified under Schedule VII to the Companies Act, 2013 or those which are recommended by the CSR Committee of the Board as per the CSR Policy and are undertaken by the Board of directors of the Company will be covered under the scope of activities of Corporate Social Responsibility.
Activities covered under Schedule VII of the Companies Act 2013:
Ministry of Corporate Affairs vide its Notification dated 27th February, 2014 (which shall come into force with effect from 1st April, 2014) has come up with the modified Schedule VII which covers wide range of activities which can be undertaken by the Companies as a part of their CSR initiatives.
The activities involve the following:
  1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
  2. Promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;
  5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up public libraries, promotion and development of traditional arts and handicrafts;
  6. Measures for the benefit of armed forces veterans, war widows and their dependents;
  7. Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;
  8. Contribution to the Prime Ministers’ National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women;
  9. Contributions or funds provided to technology incubators located within academic institution which are approved by the Central Government;
  10. Rural development projects.
The above mentioned activities constitute the CSR activities and the companies which are covered under the provisions of Section 135 shall be required to carry out any one or more of the activities as specified above along with following its CSR Policy. I came across an interesting Graphic which aptly describes the CSR 1.0 and its smooth transition towards CSR 2.0 in the artist’s imagination.
It sounds like legislation is to be celebrated – but does it go far enough?
Global Reporting Initiative’s (GRI) Sustainability Reporting for Sustainable Development conference, held this June in India, issued a joint declaration stating that while the government bill was welcome the 2% ruling could lead to forced philanthropy, ‘tick box’ behaviour, tokenism or even corruption, and masking of data to avoid having to comply. Time will show if this legislation will have a real impact on poor people’s lives and prevent actual environmental degradation.
The GRI conference, attended by thought leaders from business, civil society, social service, academia and the government, issued the Mumbai Declaration, which among a list of 13 points specifically highlights these issues with the government’s CSR guidelines.
This is not the first less than positive response to the Indian government’s CSR guidelines; business leaders have expressed concerns from the corporate perspective. Ratan Tata, the former chairman of Tata Sons, the holding company of the $100bn Tata group, has said:
We have a phenomenon which is meant to be good but is going to be somewhat chaotic … we don’t as yet know what kind of monitoring there’ll be in terms of how well this money is used.
Concerns about the motives and implementation of this new mandate have also been voiced by Azim Premji, the philanthropist and head of the £3.4bn IT services firm Wipro, part of the global Dow Jones Sustainability Index. Last year he said:
My worry is the stipulation should not become a tax isat a later stage … Spending 2% on CSR is a lot, especially for companies that are trying to scale up in these difficult times. It must not be imposed.
  • Can government-mandated CSR be a social development path for a nation in which over 900 Million have a mobile connection but only 600 million or 36% of the population has has access to a clean toilet?
  • While the current CSR spending by the top 100 Indian companies is estimated at Euros 0.6 Billion per annum, the Indian Institute of Corporate Affairs anticipates that about 6,000 Indian companies will be required to undertake CSR projects in order to comply with the new guidelines, with many companies undertaking these initiatives for the first time. Some estimates indicate that the CSR spends in India could triple to £1.8bn a year.
  • After the latest Independence Day speech by the New Prime Minister Narendra Modi TCS and Bharati Foundation pledged Rs.100 Crores each for construction of Toilets in Schools and hopefully more corporates and PSUs and Banks will follow suit.
The government has set out specific guidelines on how CSR activities should be handled. These stipulate that the CSR activities need to be implemented by a CSR committee that includes independent directors. This committee will be responsible for preparing a detailed plan on CSR activities, including the expenditure, the type of activities, roles and responsibilities of various stakeholders and a monitoring mechanism for such activities. The company board is required to approve the CSR policy for the company and disclose its contents in their report as well as publishing the details on the company’s official website. If the company fails to spend the prescribed amount, the board in its report is required to specify the reasons.
The government’s suggested CSR activities include measures to eradicate hunger, promote education, environmental sustainability, protection of national heritage and rural sports, and contributions to prime minister’s relief fund. The company can implement these CSR activities on its own, through its non-profit foundation or through independently registered non-profit organisations that have a record of at least three years in similar activities. This provision has led to a boom in the number of NGOs that can implement these CSR activities. A recent article in the Times of India reported that there are over 2 million operational NGOs in India.
Choosing the right one from such a large number of NGOs won’t be easy. Some organisations such as Samhita Social Ventures and HelpYournNGO are trying to facilitate this process by setting up online portals to assist. These portals group the NGOs across different sectors such as education, sanitation, women’s welfare, water, livelihood, and children and also seek to provide a qualitative evaluation of the NGOs.
While the larger companies typically have CSR teams to carry out evaluations and monitor the spends, the SMEs without a specialist team assigned for this activity might find it difficult to plan and monitor the spends. The government regulations allow such SMEs to pool their CSR funds with other companies to achieve scale and share a collective implementation process.
NGO evaluation portals and the pooling of resources by SMEs could help to streamline the CSR investments, and questions will continue to be asked about the government’s role in mandating such investments. Even as this debate continues, the more important question that the Indian businesses need to answer is how do we align these government mandated CSR activities to handle India’s socio-environmental challenges while enabling better long term profits for the business?
What shall constitutes a CSR Report?
Rule 8 of the CSR Rules provides that the companies upon which the CSR Rules are applicable on or after 1st April, 2014 shall be required to incorporate in its Board’s report an annual report on CSR containing the following particulars:
  • A brief outline of the company’s CSR Policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects or programs;
  • The composition of the CSR Committee;
  • Average net profit of the company for last three financial years;
  • Prescribed CSR Expenditure (2% of the amount of the net profit for the last 3 financial years);
  • Details of CSR Spent during the financial year;
  • In case the company has failed to spend the 2% of the average net profit of the last three financial year, reasons thereof;
Role of the CSR Committee in the Listed companies:
The CSR Committee constituted in pursuance of Section 135 of the Companies Act, 2013 shall be required to carry out the following activities:
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.
What if a Company ceases to be covered under Section 135?
Rule 3(2) of the Corporate Social Responsibility Rules, 2014 provides that every company which ceases to be a company covered under section 135(1) of the Act for three consecutive financial years shall not be required to :
a. constitute a CSR Committee ; and
b. comply with the provisions contained in subsection (2) to (5) of the said section till such time it meets the criteria specified in sub section (1) of Seciton 135.
Accordingly, if a company, for 3 consecutive years, ceases to be covered under the ambit of section 135(1), it shall not be required to fulfill the conditions relating to the constitution of CSR Committee and other related provisions.
To conclude,
Considering the increasingly vast and complex business environment, the move of the Ministry of Corporate Affairs is a welcoming step which apart from contributing towards society, plays a major role in various ways which includes attracting and retaining employees in a such a way as to increase morale of the employees along with creating a sense of belonging to the company and contributes towards enhancement of company’s own goodwill, positive image along with bringing competitive advantages.
Also, as rightly mentioned by United Nations Industrial Development Organization (UNIDO), CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the expectations of shareholders and stakeholders.
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