CSR - Mandate for India Inc!

Niall Fitzerald, Former CEO, Unilever once said that “Corporate Social Responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it because it is good for our business.

1. The Companies Act 2013 requires that every company (private/ public unlisted / listed) with Networth of ≥ INR 500 crore (5 billion) or Turnover of ≥ INR 1,000 crore (10 billion) or Net profit of ≥ INR 5 crore (50 million) during the financial year will constitute a CSR Board committee (CSRC).
   
2. The board will ensure that company spends, in every financial year, at least 2% of its average net profits during the immediately preceding 3 years, in pursuance of CSR policy. The CSR committee will consists of 3 or more directors with atleast 1 independent director. The Board’s report should disclose the composition of CSRC.
   
3. The board will approve the CSR policy and disclose its contents in the board report and place it on the company’s website.
   
4. If the company fails to spend the CSR amount, the Board will, in its report specify the reasons for not spending the amount.
   
5. The Ministry of Corporate Affairs (MCA) has issued “National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business,” for voluntary adoption by companies. In addition, the SEBI has mandated that the top 100 listed entities, based on their market capitalization at the BSE and NSE, should include business responsibility reports as part of their Annual Reports.
   
6. Schedule VII of the Companies Act, 2013 sets out the activities, which may be included by companies in their CSR policies. They relate to:
1. eradicating extreme hunger and poverty
2. promotion of education
3. promoting gender equality and empowering women
4. reducing child mortality and improving maternal health
5. combating HIV, AIDs, malaria and other diseases
6. ensuring environmental sustainability
7. employment enhancing vocational skills
8. social business projects
9. contribution to certain funds such as the Prime Minister’s National Relief Fund and
10. other matters that may be prescribed.

The Impact of the above provisions on India Inc:

• There is no penal provision if a company fails to spend amount on CSR activities. The board will need to explain reasons for non-compliance in its report. The law always needs to be looked at from a “Fish-Eye Lens” perspective (to look everything in tandem rather than in silos). Section 134 (3) (o) requires that the Director’s Report laid before the Company general meeting shall include a statement giving details about the policy developed and implemented by the company on CSR initiatives taken during the year. Further, Section 134 (8) states that if a company contravenes the above provision, the company shall be punishable with a fine of ≥ INR 50,000 but may extend to INR 25,00,000 and every officer of the company who is in default shall be punishable with an imprisonment for a term which may extend to 3 years or a fine which shall be ≥ INR 50,000 but may extend to INR 5,00,000; or both.
  
• Due to determination of average profit as per section 198, actual expenditure on CSR activities for a company may be higher/ lower than 2% of its average profits for the last 3 years determined in accordance with the P&L.
  
• CSR requirements depends on net worth, turnover or net profit criterion, irrespective of whether the company is a public or private company. Every company covered by CSR needs to constitute a CSR committee with at least one independent director. This implies that even a private company will need to have an independent director if it is covered under CSR requirements.
  
• It is not absolutely clear whether a company will need to create provisions in the financial statements towards unspent if it fails to spend 2% of the amount of CSR activities in a particular year. The resolution of this issue may depend of legal/ other consequences, which may follow, if a company fails to spend the requisite amount in a particular year.
  
• As per the news report, when Sachin Pilot, the Corporate Affairs Minister, was asked whether the companies would get any tax benefits from CSR expenditure, he indicated that CSR expenditure is 2% of Profit Before Taxes (PBT) and therefore a kind of benefit is already available by way of deduction from taxable income. However, he mentioned that he will speak to Finance Minister and see what can be done.
  
• Clarification from Central Board of Direct Taxes (CBDT) is awaited to clear the ambiguity surrounding the deductibility of the CSR expense.

I’d like to sign off this post with a quote I read sometime back “When the wind blows there are those that build walls and then there are those that build windmills.”

Social good is a way of conducting business..