Not a New Issue The concept of “Corporate Social Responsibility” (CSR) is not a new concept for business organisations. In fact, many organisations , both in the private and public sector, have pioneered the concept of CSR in India as part of their business responsibilities in different forms. Whilst the most common form of CSR has been the various employee welfare measures undertaken, quite a few companies / business groups have also been involved in charitable causes of different types either through their own “Not for Profit” entities or by tying up with NGOs or simply by making donations to avail of tax benefits.
Recent Developments
The concept of CSR has recently been in the limelight due to it being made mandatory under the Companies Act, 2013 (“the Act”) and the rules framed thereunder for certain classes of companies. It has been widely discussed that such mandatory provisions are not part of any other country’s corporate law provisions and in that sense it could be considered as an innovative provision. The provisions governing CSR are laid down in section 135 of the Act and the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“the Rules”) and are applicable with effect from 1st April, 2014. The provisions broadly cover the following:
Companies having a net worth (Rs. 500 crore or more), turnover (Rs. 1,000 crore or more) or net profits (Rs. 5 crore or more) are required to mandatorily spend in every financial year starting from 1st April, 2014, atleast two percent of their “average net profits” of the three immediately preceding financial years calculated as per section 198 of the Act (for determining the managerial remuneration limits), on prescribed CSR activities.
The Rules define net profit of a company to mean the net profit as per its financial statements prepared in accordance with the Act, but excludes any profit arising from any overseas branch or branches of the company, whether or not operated as a separate company and any dividend received from other companies in India that are covered under and complying with CSR provisions. Net profit in respect of a financial year for which financial statements have been prepared as per the Companies Act, 1956 is not required to be re-calculated as per the 2013 Act.
Constitution of a CSR Committee of the Board of Directors having atleast one Independent Director (as defined in the Act). However, the Rules have clarified that in the following cases, the committee need not have an Independent Director:
• Unlisted public and private companies who are not required to appoint an Independent Director under the Act.
• Private Companies having only two directors may constitute the committee with the said directors.
• In case of foreign companies, the committee shall comprise of its authorized representative in India and any other nominated person.
The above CSR Committee shall formulate and recommend to the Board of Directors, a CSR Policy which shall specify the activities to be undertaken by the Company as prescribed in Schedule VII of the Act (discussed below) and no other activities even if they are in the nature of social activities would be eligible.
The Rules specify various procedural activities to be undertaken by the above committee and the management like specifying the amount which can be spent on the prescribed activities and the monitoring thereof, displaying the policy on the web site, format for disclosures in the Annual Report, clarifying that expenses incurred for the benefit of only employees and their families would not be considered for inclusion in the prescribed limits, political contributions not covered, etc.
The following are some of the eligible CSR spending which have been prescribed in Schedule VII of the Act:
a) Promoting preventive health care and sanitation and making available safe drinking water;
b) Setting up homes, hostels for women and orphans; old age homes, day care centres and other related activities;
c) E nsuring ecological balance, and other related matters;
d) Livelihood enhancement projects;
e) Protection of national heritage, art and related activities;
f) Measures for the benefit of armed forces veterans, war widows and their dependents;
g) Training to promote rural sports, nationally recognised sports, Olympic sports etc;
h) Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
i) Promoting education and employment enhancing vocational skills;
j) Rural development projects;
k) Contribution to Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and welfare of scheduled castes, scheduled tribes, minorities and women.
Changing Paradigms
As with any new concept, the above legislative changes are expected to bring about a paradigm shift; both positive and negative in how corporates in particular and society in general could view CSR activities; the important ones amongst them are briefly discussed hereunder:
Commercialisation
Experience indicates that any new idea or concept which is mandated and thrust upon society drives its commercialisation, which is nothing but a formalised and systematic approach at launching the same. CSR which was hitherto largely seen as a voluntary concept is now mandatory, which would require companies, through the CSR Committee, to formalise various processes and formulate policies on various matters which are laid down in the Rules. The policies and procedures should cover various aspects like when, where, what and how to launch such activities within ethical and legal boundaries and keeping in mind the overall social responsibilities which are expected to take care of the interest of various stakeholders. These questions would need to be kept in mind by the CSR Committee and the Management whilst framing the CSR policy.
Certain specific aspects laid down in the Rules which would need to be kept in mind whilst framing the CSR policies and procedures are as under:
• The expenditure is required to be incurred only in respect of activities which are prescribed. This would require companies which are already undertaking CSR activities to reassess whether the same meet the criteria of eligible CSR spend. Also, any activities undertaken in the normal course of business though they may be in the nature of CSR activities need to be excluded. e.g a bank which lends money towards Clean Development Mechanism (CDM) projects and provides project and advisory services towards trading in Certified Emission Reductions (CER) even though it may facilitate in maintaining ecological balance and protecting the environment.
