section 135 (dadrawala)

Understanding Corporate Social Responsibility

By Noshir H. DadrawalaCentre for Advancement of Philanthropy

Centre For Advancement of Philanthropy

Stages of Evolution

• Trusteeship of Wealth • Corporate Philanthropy• Corporate Citizenship• Corporate Social Responsibility (CSR)• Corporate Sustainability (CS)• Corporate Shared Value (CSV)


Archie Carroll’s


History of New Companies Act

• Bill passed by the Lower House of the Indian Parliament (Lok Sabha) on 18th December 2012;

• Bill passed by the Upper House of the Indian Parliament (Rajya Sabha) on 8th August 2013;

• The Companies Act, 2013 (Act 18 of 2013) received assent of the President of India on 29th August 2013.


Date of Effectiveness

Section 135 of The Indian Companies Act 2013&

The Companies (CSR Policy) Rules 2014 (Notified on 27th February 2014)

Have come into effect from 1st April 2014


Implications of Section 135 of New Companies Act


Section 135(1)

Every company having:• Net Worth of Rs. 500/- crore or more or• Turnover of Rs. 1,000/- crore or more or • Net Profit of Rs. 5 crore or more …… during any financial year shall constitute a Corporate Social Responsibility (CSR) Committee of the Board consisting of 3 or more directors, out of which at least one director shall be an independent director.


Exceptions• An unlisted public company or a private company

covered under section 135(1) which is not required to appoint an independent director pursuant to section 149(4) of the Act, shall have its CSR Committee without such director.

• A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

• Foreign companies may have two directors on the CSR Committee of which one must be resident representative in IndiaCentre For Advancement of Philanthropy

Section 135(2)

The Board's report under sub-section (3) of section 134 shall disclose the composition of the CSR Committee.

(As per Section 134(3)(o) also the details about the policy developed and implemented by the company on CSR initiatives taken during the year)


Section 135(3)

The CSR Committee shall:(a) formulate and recommend to the Board, a CSR

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 CSR Policy of the company from time to time.


Section 135(4)

The Board of every company shall:(a) after taking into account the recommendations

made by the CSR Committee, 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, if any, in such manner as may be prescribed; and

(b) ensure that the activities as are included in CSR Policy of the company are undertaken by the company.


Section 135(5)

The Board of every company shall ensure that the company spends, in every financial year, at least 2 per cent of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR 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 CSR activities:

• Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.


Specified CSR Activities Under “Schedule VII”


Specified CSR Activities Under Schedule VII

i. Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation and making available safe drinking water;

ii. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and differently-abled and livelihood enhancement projects;

iii. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;



iv. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water;

v. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up public libraries, promotion and development of traditional arts and handicrafts;

vi. Measures for the benefit of armed forces veterans, war widows and their dependents;



vii. Training to promote rural sports, nationally recognised sports, Paralympics sports and Olympic sports;

viii. Contribution to the 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, the Scheduled Tribes, other backward classes, minorities and women.

ix. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

x. Rural development projects.


MCA’s Clarifications

• General Circular No. 21/2014(No. 05/01/2014 - CSR)

• Dated: 18th June, 2014

MCA’s Clarifications

“The statutory provision and provisions of CSR Rules, 2014, is to ensure that while activities undertaken in pursuance of the CSR policy must be related 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 Clarifications Allow ….

The following under “Promoting Education”:

a) Promotion of Road Safetyb) Consumer education and awarenessc) Conservation and renovation of school

buildings and classrooms


The following under “Vocational Skills”:

a) Training to driversb) Capacity building for farmers covering best

sustainable farm management practicesc) Training Agriculture Labour on skill

development


• The following under “promoting health care including preventive health care.’”:

a) giving medical and Legal aid, treatment to road accident victims

b) Provisions for aids and appliances to the differently- able persons

c) Trauma care around highways in case of road accidents.


Disaster relief can cover wide range of activities:

(i) Medical aid can be covered under ‘promoting health care including preventive health care.’

(ii) Food supply can be covered under eradicating hunger, poverty and malnutrition

(iii)Supply of clean water can be covered under ‘sanitation and making available safe drinking water’.

Project/Programme Mode Only

CSR activities should be undertaken by the companies in project/ programme mode.One-off events such as marathons/ awards/ charitable contribution/ advertisement/sponsorships of TV programs etc., would not be qualified as part of CSR expenditure.

Disallowed!!!

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 Companies Act.

CSR Staff & Their Salaries

Salaries paid by the companies to regular CSR staff as well as to volunteers of the companies (in proportion to company’s time/hours spent specifically on CSR) can be factored into CSR project cost as part of the CSR expenditure.

Foreign Holding 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.

Contribution to CorpusContribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure as long as:

(a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or

(b)where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.

CSR Policy Rules 2014


What CSR Will Mean?

