SECTION 135 (The NEW COMPANIES ACT 2013) CSR SPENDING ESTIMATES - BSE TOP 100

(Including Business Responsibility Reports Analysis)

fter the Lok Sabha gave its approval in December last year, there arose some noise surrounding the New Companies Bill 2013. Media, companies, and that part of the general public that seems interested in the legislative affairs of the country dissected the Bill end to end, discussed and debated the likely impacts. A few days later, the noise ceased. Nobody seemed to know what ultimately would become of the bill. Every Parliament session post December 2012 saw increased anticipation among interested stakeholders as to when Rajya Sabha will formally take up the bill for consideration. After more than seven months, on August 8th, the bill was moved for consideration in the upper house. This is a momentous day, as this will usher in a new era for the company law," said Sachin Pilot, Minister of State for corporate affairs after the bill was passed, aptly encapsulating the end of a long and anxious wait. The President gave his approval to the bill to be enacted into a law end of August 2013. The spanking new Act is simpler, with fewer clauses and pages and looks at contemporary issues such as corporate governance, investor protection, corporate social responsibility (CSR) and measures to check frauds. Further, a third of corporate boards have to necessarily comprise independent members, some boards would have to include more women, auditors will be compulsorily changed every ten years, minority shareholders and depositors can launch action suits against managements, among other sea changes. What interests us, Partners in Change (PiC), as an organization that has been pioneering the understanding and practice of corporate responsibility issues in India, is Clause 135 that makes it mandatory for companies of a certain size and profitability to spend 2% of their average net profits of previous 3 years on CSR. The proposed draft CSR rules under Section 135 of the Act has been posted on the Ministry of Corporate Affairs (MCA) website for public comments till 7th October 2013. The proposed draft rules specify that Net Profit for the section 135.. shall mean, net profit before tax as per books of accounts..

The clause on CSR is being celebrated and criticized in, may we say, equal measure. The development sector, as the world of NGOs and professionals working in the area of social and economic development has come to be known as, is rejoicing. It sees this clause as a late but welcome measure to make companies understand its responsibilities towards the society and act conscientiously. The other side of their joy is the opening up of much-needed funding options. Some in the sector, however, feel that the clause dilutes the meaning of a companys commitment to ethical and responsible business and instead focuses on the end (under Schedule VII) as opposed to means of doing business. The reactions seem appear mixed on the other side as well. Some in the corporate sector are worried that making CSR spending mandatory would lead to what is informally referred to as cheque-book CSR. Others, while sounding positive about a law that encourages companies to act

responsibly, find the list and scope of activities too small to comprehensively correspond to what entails a companys responsibilities towards the society. We at PiC, through this document, have tried to analyze the likely impact of the new Act on the CSR landscape of the country. Although we do have an opinion on the subject, we have tried to keep this document unbiased and objective. We believe that the use or misuse of the CSR clause will be determined by the intent of the companies. As Plato said Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws.

CLAUSE 135
WHO MUST COMPLY? Every registered company with: Net worth Rs 500cr or Turnover Rs 1,000cr or Net profit Rs 5cr; during any financial year WHO WILL BE ACCOUNTABLE? Company to constitute a CSR Committee of the board members consisting of at least 3 directors At least 1 committee member to be an independent director WHAT WILL THE CSR COMMITTEE DO? Formulate and recommend to Board, a CSR Policy which shall indicate the activities to be undertaken Recommend amount of expenditure to be incurred on activities Monitor CSR Policy of the company from time to time WHAT WILL BE THE ROLE OF THE BOARD OF DIRECTORS? Review recommendations made by the CSR Committee Approve CSR Policy for the company Disclose contents of the Policy in company's report/website Ensure that company spends at least 2% of its average profits during previous 3 financial years. WHAT ARE THE ACTIVITIES A COMPANY CAN UNDERTAKE? As per Schedule VII, activities, as a Project Mode: Eradication of hunger and poverty Promotion of education Promotion of gender equality and women empowerment Health - reducing child mortality, improving maternal health, combating HIV, AIDS, malaria Employment enhancing vocational skills Contribution to PM's fund or other fund set up by central govt or the state govts for socioeconomic development and relief and funds for the welfare of SC, ST, backward classes, minorities and women Ensuring environmental sustainability Social business projects Such other matters as may be prescribed

