Companies Act 2013 and Corporate Social Responsibility

Companies Act 2013 and CSR
Opportunity or Quibble?
Dr.K.Prabhakar,
Professor,
SRM University

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Centre for Social Initiatives and Management

1/11/2014

Some Questions
 What kind of economic growth is needed for the

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country -Developmental Growth or Welfare Based
Growth?
 66.33% of Profits is given for philanthropic
activities by an organization. Is it possible to rate
the organization as most CSR sensitive
organization?
 Why legislation when companies in India are
already doing a lot for education (Wipro; Reddy
Labs; Tata), Vedanta (Girl Child )?
 Legislation is good or dysfunctional as companies
may try to quibble rather than to meet the sprit of
1/11/2014
law.

Opportunity- the first legislation in the
world
 The new Companies Act 2013, which lays down

that 2% of profits earned by a certain class of
companies must be spent on corporate social
responsibility activities, would mean an estimated
Rs. 27,000 crore (estimates) will flow into
grassroots development and social enterprise
sectors every year.
 According to the Indian Institute of Corporate
Affairs, of the 1.3 million companies in India, about
6,000-7,000 companies are covered under the new
CSR rule.
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Development Growth vs. Welfare
Based Growth
 India is a country of myriad contradictions. On the

one hand, it has grown to be one of the largest
economies in the world, and an increasingly
important player in the emerging global order, on
the other hand, it is still home to the largest number
of people living in absolute poverty (even if the
proportion of poor people has decreased (?) and
the largest number of undernourished children.
What emerges is a picture of uneven distribution of
the benefits of growth which many believe, is the
root cause of social unrest.
Ref: Handbook on Corporate Social Responsibility
in India (www.pwc.in)
Question marks introduced by author
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Definitions and Operationalization
CSR is “the responsibility of enterprises
for their impacts on society”.
To completely meet their social
responsibility, enterprises “should have in
place a process to integrate social,
environmental, ethical human rights
and consumer concerns into their
business operations and core strategy
in close collaboration with their
stakeholders” .
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Ref:
(http://ec.europa.eu/enterprise/policies/sustainableCentre for Social Initiatives and Management
1/11/2014
business/corporate-social-responsibility/index_

Definitions…

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“Corporate social responsibility is a management
concept whereby companies integrate social and
environmental concerns in their business operations
and interactions with their stakeholders.
CSR is generally understood as being the way
through which a company achieves a balance of
economic, environmental and social imperatives
(Triple-Bottom-Line Approach), while at the same time
addressing the expectations of shareholders and
stakeholders. In this sense it is important to draw a
distinction between CSR, which can be a strategic
business management concept, and
charity, sponsorships or philanthropy.
Ref: (http://www.unido.org/en/what-wedo/trade/csr/what-is-csr.html)

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CSR in Indian Context
 CSR in India has traditionally been seen as a

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philanthropic activity. And in keeping with the
Indian tradition, it was an activity that was
performed but not deliberated. As a result, there is
limited documentation on specific activities related
to this concept. However, what was clearly evident
that much of this had a national character
encapsulated within it, whether it was endowing
institutions to actively participating in India‟s
freedom movement, and embedded in the idea of
trusteeship.
Ref: Handbook on Corporate Social Responsibility
in India (www.pwc.in)
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Philosophy of Business and Charity
 As water collected in a tank gets pure by

filtration, so accumulated wealth is preserved
by being employed in charity- CHANAKYA,
Vridda-Chanakya

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CSR in Indian Context
 Sustainability (corporate sustainability) is derived

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from the concept of sustainable development.
 “ Sustainable development is meeting the needs
of the present without compromising the ability of
future generations to meet their own needs” Brundtland Commission.
 Corporate sustainability essentially refers to the
role that companies can play in meeting the
agenda of sustainable development and entails a
balanced approach to economic progress, social
progress and environmental stewardship.
For a discerning reader: History of CSR in India
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(http://soulace.in/blog/)

The Missing Link
 CSR in India tends to focus on what is done with

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profits after they are made.
 Sustainability is about factoring the social and
environmental impacts of conducting business, that is,
how profits are made.
 Hence, much of the Indian practice of CSR is an
important component of sustainability or responsible
business, which is a larger idea, a fact that is evident
from various sustainability frameworks. National
Voluntary Guidelines for social, environmental and
economic responsibilities of business (issued by the
Ministry of Corporate Affairs in June 2011) principle
eight relating to inclusive development encompasses
Centre for Social the aspects covered by the CSR clause of the
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most of Initiatives and Management

