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Corporate Social Responsibility (Company Law) by Vishal Ranaware
This document provides an overview of corporate social responsibility (CSR) in India. It defines CSR and outlines its objectives. It discusses the Indian Company Law provisions related to CSR, including requirements for CSR committees and expenditures. Companies meeting certain criteria must spend 2% of their net profits on CSR activities focused on priority areas like poverty, education, and environment. The document analyzes implementation of CSR projects in India and compliance requirements like CSR reporting.
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Corporate Social Responsibility (Company Law) by Vishal Ranaware
- 1. CORPORATE SOCIAL RESPONSIBILITY (CSR) Mr.Vishal Ranaware
- 2. Objectives ■ After goingthrough this unit, you will be able to: Explain the meaning of CSR Analyse the provisions of the Company Law relating to CSR Evaluate the current position in India ©VishalRanaware
- 3. Structure ■ Introduction ■ Whatis meant by CSR? ■ Objectives of CSR/Reasons to have CSR provisions ■ Indian Scenario – Indian Company Law – CSR Committee – Functions of the Committee – CSR Activities – Computation of Net Profit – Disclosure Requirements ■ Company Law Amendment ■ Critical Analysis of Implementation of CSR Projects in India ©VishalRanaware
- 4. Introduction ■ Role ofthe Welfare State ■ Concept of Corporate Citizenship ■ International footprint ■ CSR mandate in India ©VishalRanaware
- 5. Definition CSR Management - beyond compliance Economic - sacrificing profits Institutionalist -socio-political movement ©VishalRanaware
- 6. Conti… ■ “Social responsibilityis the obligation of decision makers to take actions which protect and improve the welfare of society along with their own interests” (Keith Davis 1975). ©VishalRanaware
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- 8. Conti… ■ In general,CSR has typically been understood as policies and practices that business people employ to be sure that society, or stakeholders, other than business owners, are considered and protected in their strategies and operations. ©VishalRanaware
- 9. Objectives of CSR ■Nation/Society – To give back the community in the best possible way in return to the resources. – To support national campaigns on social and develop issues that need support to have a greater impact. ■ Company – To maximize the company’s overall impact on society and stakeholder. – To create awareness about the company & build its public profile. – To maintain long run success of the business & achieve customer loyalty. ©VishalRanaware
- 10. Historical Background ■ CSRis not new to the World ■ in Ancient Mesopotamia around 1700 BC, King Hammurabi introduced a code - builders, innkeepers or farmers were put to death if their negligence caused the deaths of others, or major inconvenience to local citizens. ■ In Ancient Rome senators grumbled about the failure of businesses to contribute sufficient taxes to fund their military campaigns. ©VishalRanaware
- 11. Conti… ■ “modern” CSRmovement – impacts of business on society and the environment – The “corporate paternalists” of the late nineteenth and early twentieth centuries used some of their wealth to support philanthropic ventures. By the 1920s discussions about the social responsibilities of business had evolved into what we can recognise as the beginnings of the “modern” CSR movement. – “The phrase Corporate Social Responsibility was coined in 1953 with the publication of Bowen’s Social Responsibility of Businessmen”. – By 80’s and 90’s CSR was taken into discussion, the first company to implement CSR was Shell in 1998. – At the end of 20th century, CSR was standard in the industry with companies like Price Waterhouse Copper and KPMG. ©VishalRanaware
- 12. Indian Scenario –Indian Company Law Applicability: ■ As per section 135 of the Companies Act 2013, the CSR provision is applicable to companies which fulfills any of the following criteria during the immediately preceding financial year: Companies having - Net Worth Turnover Net Profit Rs. 500 Crore or more Rs. 1000 Crore or more Rs. 5 Crore or more ©VishalRanaware
- 13. Conti… ■ The CSRRules - compliance obligations - include holding and subsidiary companies, foreign companies with branches or project offices in India. ■ Cessation – Rule 3 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 – not satisfy the specified criteria for a consecutive period of three financial years - not required to comply with the CSR obligations, – However, a company not satisfying any of the specified criteria in a subsequent financial year would still need to undertake CSR activities unless it ceases to satisfy the specified criteria for a continuous period of three years. ©VishalRanaware
- 14. Conti… ■ CSR Expenditure: –2% of average net profits made during three preceding financial years – The Board of every company shall ensure spending according to its Corporate Social Responsibility Policy. – If fails to spend, specify reasons in the Board Report ©VishalRanaware
- 15. Conti… ■ CSR Committee ■Fulfils criteria must constitute a CSR Committee to formulate and monitor the CSR policy of a company. ■ According to Sec 135 (1): the CSR Committee to consist of at least three directors, including at least one independent director. ■ The Board's report under sub-section (3) of section 134 (attached to the financial statement) shall disclose the composition of the Corporate Social Responsibility Committee. ©VishalRanaware
- 16. Conti… ■ Functions ofthe Committee – To formulate and recommend to the Board, a CSR Policy which would indicate the activities to be undertaken in areas or subject, specified in Schedule VII of the Act. – To recommend the amount of the expenditure to be incurred on the activities undertaken in pursuance of the CSR policy. – To institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company. – To monitor the CSR policy of the company time to time. ©VishalRanaware
- 17. Conti… ■ CSR Activities ■The CSR activities shall be undertaken by the company, as per its stated CSR Policy, excluding activities undertaken in pursuance of its normal course of business. ■ The CSR Committee of the company may decide to undertake its CSR activities approved by the Board, through – (a) a company established under section 8 of the Act or a registered trust or a registered society, established by the company, either singly or along with any other company, or – (b) a company established under section 8 of the Act or a registered trust or a registered society, established by the Central Government or State Government or any entity established under an Act of Parliament or a State legislature. CSR activities through company/trust/society other than those specified above, such company or trust or society shall have an established track record of three years in undertaking similar programs or projects; and the company has specified the projects or programs to be undertaken, the modalities of utilization of funds of such projects and programs and the monitoring and reporting mechanism. ©VishalRanaware
- 18.