he biggest challenge in providing an in-depth quantitative analysis of the impact of the CSR clause was the huge universe that needed to be sampled and scrutinized all listed and unlisted companies which match the net worth, turnover and profitability parameters. The other pressing challenge was the availability of reliable financial information relating to companies, especially the amount allocated or spent on CSR. For the purpose of this document, hence, we have chosen the Top 100 listed companies in India based on Bombay Stock Exchange (BSE) rankings on 31st March 2011. Not only are these companies the biggest and the most influential, establishing benchmarks for others to measure up to, they have also been mandated by Securities and Exchange Board of India (SEBI) to publish a yearly Business Responsibility Report (BRR) separately or along with their annual reports. BRR is a disclosure of adoption of responsible business practices by a listed company to all its stakeholders. Based on 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) notified by Ministry of Corporate Affairs, Government of India, in July, 2011, BRR has been designed to provide basic information about the company, information related to its performance and processes, and information on principles and core elements. The prescribed format also provides a set of generic reasons which the company can use for explaining their inability to adopt the business responsibility policy. The analyses in this document are based on the information relating to these top 100 companies available in the public domain. For each of these companies, we collated information on the profits after tax during financial years (FY) 2009-10 to 20012-13 from the annual reports, BRR and other secondary sources. In case of the amount spent on CSR activities during FY 2012-13 we chose to strictly stick to the BRR or annual report. We could have collected information from alternative sources such as sustainability documents, CSR websites and news reports but for robust analyses, we relied on the latest information made available by the company itself.

It should be noted that the process and results of this assessment are based on companies profit after taxes (specified in the original rules), as opposed to net profit before tax specified in the recent draft rules posted on the MCA website. As per PiCs calculations the amounts stated in the in pages below may rise by 20-30%, depending on what finally comes to be included in the calculation of net profit before taxes for the purpose of Section 135.

After having collected this information, we calculated the actual CSR spending as a percentage of average profits after tax for FY 09-10, 10-11 and 11-12 (which would be necessary amount to be spent on CSR, as per the clause, if applied retrospectively). Then we calculated what would amount

to 2% of average profits after tax for FY 09-10, 10-11 and 11-12 to assess the difference between actual and stipulated spending. Lastly, we estimated what the spending may be in FY 13-14, based on the profits of FY 10-11, 11-12 and 12-13). Note: Although we have calculated the amount that may be spent on CSR in FY 13-14, section 135 makes it mandatory to spend on CSR from FY 14-15 onwards only.

Section 135 makes it mandatory to spend on CSR from FY 14-15 onwards.

XYZ Company India Ltd

FINANCIALS (INR Crore)
Net Profit in FY 2009-10 Net Profit in FY 2010-11 Net Profit in FY 2011-12 Net Profit in FY 2012-13 CSR Spending in FY 2012-13 % of Net Profit of FY 12-13 spent on CSR 1,000 2,000 3,000 4,000 100 (100/4000)*100 2.5% Average Net Profit of FY 2009-10, 2010-11, 2011-12 2% of Average Net Profit of FY 2009-10, 2010-11, 2011-12 Actual CSR spending as % of Average Net Profit of FY 2009-10, 2010-11, 2011-12 Average Net Profit of FY 2010-11, 2011-12, 2012-13 (1000+2000+3000)/3 2,000 (2/100)*2000 40 (100/2000)*100 5% (2000+3000+4000)/3 3,000 (2/100)*3000 60

CSR spending required in FY 2012-14

AVAILABILITY OF INFORMATION
As of 30th September 2013, we were able to access 84 companies AR and/or BRR. In case of seven companies, the BRR did not have the required information. In case of 9 companies on the Top 100 list, BRR was not available on the company websites. These either did not have their annual reports/BRR on the website or the annual report was not due to be released.
Figure I: Availability of Information

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BRR with required information

BRR available without required information BRR not available

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COMBINED CSR ACCOUNT

The 84 companies whose CSR specific information was available and assessed spent approximately Rs Rs 2724 crores in 2012-13. If all the 100 companies follow the clause under the new companies bill in 2013-14, the total CSR expenditure for this financial year would be at least Rs 5,690 crores.
Figure II: Actual CSR spending and requirement

2,724 4,276 4,688 5,690

Actual CSR spending by the assessed 84 companies in FY 12-13 2% of Average net profit of FY 10, 11 and 12 for the assessed 84 companies CSR spending requirement in FY 13-14 as per the Act for the assessed 84 companies

COMPANY GRADING CSR spending requirement in FY 13-14 as

per the Act for top 100 listed companies

To analyse the companies on the basis of how much they spent on CSR in FY 12-13, keeping in mind the 2% clause which has come into effect, four grades were set. Companies that spent more than 2% of their average profits of the previous three years in FY 12-13 were categorized under Grade A; those who spent between 1 and 2% under Grade B; those who spent between 1 to .5% under Grade C and companies that spent lower than that in the last category, i.e Grade D.