Context
“The Companies Act, 2013 aims to improve
corporate governance by simplifying
regulations, enhance the interests of minority
investors and for the first time legislates the role of
whistle-blowers. The new law will replace
Companies Act, 1956”.
“ The corporate regulations are made
contemporary and made as a model for other
economies with similar characteristics. It is a rule
based legislation with more than 180 sections
prescribing rules. CSR which was voluntary is
legislated for the first time”.
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Principles VS Rule Based
Legislations
 Principles-based legislation focuses on accountability

and outcomes (for example, service delivery, financial
statements and annual reports). This approach
provides senior management with greater flexibility to
determine the processes and functions to be used in
the delivery of an agency‟s objectives and services.
 Rules-based legislation contains detailed legislative
requirements demanding agency compliance and
tends to be detailed in content, complex in
interpretation, and prescriptive in application. It
attempts to address the current social, economic and
legal environment in which the legislation has been
framed, and results in the legislation requiring
constant revision as these factors change.
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Ref:(http://www.treasury.qld.gov.au/office/knowledge/docs/fina
ncial-accountability-handbook/1-3-principles-based- 1/11/2014

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CSR Legislation-Quibble?
 In terms of fiction, a quibble is a plot device, used

to fulfill the exact verbal conditions of an
agreement in order to avoid the intended meaning.
Typically quibbles are used in legal bargains
and, in fantasy, magically enforced ones.
 In one of the best known examples, William
Shakespeare used a quibble in The Merchant of
Venice. Portia saves Antonio in a court of law by
pointing out that the agreement called for a pound
of flesh, but no blood, and therefore Shylock can
collect only if he sheds no blood.
(Wikipedia)
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Initiatives of State
 PM‟s Ten Point Social Charter

 Voluntary Guidelines on CSR, 2009
 From the year 2010-11, the Department of Public

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Enterprises, India has substantially incentivised
Sustainable Development & CSR for Public Sector
Enterprises (PSEs);
 National
Voluntary
Guidelines
on
Social,
Environmental
and
Economic
Responsibilities
2011
(NVGs:
the
revised, elaborated version of 2009 CSR
Guidelines )
 Planning Commission and Task Force on Business
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Regulation

UN Global Compact
 Human Rights
 Principle 1: Businesses should support and respect the protection of







internationally proclaimed human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment and
occupation.

 Environment

 Principle 7: Businesses should support a precautionary approach to

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environmental challenges;
 Principle 8: undertake initiatives to promote greater environmental responsibility;
and
 Principle 9: encourage the development and diffusion of environmentally friendly
technologies.
 Anti-Corruption
 Principle 10: Businesses should work against corruption in all its forms, including
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extortion and bribery.

Principles of NVG
 Principle 1: Ethics, Transparency and Accountability
 Principle 2: Providing Goods and Services that are








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Sustainable over entire Life Cycle
Principle 3: Well-being of Employees
Principle 4: Being Responsive towards Stakeholders,
especially the disadvantaged
Principle 5: Respecting and Promoting Human Rights
Principle 6: Protecting and Restoring the Environment
Principle 7: Responsible Policy Advocacy that enhances
Public Good
Principle 8: Supporting Inclusive Growth and Development
Principle 9: Providing Value to Customers responsibly

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Application and Constitution of Committee
(Sec 135 of the Companies Act 2013)
Every company
- net worth of Rs 500 crore or more, or
- turnover of Rs 1000 crore or more ,or
- net profit of Rs 5 crore or more during any financial
year
shall constitute a Corporate Social Responsibility
Committee of the Board.
 The committee would comprise of three or more
directors, out of which at least one director shall be
an independent director .
 The Board of every company referred to above
shall after taking into account the
recommendations made by CSR Committee.
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mandate of the said CSR
committee
 To formulate and recommend to the Board, a Corporate Social

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Responsibility Policy, which shall indicate the activities to be
undertaken by the company as specified in Schedule VII;
 To recommend the amount of expenditure to be incurred on the
activities
 To monitor the Corporate Social Responsibility Policy of the
company from time to time
 To approve the CSR Policy for the company and disclose
contents of such Policy in its report and also place it on the
company‟s website, and
 To ensure that the activities as are included in CSR Policy of the
company are undertaken by the company, and - ensure that the
company spends, in every financial year, at least two per cent of
the average net profits
 • If the Company fails to spend such amount, the Board shall, in
its report specify the reasons for not spending the amount.
 “Average net profit” shall be calculated in accordance with the
provisions of section 198 of the 2013 Act. It is profit before tax
and not including profits made outside country.

