Corporate

Social
Responsibili
Is it new to India?
ty
Legal requirements & its
implications
11 June 14
CA S Rajeshwari
1

What is CSR?
Corporate

social

responsibility

is

the

continuing commitment by business to

behave

ethically

development

while

quality of life

and contribute to economic

improving

the

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

Early definitions of
CSR..

CSR defined by EU

What CSR means today

philanthropy

CSR goes beyond

Holistic and integrated approach for sustainable

development to all stakeholders

CSR

is

process

that

creates

self-reliant

communities

It is a process of taking everybody together to have a

sustainable society

CSR In India
How CSR has grown in India over the years

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 dont 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

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 PSUs

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

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

17

Introduction

Comparison of current vs.

possible CSR- PSUs (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

29

72.41

Source: Deccan Herald 30th September

2013

18

Introduction

Comparison of current vs.

possible CSR- PSUs (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

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

of

implementation

The monitoring process

execution

and

24

Role of the Board Governance

Board Responsibilities
{Sec 135 (4)}

Approve the CSR policy

Place the CSR policy on the companys 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 companys
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

the

provisions of S 135

Surplus shall not form part of business profit of co. (rule 6(2))

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
Rule 2 (f) states:
profits

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)

32

What can you spend on?

Contd. (Notification dated 27 Feb 14)

33

What can you spend

on?
in India
Expenditure only

(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

corpus for projects/programs if within the

Sch VIII (Rule 7)

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
See rule 2(e), 4(1), Proviso to 6(1)
allowed

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 cant 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 68 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

with

50%

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 NGOs to help corporates select NGOs 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 their project cost
towards Corporate Social Responsibility
(CSR) activity.
NEWS

ITEM 14 MAR 14

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, health,
environment, and women's empowerment.

48

CSR in India

49

CSR in India

50

CSR by Corporate
Foundations

51

CSR Internationally

Final word- CSR could be

a business opportunity for
some
52

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/predictsuccess-nonprofit-before-itstarts/#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