Understanding

Corporate Social Responsibility

By Noshir H. Dadrawala
Centre for Advancement of Philanthropy

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Stages of Evolution

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

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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.
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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
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Implications of Section 135

of New Companies Act

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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.
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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 India
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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)
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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.
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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.
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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.
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Specified CSR Activities

Under Schedule VII

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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;
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Specified CSR Activities

Under Schedule VII
iv. Ensuring environmental sustainability, ecological balance,
protection of flora and fauna, animal welfare, agroforestry, 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;

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Specified CSR Activities

Under Schedule VII
vii. Training to promote rural sports, nationally recognised
sports, Paralympics sports and Olympic sports;
viii. Contribution to the Prime Ministers 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.
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MCAs Clarifications
General Circular No. 21/2014
(No. 05/01/2014 - CSR)
Dated: 18th June, 2014

MCAs 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 Safety
b) Consumer education and awareness
c) Conservation and renovation of school
buildings and classrooms

The Clarifications Allow .

The following under Vocational Skills:
a) Training to drivers
b) Capacity building for farmers covering best
sustainable farm management practices
c) Training Agriculture Labour on skill
development

The Clarifications Allow .

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.

The Clarifications Allow .

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
companys 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 Corpus
Contribution 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

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What CSR Will Mean?

CSR will mean and include but not limited to
projects or programs relating to activities specified
in Schedule VII to the Act or
Projects or programs relating to activities
undertaken by the board of directors of a company
in pursuance of recommendations of the CSR
Committee of the Board as per declared CSR Policy
of the company subject to the condition that such
policy will cover subjects enumerated in Schedule
VII of the Act.
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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.

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CSR Policy Key Ingredients

List of CSR
Projects/programs
(relating to activities
specified in Schedule VII

Modalities of Execution

Policy
Essentials
Transparent monitoring
mechanism

Expenditure/Budget for
CSR Activities

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.
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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.

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CSR Through Companys 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.
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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.
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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.
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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.
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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.

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What Should CSR Policy Include?

The companys 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.
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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.

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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.
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Making CSR Strategic & Meaningful

Areas of Intervention?

Governance Structures

Linkage to Business?

Board & CSR Committee

Where do we add real value?

Identify
Systems & Processes
Project Partners
Selection criteria
Effective Partnerships

M&E
Tools, Framework, Outcomes
& Impact

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.
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CSR Report Should Include:

3) Average net profit of the company for

last three financial years.

4) Prescribed CSR Expenditure (2% of the

amount as in 3 above)

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CSR Report Should Include:

5) Details of CSR expenditure during the

financial year.
a) Total amount to be spent for the
financial year;
b) Amount unspent, if any;

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CSR Report Should Include:

6) Manner in which the amount spent
during the financial year detailing:
i) The CSR Project of Activity identified
ii) Sector in which the project is covered
(E.g. Education, Preventive Health
Care, Environmental Sustainability etc.)
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CSR Report Should Include:

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

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CSR Report Should Include:

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

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CSR Report Should Include:

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

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CSR Report Should Include:

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.

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CSR Report Should Include:

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.
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Consequences of Contravention

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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.
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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 nondisclosures of CSR.
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Statistics

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MCAs 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.
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For Further Assistance Contact

Tel: (022) 22846534

E mail: connect@capindia.in
Web: www.capindia.in

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