- 19. Conti… ■ Activities wouldnot qualify as CSR: – The CSR projects or programs or activities that benefit only the employees of the company and their families. – One- off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes etc. – Expenses incurred by companies for the fulfilment of any other Act/ Statue of regulations (such as Labour Laws, Land Acquisition Act, 2013, Apprentice Act, 2013, Apprentice Act, 1961 etc.) – Contribution of any amount directly or indirectly to any political party. – Activities undertaken by the company in pursuance of its normal course of business. – The project or programmes or activities undertaken outside India. Statue of Unity - CAG report & Wire Case Study ©VishalRanaware
- 20. Conti… ■ Disclosure Requirements: ■It is mandatory for companies to disclose in Board’s Report, an annual report on CSR. The report of the Board of Directors attached to the financial statements of the Company would also need to include an annual report on the CSR activities of the company in the format prescribed containing following particulars – – A brief outline of the company's CSR policy, including overview of projects or programs proposed to be undertaken and a reference to the web-link to the CSR policy and projects or programs. – The Composition of the CSR Committee. – Average net proflt of the company for last three financial years – Prescribed CSR Expenditure – Details of CSR spent during the financial year. – In case the company has failed to spend the two per cent of the average net profit of the last three financial years or any part thereof, the company shall provide the reasons for not spending the amount in its Board report. – A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy, is in compliance with CSR objectives and Policy of the company. ©VishalRanaware
- 21. Key highlights ofthe Amendment relevant to CSR ■ Transfer of unspent funds: If there are any unspent CSR funds during a financial year (in respect of an ongoing CSR Project), in accordance with its CSR policy, the company must transfer such unspent CSR funds into a special account within a period of 30 (thirty) days from the end of the financial year. Such account, to be opened with a scheduled bank by the company, will be called an Unspent Corporate Social Responsibility Account (Unspent CSR Account) and the proceeds of the Unspent CSR Account will have to be spent by the company towards the CSR projects (under its CSR policy) within 3 (three) financial years from the date of such transfer. If the company is unable to spend the sum in the Unspent CSR Account within the prescribed period of 3 (three) financial years, then, such unspent amount should be transferred to a fund specified under Schedule VII of the Companies Act (Schedule VII Fund) within 6 (six) months from the end of the relevant financial year. ■ However, if there are any unspent CSR funds at the end of a financial year and there are no ongoing CSR projects, the funds should be directly transferred to the Schedule VII Fund, within 6 (six) months from the end of the relevant financial year. ■ In effect, the Schedule VII Fund means, 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 / tribes, other backward classes, minorities and women. ©VishalRanaware
- 22. Conti… ■ Penal liabilityfor non-compliance: If a company fails to comply with above mentioned obligations, the Amendment provides for imposition of penalty of not be less than INR 50,000 but which may extend to INR 2.5 million (Rs. 25 lacs). Additionally, the Amendment also provides for imprisonment of every officer of the company who is in default for up to 3 (three) years or a fine of not be less than INR 50,000 but which may extend up to INR 500,000 or with both. Additionally, separate penalty for continuing offences has also been prescribed. ©VishalRanaware
- 23. Conti… ■ CSR incase new companies: It has now been clarified in the Amendment that if the company has not completed 3 (three) years from incorporation, the amount to be spent on a CSR fund will be equivalent to 2 percent of the net profits made by the company in the previous financial year (as against average net profits made by the company in 3 (three) immediately preceding financial years). ■ Central government to have rule making power: Under the Amendment, the central government has been empowered to make rules and issue directions to ensure compliance. ©VishalRanaware