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Schedule VII- An inclusive definition

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CSR activities to include:
1. 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.
2. Contribution to the Prime Minister's National Relief Fund or
any other fund set up by the Central Government or the
State Governments for socio-economic 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.
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3. The 2013 Act provides that the company shall give

Draft CSR rules
 • „Net Profit‟ for the section 135 and these rules

shall mean, net profit before tax as per books of
accounts and shall not include profits arising from
branches outside India.
 • Reporting will be done on an annual basis
commencing from FY 2014-15
 • Tax treatment of CSR spend will be in accordance
with the IT Act as may be notified by the Central
Board of Direct Taxes (CBDT)
 • CSR activities may generally be conducted as
projects or programmes (either new or ongoing)
excluding activities undertaken in pursuance of the
normal course of business of a company
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What CSR Committee Should do?
 • The CSR Committee shall prepare the CSR Policy of the








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company which shall include the following:
Specify the projects and programmes to be undertaken
Prepare a list of CSR projects/programmes which a
company plans to undertake during the implementation
year, specifying modalities of execution in the areas/sectors
chosen and implementation schedules for the same
CSR projects/programmes of a company may also focus on
integrating business models with social and environmental
priorities and processes in order to create shared value surplus arising out of the CSR activity will not be part of
business profits of a company and should be credited to
CSR initiative.
Would specify that the corpus would include 2 percent of
the average net profits, any income arising there from, and
surplus arising out of CSR activities need to be credited to
CSR Corpus.


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…
 Where a company has been set up with a

charitable objective or is a
Trust/Society/Foundation/any other form of entity
operating within India to facilitate implementation of
its CSR activities, the following shall apply:
 Contributing company would need to specify the
projects/ programs to be undertaken by such an
organization, for utilizing funds provided by it;
 Contributing company shall establish a monitoring
mechanism to ensure that the allocation is spent
for the intended purpose only
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How Organizations
make decisions
and NGO‟s
Suggested Plan

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Clarifications already given
 Surplus arising out of CSR activities will have to be reinvested

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into CSR initiatives or corpus, and this will be over and above the
2% figure.
 The company can implement its CSR activities through the
following methods:
 Through its own non-profit foundation set- up so as to facilitate
this initiative
 Through independently registered non-profit organizations
that have a record of at least three years in similar such
related activities
 Collaborating or pooling their resources with other companies
 Only CSR activities undertaken in India will be taken into
consideration
 Activities meant exclusively for employees and their families will
not qualify
 A format for the board report on CSR has been provided which
includes amongst others, activity-wise , reasons for spends
under 2% of the average net profits of the previous three years
and Social Initiatives and statement
Centre fora responsibility Management that the CSR policy,
1/11/2014
implementation and monitoring process is in compliance with the

Clarity is needed and some
thoughts
 There is a debate as to whether any penal

consequences will emanate on failure to spend, or
an explanation in the directors‟ report. "serious
offence“ says Sachin Pilot.
 There may be reluctance in compliance for loss
making companies.
 It is not clear what all constitutes CSR activities as
the list specified under Schedule VII of the Act
seems is an inclusive list and not exhaustive. It is
narrow. But it cannot be so broad for practical
reasons.
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Business responsibility reporting
 The other reporting requirement mandated by the government of

India, including CSR is by the SEBI which issued a circular on 13
August 2012 mandating the top 100 listed companies to report
their Environmental, Social and Governance initiatives.
 These are to be reported in the form of a BRR as a part of the
annual report.
 Business responsibility reporting is in line with the NVG
published by the Ministry of Corporate Affairs in July 2011.
Provisions have also been made in the listing agreement to
incorporate the submission of BRR by the relevant companies.
 The listing agreement also provides the format of the BRR. The
BRR requires companies to report their performance on the nine
NVG principles. Other listed companies have also been
encouraged by SEBI to voluntarily disclose information on their
ESG performance in the BRR format.

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References
Comments and Information
http://www.safrg.org/uploads/getready4csr.pdf
http://the4thwheel.com/Blog/companiesbill2011/
http://www.indiacsr.in/en/
 Research on NGOshttp://www.indiacsr.in/en/ Perception
(http://samhita.org/voices-from-the-field-social-sectors-feedback-andpreparedness-on-section-135/)
 Sanjay Kumar Sharma(2013),A 360 degree analysis of Corporate Social
Responsibility (CSR) Mandate of the New Companies Act, 2013
 National Voluntary Guidelines on SEE Responsibilities of Business
(http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011
_12jul2011.pdf )

 Global Compact

http://www.unglobalcompact.org/
 SEBI Guidelines for BRR
(http://www.sebi.gov.in/cms/sebi_data/attachdocs/1344915990072.pdf)
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Companies Act 2013 and Corporate Social Responsibility

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