GRADING

CSR SPENDING IN 2012-13

More than 2 % of Average Net Profit of FY 09-10, 10-11 & 11-12 Between 2-1% of Average Net Profit of FY 09-10, 10-11 & 11-12 Between 1 - .5 % of Average Net Profit of FY 09-10, 10-11 & 11-12 Less than 0.5 of Average Net Profit of FY 09-10, 11-12 & 11-12

A B C D

Among the top 100 companies, only 16 fell under Grade A; 28 came under Grade B and 22 in Grade C. A total of 15 companies in the Top 100 list spent less than .5% of their profits on CSR, with one company admitting it has not spent anything. While information for 16 companies was not available at the time of writing this report, 3 companies spent on CSR, despite incurring losses in FY 12-13.
Figure III: Number of companies in each grade

16 3

16 Grade A Grade B Grade C

15 28

Grade D Spent despite losses No information

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Adani enterprises topped the Grade A list with almost 5.28% of the average of the previous three years profits spent on CSR in FY 12-13. The other top spenders include Adani Power, Reliance Power, NALCO, Ambuja Cements and Nestle India. The graph above shows the companies falling

under Grade A and the following figures show the companies falling under Grade B and C and the percentage of profit they spent on CSR during FY 12-13. Topping the list of companies which came under Grade B is Bajaj auto with around 1.93% of its average profits spent on CSR. This figure, however, is lower than what will be expected of companies once the new law comes into effect. Other big spenders in this category include Dr Reddys Laboratories, ACC, Reliance Industries among others. Theres one company in the Top 100 list which claimed that it has not spent anything on CSR in 2012-13. The following figure shows the companies under Grades A and B and the amount spent by them on CSR in 2012-13 as a percentage of the profits of the previous three financial years (as per the Companies Act requirement). For Grades C and D, only company names have been mentioned.

Figure IV: Companies in Grade A and B

Adani Enterprises Jindal Steel & Power Adani Power Reliance Power National Aluminium Company Ambuja Cements Nestle India Hindustan Unilever Tata Steel Adani Ports & Special Economic Zone Ultratech Cement IDFC Colgate-Palmolive (India) ICICI Bank Jaiprakash Associates Hindustan Copper Bajaj Auto Dr. Reddy'S Laboratories ACC Reliance Industries Gail (India) Larsen & Toubro Grasim Industries LIC Housing Finance ITC Indusind Bank MMTC Hindalco Industries United Breweries Oil India Limited ABB Cadila Healthcare Mahindra & Mahindra JSW Steel Cummins India Oil And Natural Gas Corporation State Bank Of India Axis Bank Lupin Bharat Petroleum Corporation Indian Oil Corporation Neyveli Lignite Corporation Bharat Heavy Electricals Tata Motors

5.28% 5.26% 4.89% 3.75% 3.40% 3.22% 3.01% 2.88% 2.75% 2.70% 2.63% 2.43% 2.34% 2.24% 2.22% 2.18% 1.93% 1.90% 1.90% 1.89% 1.87% 1.72% 1.71% 1.63% 1.62% 1.58% 1.55% 1.42% 1.39% 1.38% 1.37% 1.35% 1.32% 1.32% 1.29% 1.29% 1.27% 1.25% 1.24% 1.22% 1.11% 1.11% 1.09% 1.09%

HDFC Bank Yes Bank Maruti Suzuki India NTPC Power Grid Corporation Of India Tata Consultancy Services Tata Power Power Finance Corporation Cipla Godrej Consumer Products Glaxosmithkline Pharmaceuticals

GRADE C Sesa Goa Titan Industries NHPC Bosch DLF Steel Authority Of India Petronet LNG Bharat Electronics Container Corporation Of India Shriram Transport Finance Company Kotak Mahindra Bank GRADE D Asian Paints Punjab National Bank Hero Motocorp Bank of India Union Bank of India Glaxosmithkline Consumer Healthcare Oracle Financial Services Software

Reliance Infrastructure Bharti Airtel Canara Bank Sun Pharmaceutical Industries Wipro Zee Entertainment Enterprises Exide Industries Bank of Baroda

MMTC

COMPANIES THAT SPENT DESPITE LOSSES IN FY12-13 Ranbaxy Laboratories Adani Power

COMPANIES THAT SPENT MORE THAN 2% OF AVERAGE NET PROFIT OF FY11,12 & 13
Among the top 100 companies, there were a few who may not worry about not meeting the 2% target, at least for the FY 2012-13. These companies spent more than 2% of their average profits of the previous three years in 2012-13. The graph below shows which companies went beyond the 2% rule and by how much.