- 24. Critical Analysis ofImplementation of CSR Projects in India ■ Rs. 50,000 Cr.: total CSR spend by March 2019. ■ In FY’16, only Rs 46.51 crore was spent under the conservation of national heritage category, according to the data of 92 companies analyzed by Goodera, a CSR and sustainability management platform. There was a sudden spurt in spending under this category to Rs 155.78 crore in FY ’17. ■ The reason is that five PSUs – the Oil and Natural Gas Corporation, Hindustan Petroleum Corporation Limited, Bharat Petroleum Corporation Limited, Indian Oil Corporation Limited and Oil India Limited – have contributed Rs 146.83 crore together (ONGC: Rs 50 crore, IOCL: Rs 21.83 crore, BPCL, HPCL, OIL: Rs 25 crore each) towards the construction of the ruling party’s pet project, the Statue of Unity. The expenditure came from funds earmarked for CSR under the conservation of national heritage category. In addition, 14 PSUs from Gujarat also contributed Rs 104.88 crore under CSR for the same project. ■ CSR fund has been used by the political parties or organizations to complete their dream projects or used for the activities which are not the part of CSR Policy as per schedule VII of the Companies Act 2013. ©VishalRanaware
- 25. Conti… ■ CAG Report2019: 33% CSR fund utilized through Swatch Bharat Abhiyan ■ India is developing country, there are many other areas which need a special attention or initiatives like, – a) Poverty, as in India most people living in extreme poverty, – b) Malnutrition, as India ranked 103 as per the Global Hunger Index where hunger is serious, – c) Skills education, 2018 report published by the Centre for Monitoring Indian Economy (CMIE), there are around 31 million unemployed Indians seeking jobs, etc. ©VishalRanaware
- 26. Now We Know ■Meaning & Definition of CSR ■ Objectives of CSR ■ Indian Company Law Provisions Relating to CSR ■ International Footprint of CSR ■ Controversies Surrounding CSR in India ©VishalRanaware
- 27. Q & A ■Thank you! ©VishalRanaware
Editor's Notes
- #8 The four-part definition of CSR was originally published in 1979. In 1991, Carroll (Archie B. Carroll) extracted the four-part definition and recast it in the form of a CSR pyramid. “Corporate social responsibility encompasses the economic, legal, ethical, and discretionary (philanthropic) expectations that society has of organizations at a given point in time” (Carroll 1979, 1991).
- #12 With well informed and educated general people it has become a threat to the corporate and CSR is the solution to it. In 1990 CSR was standard in the industry with companies like Price Waterhouse Copper and KPMG. CSR evolved beyond code of conduct and reporting, eventually it started taking initiative in NGO’s, multi stake holder, ethical trading.
- #13 The CSR Rules have widen the ambit for compliance obligations to include the holding and subsidiary companies as well as foreign companies whose branches or project offices in India which fulfills the criteria specified above.
- #15 Any surplus arising out of CSR activities will not be considered as business profit for the spending company. 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. Computation
- #16 Where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors. 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.
- #18 The CSR projects or programs or activities undertaken in India only shall amount to CSR Expenditure. The CSR projects or programs or activities 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. Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity.
- #19 However, in determining CSR activities to be undertaken, preference would need to be given to local areas and the areas around where the company operates. As per Clarification issued by MCA on 18th June, 2014; following may be noted with regard to provisions mentioned under section 135: • One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programmes etc. do not be qualified as part of CSR expenditure. • Expenses incurred by companies for the fulfillment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) are not count as CSR expenditure under the Companies Act. CSR
- #20 In June 2017, it emerged that the Statue of Unity in Gujarat was built with over Rs 100 crore from public sector undertakings (PSUs) in the oil business. The debate intensified a year later when the Comptroller and Auditor General (CAG) noted that those contributions shouldn’t qualify as CSR activity, as the statue of Sardar Vallabhai Patel was not a proper heritage asset. In FY ’16, only Rs 46.51 crore was spent under the conservation of national heritage category, according to the data of 92 companies analysed by Goodera, a CSR and sustainability management platform. There was a sudden spurt in spending under this category to Rs 155.78 crore in FY ’17.
- #24 Under current laws, in spite of not meeting the CSR obligation, companies have merely received notices from the Ministry of Corporate Affairs asking for reasons for not meeting the CSR spend. Post the Amendment, not meeting the CSR obligation will carry penal consequences. The government's case for the Amendment is that this has been done to bring in more effectiveness to the CSR regime. It is too early to assess the exact impact of the CSR related Amendment, the companies must watch out and meticulously comply with the CSR requirements. A substantial picture of compliance requirements will be clear only after the publication of the amendments to the Companies (Corporate Social Responsibility Policy) Rules, 2014 and other ancillary rules and regulations.