The new Companies Act, 2013 contains an important clause (Clause 135) that mandates CSR regulations for Indian companies. The final rules were notified on 27th February 2014, coming into force on 1st April 2014.
This piece provides a guide to the rules and how these rules affect your business.
Who are these rules applicable for?
The mandatory CSR clause is applicable to companies with net worth of Rs 500 crores or more; or annual turnover of Rs 1000 crores or more; or annual net profit of Rs 5 crores or more. We call this the CSR funnel and it is show in the diagram.
How is net profit calculated?
1. Net profit before tax, not including profits arising from branches outside India.
2. The two percent CSR spending needs to be computed as two percent of the average net profits made by the company during every block of three years. For the purpose of the first CSR reporting, the net profit should be calculated as average of the annual net profit of the preceding three financial years ending on or before 31 March 2014.
2% CSR Expenditure – What does it include?
CSR expenditure has to be in line with the amended Schedule VII of the Companies Act 2013. While the company can conduct CSR activities across a range of areas that it may deem suitable. However, only investments in areas specified in Schedule VII will be considered as eligible CSR expenditure. Therefore, companies will have to draw up the policy and action plan to ensure that they spend the required 2% amount on the activities included in Schedule VII
CSR expenditure should exclude expenditure on activities undertaken in pursuance of normal course of business of a company.
Foreign companies to contribute to CSR based on the profits of their Indian business operations.
Companies belonging to the same group can set up a trust or not for profit company to undertake CSR. Companies can also join hands with other companies to undertake CSR projects jointly. This would allow groups and companies operating in an area to come together and undertake projects of a larger scale.
10 areas where the CSR Budget can be spent
i) Eradicating hunger, poverty and malnutrition, promoting preventative 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 the 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 other such facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
iv) Ensuring environmental sustainability, ecological balance, protections of flora and fauna, animal welfare, agroforestry, conversation 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, regionally recognised sports, Paralympics 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 by technology incubators located within academic institutions which are approved by the Central Government;
x) Rural development projects
Directives for Companies
1. Create a “CSR Committee”, made up of three or more Directors, one of whom must be an independent director.
2. Report details of all CSR initiatives undertaken by the company in the Directors’ Report and on the company website at the end of each year.
3. Create a “Corporate Social Responsibility Policy” that details which activities will be undertaken by the company, and what budget will be spent on them. This should be published on the company’s website.
The rules have brought clarity to the apprehensions which the companies have had with regards to CSR expenditure. The range of themes is likely to promote national causes. It will now be up to companies to expand their range of activities.
Our earlier posts have shown that companies generally tend to focus on communities and employees as the focus area of CSR. This restrictive investment mind-set must change. If the feeling that the government is passing on its burden to corporates (given the number of areas where government alone is investing currently) persists then the rules might come a cropper. The question is not who does it – the question should be: is it done?
If the rules help bring about this mind-set change they would have served the purpose.