Figure V: Companies that went beyond 2%

2% of Average PAT of FY10, 11 and 12

4.68 5.11 8.47 9.92 26.01 28.81 2.66 6.50 5.71 10.70 25.65 31.21 19.09 25.78 16.29 24.54 5.89 15.57 32.95 43.40

CSR Spending in FY 13

Hindustan Copper Colgate-Palmolive (India) Jaiprakash Associates Adani Power Reliance Power IDFC Adani Ports & SEZ Nestle India Adani Enterprises Ultratech Cement ICICI Bank National Aluminium Company Ambuja Cements Hindustan Unilever Tata Steel Jindal Steel & Power

104.27 116.55

18.22 30.99 24.73 39.82 47.99 69.09 124.05

170.59

37.69

99.14

TOP SPENDERS IN ABSOLUTE TERMS

The figures above are based on the percentage of profits spent on CSR. The list changes its character once we look at the amount spent in absolute terms. The list is, unsurprisingly, topped by Reliance Industries with almost Rs 357 crore spent on CSR in 2012-13. The list also includes ONGC, Tata Steel, State Bank of India, ICICI Bank, ITC, Indian Oil Corporation, Larsen and Taubro and Hindustan Unilever. The chart below shows the top ten spenders among the top 100 and the approximate amount they spent on CSR in 2012-13.

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Figure VI: Top spending companies

Larsen & Toubro NTPC Indian Oil Corporation ITC Jindal Steel & Power ICICI Bank State Bank of India Tata Steel Oil and Natural Gas Corporation Reliance Industries

73.16 79.53 80.08 82.34 99.14 116.55 123.27 170.59

Amount in INR Crore

261.58
357.05

OBSERVATIONS ON COMPANY BRRs

While studying the Business Responsibility reports of the companies under assessment, quite a few anomalies were observed. While SEBI has created a structured format for reporting, the same has not been followed by many companies. A few of the observations are listed below. Many companies are not using the suggested format In many cases, the reporting requirements have been diluted by excessive descriptive text and avoiding statistics Companies do not seem to be on the same page when it comes to the understanding of NVG principles Many companies have not provided (sufficient) information on resource consumption. Sustainable sourcing as a subject has not been addressed by many companies, either due to lack of understanding or due to lack of initiatives. Theres a need to define what sustainable sourcing entails. Many companies seem to treat impact assessments by external agencies at par with internal feedback mechanisms. Companies have avoided information about joint ventures and subsidiaries, therefore weaken the significance of the report.

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ANNEXURE Table 1. Companies and their current and potential CSR spending
CSR Spending in FY 12- 13 2% of Average PAT of FY 10, 11 and 12 INR Crore 377.07 405.42 161.09 101.41 180.35 194.25 152.48 80.27 93.29 104.27 47.99 85.26 2.71 35.29 144.13 NA* 115.75 28.01 37.69 53.27 53.63 69.03 67.63 124.05 16.29 50.85 CSR spending estimate in FY 13-14 2% of PAT of FY 11, 12 and 13 408.86 433.15 208.88 123.79 206.29 227.18 123.61 105.46 101.19 132.94 58.61 88.82 0.80 22.36 109.36 79.25 131.11 25.25 38.44 67.90 62.57 74.91 85.39 124.15 18.97 59.28

Company Name
Reliance Industries Oil And Natural Gas Corporation Tata Consultancy Services ITC NTPC State Bank of India Bharti Airtel HDFC Bank Wipro ICICI Bank Hindustan Unilever Larsen & Toubro MMTC Tata Motors Indian Oil Corporation Cairn India Bharat Heavy Electricals Sun Pharmaceutical Industries Jindal Steel & Power Power Grid Corporation Of India Bajaj Auto GAIL (India) Axis Bank Tata Steel Nestle India Mahindra & Mahindra

357.05 261.58 65.21 82.34 79.53 123.27 29.56 39.01 14.13 116.55 69.09 73.16 2.10 19.14 80.08 20.50 63.00 4.55 99.14 21.75 51.73 64.65 42.42 170.59 24.54 33.52