CSR will mean and include but not limited toprojects or programs relating to activities specifiedin Schedule VII to the Act orProjects or programs relating to activitiesundertaken by the board of directors of a companyin pursuance of recommendations of the CSRCommittee of the Board as per declared CSR Policyof the company subject to the condition that suchpolicy will cover subjects enumerated in ScheduleVII of the Act.Centre For Advancement of Philanthropy

CSR Policy

CSR Policy relates to 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.


CSR Policy Key Ingredients

List of CSR Projects/programs

(relating to activities specified in Schedule VII

Modalities of Execution

Transparent monitoring mechanism

Expenditure/Budget for CSR Activities

Policy Essentials

Net Profit

Net profit means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise and any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.


Finance Act 2014

• CSR expenditure shall not be allowed as expenditure under section 37 of Income Tax Act, 1961.

• However, any CSR expenditure which is allowed as deduction under other sections (such as section 35, 35AC, 80G shall be permissible.)

How CSR Can Be Undertaken?

CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities (either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.


CSR Through Company’s Foundation• The Board of a company may decide to undertake its CSR

activities approved by the CSR Committee, through a registered trust or a registered society or a company established by the company or its holding or subsidiary or associate company under section 8 of the Act or otherwise

• Provided that, if such trust, society or company is not established by the company or its holding or subsidiary or associate company, it shall have an established track record of three years in undertaking similar programs or projects; the company has specified the project or programs to be undertaken through these entities, the modalities of utilization of funds on such projects and programs and the monitoring and reporting mechanism.Centre For Advancement of Philanthropy

Scope for Collaboration

A company may also collaborate with other companies for undertaking projects or programs or CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such projects or programs in accordance with these rules.Centre For Advancement of Philanthropy

What Would Not Be CSR?

• 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.


Building Capacity

Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least three financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.


Role of the CSR Committee

The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the company.


What Should CSR Policy Include?

The company’s CSR Policy should include a list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same; and monitoring process of such projects or programs.


CSR Surplus

The CSR Policy should specify that surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company.


What is CSR Expenditure?

CSR expenditure shall include all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the Act.Centre For Advancement of Philanthropy

Making CSR Strategic & Meaningful

Areas of Intervention?Linkage to Business?

Where do we add real value?

Governance StructuresBoard & CSR Committee

Systems & ProcessesProject PartnersSelection criteria

Effective Partnerships

M & ETools, Framework, Outcomes

& Impact

Identify

CSR Report Should Include:

1) 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.

2) The Composition of the CSR Committee.



3) Average net profit of the company for last three financial years.

4) Prescribed CSR Expenditure (2% of the amount as in 3 above)



5) Details of CSR expenditure during the financial year.a) Total amount to be spent for the financial year;b) Amount unspent, if any;



6) Manner in which the amount spent during the financial year detailing:

i) The CSR Project of Activity identifiedii) Sector in which the project is covered

(E.g. Education, Preventive Health Care, Environmental Sustainability etc.)



iii) If the Project or Program is in local area or otherwise and specify the State and District where undertaken

iv) Budget – the amount outlaid project or program wise



v) Amount spent on projects and programs specifying what were spent directly on projects and programs and what was spent on overheads

vi) Cumulative expenditure up to the end of the reporting period



vii) Details of amount spent directly or through implementing agency(including details of the implementing agency)



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.

• The Annual Report on CSR Activities to be signed by the CEO or the MD as also the Chairman of the CSR Committee and the Authorized Person Resident in India, in case of a foreign company as specified under Section 380(1)(d) wherever applicable.


Consequences of Contravention


Consequences of Contravention Under Section 134(3)(o):“There shall be attached to statements laid before a company in General Meeting, a Report by its Board of Directors, which shall include the details about the policy developed and implemented by the company on CSR initiatives taken during the year”

Under Section 134(8) if a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than Rs. 50,000/- but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.


Consequences of Contravention

The Act allow companies to follow the ‘Comply or Explain’ philosophy on CSR.

The company and its officers are liable to be fined only in case of non-disclosures of CSR.


Statistics


MCA’s Projections

• About 16,000 companies would fall within the purview of Section 135 of the Companies Act 2013, spending about Rs. 20,000 Crores from F.Y. 2014-15.

• Thus at any point of time, there would be about 48,000 Board members sitting on the CSR Committees of these boards.

• They would be in charge of Policy Formulation, Monitoring as well as actually ensuring that CSR projects are implemented.


For Further Assistance Contact

Tel: (022) 22846534E mail: [email protected]: www.capindia.in

This presentation cannot be re-produced, transmitted in any form or by any means, electronically or mechanically, on any information storage or retrieval system, without prior permission of Centre for Advancement of Philanthropy.

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http://www.capindia.in/

section 135 (dadrawala)

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