Subject: CSR guidelines
Corporate Social Responsibility- Disclose-or-Explain mandate
Introduction:
In simple words, Corporate Social Responsibility (CSR) is the responsibility of
company towards society. CSR is attracting attention day by day. Like 'Swachh
Bharat Abhiyaan' campaign started by our Prime Minister Narendra Modi, is the
responsibility of each and every citizen of India, similarly Corporate Houses
are also responsible for addressing the needs and desires of society in which
they exist with intent to development of the nation.
Adam Smith a renowned Economist wrote in his book "Wealth of Nations" that
people engage in Commerce or Business out of selfish reasons or for their
personal benefit.
"CSR isn't a particular program, it's what we do every day, maximizing positive
impact and minimizing negative impact"
Benefits of CSR :
As per Better Business Journey, UK Small Business Consortium:
"88% of consumers said they were more likely to buy from a company that
supports and engages in activities to improve society."
a.. Better Credibility
b.. Enhancing Goodwill of the company
c.. Attracting the Investors
d.. Differentiate yourself from your competitors
e.. Provide access to investmentand funding opportunities
f.. Generate positive publicityand media opportunities due to media interest
in ethical business activities
Although Many Companies have already been engaged in approaching CSR activities
voluntarily, but new Companies Act put formal and greater responsibility on
specified companies in India to do CSR activities mandatorily to set out clear
framework and processes to strict compliance.
The Companies Act, 2013(hereinafter called the Act) has introduced the idea of
CSR to the forefront and through its disclose-or-explain mandate, is promoting
greater transparency and disclosure.
Legal provisions governing CSR:
a.. Section 135 of the Act
b.. Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR
Rules)
c.. Schedule VII of the Act, which lists out the CSR activities, suggests
communities to be the focal point
Section 135, CSR Rules and Schedule VII has come in to effect form 1st April,
2014
Definition of Corporate Social Responsibility as provided in the Act:
As per CSR Rules, Corporate Social Responsibility means and includes but not
limited to:
(i) Projects or programs relating to activities specified in the Schedule VII
of the Act or
(ii) Projects or programs relating to activities undertaken by the board
of directors of a company (Board) in recommendations of the CSR Committee of
Board as per declared CSR policy of the company subject to the condition that
will cover subjects enumerated in Schedule VII of the Act.
"Businesses cannot be successful when the society around them fails."
The above mentioned Companies 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.
Section 135(2)-Disclosure in Board's Report:
The Board's report under sub-section (3) of section 134 shall disclose the
composition of the Corporate Social Responsibility Committee.
Section 135(3)-Functions of CSR Committee:
The Corporate Social Responsibility Committee shall,-
(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.
Section 135(4)-CSR Policy:
The Board 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.
135(5)-Responsibilities of Board of Directors:
The Board shall ensure that the company spends, in every financial year, at
least 2% of the average net profits of the company made during the three
immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy
First Proviso to Section 135(5):
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:
Second Proviso to Section 135(5)- Contravention based on Disclose or Explain:
Provided further that If the company fails to spend such amount, the Board
shall, in its report made under Section 134(3)(o), specify the reasons for not
spending the amount.
Companies (Corporate Social Responsibility Policy) Rules, 2014 (CSR Rules)
Calculation of Net Profit:
As per Rule 2(f):
"Net profit" means the net profit of a company as per its financial statement
prepared in accordance with the applicable provisions of the Act, but shall not
include the following, namely :-
(i)any profit arising from any overseas branch or branches of the company
whether operated as a separate company or otherwise; and
(ii)any dividend received from other companies in India, which are covered
under and complying with the provisions of section 135 of the Act
Provided that net profit in respect of a financial year for which the 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 the provisions of the Act:
Provided further that in case of a foreign company covered under these rules,
net profit means
the net profit of such company as per profit and loss account prepared in terms
of clause (a) of sub section (l) of Section 381 read with Section 198 of the
Act.
Category of Companies in which CSR provisions shall apply:
As per Rule 3:
Every company including its holding or subsidiary, and a foreign company
defined under clause (42) of section 2 of the Act having its branch office or
project office in India which fulfills the criteria specified in sub-section
(l) of section 135 of the Act shall comply with the provisions of section 135
of the Act and these rules.
Provided that 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 Act.
(2) Every company which ceases to be a company covered under sub-section (1) of
section 135 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 sub-section (2) to (5) of the
section 135
till such time it meets the criteria specified in sub-section (1) of section 135
CSR Committees:
As per Rule 5
(1) The companies mentioned in the rule 3 shall constitute CSR Committee as
under.-
(i) an unlisted public company or a private company covered under sub-section (
I ) of section I 35 which is not required to appoint an independent director
pursuant to sub-section (4) of section 149 of the Act, shall have its CSR
Committee without such director
(ii) a private company having only two directors on its Board shall constitute
its CSR Committee with two such directors:
(iii) with respect to a foreign company covered under these rules, the CSR
Committee shall comprise of at least two persons of which one person shall be
as specified under clause (d) of sub-section (1) of section 380 of the Act and
another person shall be nominated by the foreign company.
(2) The CSR Committee shall constitute a transparent monitoring mechanism for
implementation of the CSR projects or programs or activities undertaken by the
company
CSR Policy:
As per Rule 6:
(1) The CSR Policy of the company shall, inter-alia, include the following,
namely -
(a) a list of CSR projects or programs which a company plans to undertake
falling within the purview of the Schedule VII of the Act, specifying
modalities of execution of such project or programs and implementation
schedules for the same; and
(b) monitoring process of such projects or Programs:
Provided that the CSR activities does not include the activities undertaken in
pursuance of normal course of business of a company.