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Ultratech Cement Hero Motocorp Kotak Mahindra Bank Maruti Suzuki India Steel Authority of India Adani Enterprises DLF Reliance Power Bank of Baroda Asian Paints (India) Oil India Dr. Reddy'S Laboratories Punjab National Bank Ambuja Cements Bosch Adani Ports & SEZ ACC Bharat Petroleum Corporation Hindalco Industries Hindustan Copper Cipla Power Finance Corporation NHPC Grasim Industries Tata Power Lupin Oracle Financial Services Software Canara Bank IDFC Titan Industries Ranbaxy Laboratories Bank of India Glaxosmithkline Pharmaceuticals

43.40 1.27 4.08 18.90 32.55 15.57 6.81 10.70 7.17 0.98 41.28 16.82 3.32 39.82 5.75 25.78 25.60 17.88 29.79 5.11 7.65 22.10 15.73 25.30 7.88 9.32 0.00 11.20 31.21 2.97 4.26 1.10 3.69

32.95 43.58 16.43 42.80 101.33 5.89 20.50 5.71 82.03 16.71 59.63 17.67 88.15 24.73 17.13 19.09 27.01 29.30 41.93 4.68 21.10 57.88 46.85 29.67 20.38 15.08 18.11 68.87 25.65 8.53 NA* 46.04 10.37

43.37 42.83 21.76 42.10 70.77 7.66 18.74 7.32 91.51 18.55 66.15 20.47 93.76 25.25 19.59 26.11 23.37 36.66 40.49 6.01 23.94 67.13 48.57 23.89 20.89 19.15 20.57 67.87 31.15 11.70 NA* 52.76 10.47

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ABB Jaiprakash Associates Reliance Communications Sesa Goa Godrej Consumer Products Jsw Steel Cadila Healthcare Reliance Infrastructure Colgate-Palmolive (India) Indusind Bank Adani Power Neyveli Lignite Corporation United Breweries National Aluminium Company Cummins India Shriram Transport Finance Company Yes Bank Exide Industries Petronet LNG LIC Housing Finance Zee Entertainment Enterprises Union Bank of India Container Corporation Of India Bharat Electronics Glaxosmithkline Consumer Healthcare TOTAL

2.74 28.81 2.62 22.59 3.07 24.85 7.98 6.40 9.92 9.12 6.50 14.59 1.72 30.99 7.00 5.58 6.50 1.25 3.68 13.89 1.41 0.76 4.38 4.21 0.01 2723.75

4.01 26.01 NA* 63.65 8.58 37.72 11.80 28.21 8.47 11.53 2.66 26.37 2.47 18.22 10.84 22.39 14.54 11.09 13.87 17.00 10.83 39.61 16.93 16.08 5.92 4276.07

2.56 17.96 0.15 61.32 10.33 36.25 11.77 33.86 8.96 16.27 NA* 27.79 2.97 16.75 12.97 25.64 20.03 10.99 18.83 19.41 11.37 40.17 17.95 17.21 7.27 4687.86

* Losses in previous years

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Established as a not-for-profit organization in 1995, Partners in Change (PiC) has been pioneering the understanding and practice of corporate responsibility issues in India, whilst simultaneously promoting cross-sector partnerships as a tool to overcome complex development challenges. Partners in Change works with companies, NGOs, business associations and governments for promoting the practice of corporate social responsibility for the all-round sustainable development of the society. We have been Drafting Committee member for the National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Businesses under Ministry of Corporate Affairs. We were a Steering Committee member for the Planning Commission's report on the Voluntary Sector for the Eleventh Five Year Plan. We have been instrumental in designing the Workplace Code of Conduct with Bureau of Indian Standards(BIS) GoI. PiCs core strength lies in helping companies to devise CSR strategy, identify implementation partners, undertake need assessment, stakeholder mapping and impact assessment. PiC has been helping many national and international NGOs to establish CSR partnerships in India. Contact Sunanda Poduwal Sunanda.poduwal@projects.picindia.org +91-9971593423

Bhomik Shah Bhomik.shah@picindia.org +91-8860179180

C - 75, South Extension Part II, New Delhi - 110049 (India) Tel: +91 11 41642348-51; Fax: +91 11 41642995 www.picindia.org
Note: The information provided in this document has been derived from the secondary sources and Partner in Change indemnifies itself from the further use or citing of the information contained herein.

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