• CSR projects / programs / activities are required to be undertaken in India only.
• CSR projects / programs / activities benefitting only the employees of the Company and their families will not be considered as CSR activities.
• Contribution of any amount directly or indirectly to any political party will not be considered as CSR activity.
• The policy shall specify that any surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the Company.
Further, the Rules provide that the CSR programmes / activities which are approved can be implemented through either of the following:
• registered trust, or
• a registered society, or
• a company
established by the company or its holding or subsidiary or associate company whether as a “not for profit” company or otherwise.
If any of the above entities is not established by the company or its holding or subsidiary or associate company, it must have an established track record of 3 years in undertaking similar programs or projects. The company must also specify the projects or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.
The Rules also provide that the companies may build CSR capacities of their own personnel as well as those of their implementing agencies through institutions with established track record of at least three financial years. However, such expenditure is capped at 5% of total CSR expenditure of the company in a particular financial year. Also, collaboration with other companies for undertaking CSR activities is permissible provided that the CSR Committees of respective companies are in a position to report separately.
The above provisions if implemented in the right spirit would lead to a significant amount of funds getting channelized for the poorer and disadvantaged sections resulting in sustainable and all-round development. However, for companies which are already incurring expenses towards the benefit of their employees and families or in respect of other social causes which are not specifically within the purview of CSR activities prescribed in the Rules would have to incur additional expenses which may lead to a reduction of the distributable profits and consequentially lower returns to the shareholders. Hence, it is imperative that companies engage in a dialogue with the various stakeholders when formulating the CSR policy.
Professionalism
Professionalism is inevitable when commercialisation creeps in and the same is bound to happen also in the case of CSR. Professionalism encompasses taking the help of specialists and consultants. It is expected that many companies would take the help of professionals in formulation of customised CSR strategies aligned with the company’s core values as well as on various types of activities to be undertaken and the effective implementation thereof within the boundaries imposed by regulations so as not to fail on the legal front and be exposed to penalties. This would also open up opportunities for professionals at the same time increasing the cost for companies in the form of fees. Professionalism would also creep in internally through setting up of specialised departments by companies staffed by experienced professionals with the desired competencies to enable companies to navigate through the CSR regulatory maze.
Transparency
Commercialisation and professionalism make transparency inevitable. Further, the Act and the Rules contain various provisions / requirements which would bring about transparency, some of which are as follows:
• Displaying the CSR policy duly approved by the Board of Directors on the company’s web site.
• Detailed disclosures in the Board Report regarding the policy developed and implemented by the Company and the specific initiatives undertaken by the Company on the CSR front.
Many companies have already been disclosing in their Annual Reports on a voluntary basis their CSR initiatives. Further, SEBI through an amendment to the Listing Agreement, mandated the top 100 companies in terms of market capitalisation to include a Business Responsibility Report containing prescribed particulars dealing with various aspects of the company’s contribution towards various sustainability initiatives which amongst others would also include its CSR initiatives, including the amount spent towards the same. This could lead to some amount of duplication and information overload between the disclosures under the Act and the Listing Agreement for the large companies.
Whilst greater transparency is always desirable, it could also have negative connotations since competing recipients / donors of services could demand greater benefits for themselves thereby putting undue pressure on companies.
Employee Benefits
Presently most of the companies equate CSR with providing benefits to their employees and their families in the form of housing, education and medical benefits. However, these activities that benefit only the employees of the company and their families are not considered as CSR activities in the revised guidelines. Hence, most of the companies would have to go much beyond their employees to fulfill their CSR obligations. Further, any social service activities undertaken by the employees of the company not represented by actual spending by the company on the prescribed activities would not be considered to fall within the purview of CSR.
Political Overtones
Though donations to political parties and political contributions are not covered as eligible CSR spend, the CSR mandate could lead to certain forms of indirect contributions to political parties under which companies could be forced to incur CSR spend through organisations which have some form of political patronage or in areas of specific interest to the local political parties. However, it may be noted that contribution to the Prime Ministers’ National Relief is one of the permissible avenues for CSR spend.
Conclusion
Whilst the objectives and intentions of the above innovative provisions are laudable and a step in the right direction for a developing country like ours, it needs to be seen as to how India Incorporated navigates through its various positives and pitfalls.
