The Companies Act 2013 opened a new chapter on India Inc’s outlook towards contributing to society for social benefits. Voluntary philanthropy, if any, has given way to universal mandatory expenditure in the new scheme of things in India. Read on to know more.
India opened its economy in 1992 and charted for itself a path of free market economy where the market determined the choice of investments. It was clear to those at the vanguard of such change that there will be undersupply of investment on education, health, cleanliness, environment, etc. The corporate spending for such social cause, for the public good was really a cause for concern. When India passed a new Companies Act in 2013, it made Corporate Social Responsibility mandatory for the companies to undertake. The Ministry of Corporate Affairs later notified section 135 and Schedule VII of the Companies Act as well as the provisions of the rules which came into effect from April 1 2014. The ministry framed rules and guidelines for the corporate to don a responsible businessman’s thinking hat and give back to society from where he earned his riches.
According to Section 135 of the Company Act 2013, every company which has during any of the three preceding financial years has net worth of ` 500 crores or more, or turnover of ` 1000 crores or more, or net profit of ` 5 crores must spend at least two per cent of their average net profits on CSR activities and report the reason for spending or non-expenditure.
Every company on which CSR is applicable after meeting the above-mentioned threshold limit should have a CSR Committee of the Board consisting of three or more directors out of which at least one director should be an independent director. The Committee should formulate and recommend to the Board, a CSR policy which shall indicate the activities to be undertaken; recommend the amount of expenditure to be incurred on the activities and monitor the CSR policy. The Board shall take into account the recommendations made by the CSR Committee and approve the CSR policy of the company and disclose contents of such Policy in its report and also place it on the company’s website.
Section 135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year 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. (2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) 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.
(4) The Board of every company referred to in sub-section (1) 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.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
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:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of subsection (3) of section 134, specify the reasons for not spending the amount.
Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.
As mentioned above, the CSR Committee formed under the section 135 must have three directors, of which one must be an independent director. However, the CSR Rules have dispensed with the requirement of appointing an independent director on the CSR Committee of the Board of an unlisted company as well as a private company. Further, the CSR Rules have relaxed the requirement regarding the presence of three or more directors on the CSR Committee of the Board. In case where a private company has only two directors on the Board, the CSR Committee can be constituted with these two directors. The CSR Committee of a foreign company shall comprise of at least two persons wherein one or more persons should be resident in India and the other person nominated by the foreign company.
The activities that can be done by the company to achieve its CSR obligations include eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment enhancing vocational skills, social business projects, contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women and such other matters as may be prescribed.
However, according to the rules notified by the ministry, the Companies (Corporate Social Responsibility Policy) Rules, 2014, entries in the Schedule VII may be liberally construed, as the items enlisted are broadbased and are intended to cover a wide range of activities. The activities undertaken by the company under CSR may not be just limited to programme specified in the Schedule VII and may include many more programme on the recommendation of CSR Committee.
M Venkaiah Naidu, Parliamentary Affairs Ministry, while speaking at the National Industry Conclave on Skill organised by the Ministry of Skill Development in association with Confederation of Indian Industry (CII) in Mumbai, Naidu announced that the skill development projects by companies would now be considered as corporate social responsibility (CSR) activity.
According to experts, “The definition of CSR assumes significance as it allows companies to engage in projects or programs relating to activities enlisted under the Schedule. It also permits flexibility to companies by allowing them to choose their preferred CSR engagements that are in conformity with the CSR policy”.
However, it has been clarified that the following activities would not clarify as CSR projects benefiting only the employees of the companies
According to Section 135, the average net profit shall be calculated in accordance with the provisions of Section 198 of the Companies Act. According to the CSR rules framed by the Ministry of Corporate Affairs, for an Indian company, the dividend income received from another Indian company or profits made by the company from its overseas branches have been excluded. Moreover, the 2% CSR is computed as 2% of the average net profits made by the company during the preceding three financial years.
In the case of a foreign company that has its branch or a project office in India, CSR provision will be applicable to such offices. Further, the balance sheet and profit and loss account of a foreign company will be prepared in accordance with Section 381(1)(a) and net profit to be computed asper Section 198 of the Companies Act. 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 Companies Act.
While no specific tax exemption has been extended to CSR per se, spending on several activities like contributions to Prime Minister’s Relief Fund, scientific research, rural development projects, skill development projects, agricultural extension projects, etc. which find place in the Schedule, already enjoy exemptions under different sections of the ITA.
Company can undertake its CSR activities through a registered trust or society, a company established by its holding, subsidiary or associate company or otherwise, provided that the company has specified the activities to be undertaken, the modalities for utilization of funds as well as the reporting and monitoring mechanism. If the entity through which the CSR activities are being undertaken is not established by the company or its holding, subsidiary or associate company, such entity would need to have an established track record of three years undertaking similar activities.
Corporate Social Responsibility has now become a part of a corporate objective. According to KPMG report, “Few global companies today fail to highlight their social initiatives and performance on their websites, while over 90% of the Global 250 companies voluntarily disclose more environmental, social and governance information than required by law.” The experts point out that this landmark initiative has brought in around 8,000 companies with a mandate to spend ` 12,000 – 15,000 crore annually in the CSR activities.
In the first year of legislation, ` 6,490 crore was the total outlay to be spent towards CSR, against which ` 5,115 crore (79 per cent) was spent towards CSR. According to experts, being the first year of implementation, this can be looked at as a good scenario. More than 50 per cent of spends on CSR were towards health, sanitation and education. Thus, health and sanitation are the priority sector of spending (26 per cent) followed by education (24 per cent), environment (11 per cent), rural development (9 per cent) and women empowerment (4 per cent). The compliance rate ranged from 83-97%.
However, the report also suggests that more than half of the 460 firms that filed their annual reports on CSR as of January 31, 2016, failed to spend the prescribed amount for 2014-15. ONGC, NTPC, TCS and Bharti Airtel are some of the big companies that failed to meet their social obligation. While Monsanto India, which is in the agriculture business, did not spend any money out of its prescribed ` 1.8 crore, Indian multinationals such as Apple India, Pfizer and Nestle India also failed to spend even half the prescribed fund.
In fact, ` 1800 crores was spent in the field of education and skills through construction and improvement of academic facilities, providing vocational skills and livelihoods training and ` 1700 crores was spent towards healthcare and sanitation which included initiatives such as health camps, construction of medical facilities, building toilets, providing safe drinking water and similar.
When the new government was constituted in 2014, it added Swatch Bharat and Namami Ganga to list of activities under corporate social activities.
As per Niti Aayog report, the Swachh Bharat Mission requires an investment of nearly ` 2.23 lakh crore over a five-year period for constructing household toilets, community and public toilets and scientific waste management. However, the response of the India Inc to Swatch Bharat and Namami Ganga has not been encouraging so far. According to a report, they have not even got 1% of the total spending on CSR by the India Inc.
According to a latest report on CSR spending by the India Inc while in 2014-15, there were three companies who had not spent any single penny from the prescribed CSR budget, in 2015-16 all companies have spent certain amount from the CSR budget. The report suggests that companies have become more serious about the CSR and they are endeavouring to match the prescribed CSR requirements with the actual CSR spend. The fact that 58% of the companies spent exactly as prescribed or more than the prescribed, it shows the eagerness of India Inc to take up CSR seriously and give back to society.
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