Provided further that the Board of Directors shall ensure that activities
included by a company in its Corporate Social Responsibility Policy are related
to the activities included in Schedule VII of the Act.
(2) The CSR Policy of the company shall specify that the surplus arising out of
the CSR projects or programs or activities shall not form part of the business
profit of a company.
CSR Expenditure
As per Rule 7:
CSR expenditure shall include all expenditure including contribution to corpus,
for projects or programs relating to CSR activities approved by the Board on
the recommendation of its CSR Committee, but does not include any expenditure
on an item not in conformity or not in line with activities which fall within
the purview of Schedule VII of the Act.
CSR Reporting
As per Rule 8:
(l) The Board's Report of a company covered under these rules pertaining to a
financial year commencing on or after the 1st day of April, 2014 shall include
an annual report on CSR containing particulars specified in Annexure.
(2) In case of a foreign company, the balance sheet filed under sub-clause (b)
of sub-section (l) of Section 381 shall contain an Annexure regarding report on
CSR.
Display of CSR activities on its website:
As per Rule 9:
The Board of Directors of the company shall, after taking into account the
recommendations of CSR Committee, approve the CSR Policy for the company and
disclose contents of such policy in its report and the same shall be displayed
on the company's website, if any, as per the particulars specified in the
Annexure.
Circular issued by Ministry of Corporate Affairs w.r.t. CSR:
General Circular No. 21/2014
No. 05/01/2014- CSR
Clarifications with respect to representations received in the Ministry on
Corporate Social Responsibility (hereinafter referred as ('CSR') are as under:-
(i) The statutory provision and provisions of CSR Rules, 2014, is to ensure
that while activities undertaken in pursuance of the CSR policy must be
relatable to Schedule VII of the Companies Act 2013, the entries in the said
Schedule VII must be interpreted liberally so as to capture the essence of the
subjects enumerated in the said Schedule. The items enlisted in the amended
Schedule VII of the Act, are broad-based and are intended to cover a wide range
of activities as illustratively mentioned in the Annexure.
(ii) It is further clarified that CSR activities should be undertaken by the
companies in project programme mode [as referred in Rule 4 (1) of Companies CSR
Rules, 2014]. One-off events such as marathons/ awards/ charitable
contribution/ advertisement/ sponsorships of TV programmes etc. would not be
qualified as part of CSR expenditure.
(iii) Expenses incurred by companies for the fulfillment of any Act/ Statute of
regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as
CSR expenditure under the Companies Act.
(iv) Salaries paid by the companies to regular CSR staff as well as to
volunteers of the companies (in proportion to company's time/hours spent
specifically on CSR) can be factored into CSR project cost as part of the CSR
expenditure.
(v) "Any financial year" referred under Sub-Section (1) of Section 135 of the
Act read with Rule 3(2) of Companies CSR Rule, 2014, implies 'any of the three
preceding financial years'.
(vi) Expenditure incurred by Foreign Holding Company for CSR activities in
India will qualify as CSR spend of the Indian subsidiary if, the CSR
expenditures are routed through Indian subsidiaries and if the Indian
subsidiary is required to do so as per section 135 of the Act.
(vii) 'Registered Trust' (as referred in Rule 4(2) of the Companies CSR Rules,
2014) would include Trusts registered under Income Tax Act 1956, for those
States where registration of Trust is not mandatory.
(viii) Contribution to Corpus of a Trust/ society/ section 8 companies etc.
will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8
companies etc. is created exclusively for undertaking CSR activities or (b)
where the corpus is created exclusively for a purpose directly relatable to a
subject covered in Schedule VII of the Act.
Amended Schedule VII of the Act:
Activities which may be included by Companies in their Corporate Social
Responsibility Policies:
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
vocation 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 recognised sports,
paralympic sports and Olympic sports;
8.. contribution to the Prime Minister's 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 institutions which are approved by the Central Government
10.. rural development projects;
SEBI CONSIDERED CSR COMPULSORY
SEBI vide its circular CIR/CFD/DIL/8/2012 dated August13, 2012 has made it
mandatory for top 100 listed companies (by market capitalization) to report
certain critical information as part of their business responsibility.
A new Clause 55 has been inserted to read as under:
"Listed entities shall submit, as part of their Annual Reports, Business
Responsibility Reports, describing the initiatives taken by them from an
environmental, social and governance perspective, in the format suggested in
the circular"
This includes
a.. How much the company is spending on CSR as a percentage of its net
profit,
b.. The number of stakeholders' complaints received and resolved,
c.. Details of any pending case filed by stakeholder against any unfair trade
practice, irresponsible advertising or anti-competitive behavior adopted by the
company.
This will enable the shareholders to have a better understanding of the manner
in which their companies' function and adopt responsible business practices.
The circular exhorts the companies to follow the national voluntary guidelines
on social, environmental and economic responsibility that have been formulated
by Ministry of Corporate Affairs in July 2011.
Conclusion: This is the first year of CSR implementation by Companies under the
Act. The likely amount of CSR expenditure for the year 2014-15 would be known
only after the Annual Financial Statements are filed by Companies due after
September, 2015.
Source: Companies Act, 2013, MCA circular and SEBI circular
Disclaimer: This article contains interpretation of the Act, Rules and
personal views of the author are based on such interpretation. It is not
intended to be a professional advice and should not be relied upon for real
time professional facts. Readers are advised either to cross check the views of
the author with the Act or seek the expert's views if they want to rely on
contents of this article. Author accepts no responsibility whatsoever and will
not be liable for any losses, claims or damages which may arise because of the
contents of this write up. Kindly share your opinion.
Dr. Vimal Dengla,
CEO & Member Secretary
NAB PNM Rehab. centre for Blind,
East view, Delwara Road
Mount Abu-307501
ph-02974235181
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