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Indic Inc Gearing Up To Comply With New CSR Requirements

Published on Thu, Jul 24,2014 | 18:24, Updated at Thu, Jul 24 at 18:24Source : Moneycontrol.com 

By: Monisha Parikh, Partner - Deloitte Haskins & Sells

Corporate Social Responsibility (CSR) is not a new concept for Corporate India. Over the years many corporate groups have been working silently towards fulfilling their social responsibility agenda making significant impact. Today, we can proudly state that we are the first country to recognize social responsibility through the Company Law. The introduction of CSR requirements in the Companies Act, 2013 (“the 2013 Act” or “the Act”), recognizes the significant role that corporates play in the social upliftment, rural development, environmental sustainability, health care, education, equality and in general the overall well-being of the society at large.

The definition of ‘Corporate Social Responsibility’ is contained in the Rules called the Companies (Corporate Social Responsibility Policy) Rules, 2014 ( “the CSR Rules”) which states “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.

Further, CSR Policy is defined as the activities to be undertaken by the company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of a company.

Essentially therefore CSR under the Act is possibly preferred to be activity, projects and programs driven, though contributions to the Prime Minister’s National Relief Fund etc. are also considered as recognized activities as per Schedule VII.

What are the applicability criteria under the 2013 Act?

As per section 135(1) of the Act, every company having a net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year is required to constitute a CSR Committee of the Board.

Interestingly the section referred to ‘any financial year’ without specifying which financial year(s). Subsequently, the Ministry of Corporate Affairs (MCA) vide its General  Circular of June 18, 2014 clarified that ‘Any financial year referred under section 135(1) of the Act read with Rule 3(2) of the CSR Rules, implies any of the three preceding financial years’. Accordingly, amongst other things, the constitution of a CSR Committee would have to be a top priority for specified companies at the forthcoming board meetings, if not already attended to.

What are the responsibilities of the CSR Committee and the Board?

As per section 135(3) of the Act, broadly the responsibility of the CSR committee is threefold – Firstly, it is required to formulate and recommend to the Board, a CSR Policy which shall also specify the activities to be undertaken by the company as specified in Schedule VII of the Act. Secondly, it has to recommend the amount of expenditure to be incurred on the recommended activities and thirdly to monitor the CSR Policy from time to time.

As per section 135(4) and (5) of the Act, the board is responsible to i) approve the CSR policy after taking into account the recommendations made by the CSR Committee; ii) disclose the contents of such Policy in its report; iii) place such Policy on the company’s website (if any); iv) ensure that activities as included in the Policy are undertaken by the company; v) 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 CSR Policy; and vi) if the company fails to spend such amount, it shall in its report specify the reasons for not spending the amount.

With these responsibilities cast on the CSR Board committee and the Board at large, CSR is being given a direction and purpose. CSR activities can no longer be one time associations or sporadic programs initiated by employees with ‘philanthropic’ mindset, but are expected to be serious commitments with strategies interwoven with the core business plan.

The MCA in its General circular of June 18, 2014 has given three important clarifications among others – First clarification states that ‘The statutory provision and provisions of the CSR Rules, 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 …’

It is further clarifies that ‘CSR activities should be undertaken by the companies in project/ programme mode [as referred in Rule 4 (1) of the CSR Rules]. One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. would not be qualified as part of CSR expenditure.’

The third significant clarification states that ‘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 Act’.  

The intention behind these clarifications is to encourage a culture of CSR in the Indian corporate world and not restrict it merely to a compliance activity.

With these clarifications and the principle of ‘comply’ or ‘disclose’ as provided in the second proviso of section 135(5) of the Act, it is well established that the expectation is of transparency rather than penalties as the Act recognizes practical situations where due to genuine reasons a company is unable to spend the minimum 2% of the average net profits towards CSR activities and hence prescribes only disclosure. However, indirectly penalty clause becomes applicable, of course not for inability to spend but for non-disclosure in the board report of the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year which is a mandatory disclosure as per clause (o) of sub-section (3) of section 134 of the Act. Sub section (8) of section 134 prescribes penalty for contravention of the provisions of section 134 which in case of such non-disclosure is a fine which shall not be less than fifty thousand rupees but which may extend to twenty- five lakh rupees for the company and for every officer of the company who is in default it is imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both. It appears contradictory that while there is no penalty for non-spending, non-disclosure should attract such a severe penalty.

Coming to the operating aspect of the CSR committee, as per Rule 5(2) of the CSR Rules, the said committee has to institute a transparent monitoring mechanism for implementation of the CSR projects / programs/ activities undertaken by the company with such monitoring process forming part of the CSR Policy. Another important responsibility is to ensure that the CSR Policy specifies the modalities of execution of the projects / programs along with their implementation schedules.

It is clear that the intention is that the CSR committee functions with the same rigor as any other business project committee ensuring appropriate planning, implementation, monitoring and measurement mechanisms.

Some interesting points to be noted:

  • The first proviso to section 135(5) states that a company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR. In a country like ours, where there is quite a lot yet to be done for social development in various sectors, restricting a company to undertake CSR activities in specific areas may probably be against the broader concept of CSR for i) the company may be located in a relatively ‘developed’ area or ii) it may identify projects or programs which have more relevance in other areas than the area where it is located. In this context, one has to note that the proviso refers to ‘preference’ to the local area. Therefore, one can interpret that the Act while encouraging local area development does not impose any rigid restrictions.
  • Rule 4(5) of the CSR Rules states that the CSR projects that benefit only the employees of the company and their families shall not be considered as CSR activities in accordance with section 135 of the Act. This, it appears does not embrace the broader CSR concept as it fails to recognize the contributions that a company makes in the well-being of the families of its employees. These contributions are generally beyond the so called perquisites given to the employees forming part of their ‘CTCs’ and are more towards fulfilling the objective of social and economic development in line with a company’s philosophy of social responsibility whereby it encourages and promotes health care, education and vocational skills etc. amongst a group represented by its employees families. The said Rule probably is going against the age old proverb of ‘charity begins at home’. The view, which probably seems to have been considered in framing the said Rule is that as a corporate, it is expected of it to be able to ensure the ‘well-being’ of the employees families and therefore, now the expectation is of demonstrating a higher degree of maturity where the corporates consider the well-being of the society at large.
  • The Rules do not require any provision or transfer to a fund of the residual amount that a company was unable to spend as per the threshold requirements of 2% of its average net profit. If a company is keen on ensuring meeting the threshold expenditure on a year on year basis, it is at liberty to create a provision in its books so as to not overburden any year’s profit statement. While making such a provision, it will have to however evaluate whether it will be in compliance with the requirements of AS 29 ‘Provisions, Contingent Liabilities and Contingent Assets’.
  • Even when a company has been incurring losses over the past three years but has recorded turnover of more than Rs. 1000 crores or net worth of more than Rs. 500 crores, it will have to comply with the CSR provisions. The Act does not recognize liquidity challenges that a company may be facing. 
  • It is to be seen whether companies would prefer to comply with the CSR provisions by investing time and effort in identifying and monitoring CSR programs and projects or would prefer to make contributions to eg. Prime Minister’s National Relief Fund.

What can we expect?

Traditional approach to CSR agenda is expected to undergo a reform as corporates gear up to address CSR through processes integrated with business practices.

Emphasis is likely to increase on the External CSR activities (community related) rather than restricting to Internal CSR activities (employees related).

Significant spend is expected under CSR initiatives in the coming years

And we wait to see the ground results…

 
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