CSR

Understanding
&
Implementation
By CS Rupanjana De
CSR and sustainability
Concept of CSR arises from concerns for
sustainability. The UN Brundtland
Commission defined sustainability as :-

“development that meets the

needs of the present without
compromising the ability of future
generations to meet their own
needs”.

CS Rupanjana De
“Businesses cannot be
successful when the
society around them fails”

CS Rupanjana De
• CSR is an inter-disciplinary subject which
combines social, ethical and moral responsibility
by complying with legal and voluntary
requirements. It is based on the management of
corporate responsibility activities for producing
a positive effect on society.

• Commission of the European Communities, 2003

“CSR is the concept that an enterprise is
accountable for its impact on all relevant
stakeholders. It is the continuing commitment
by business to behave fairly and responsibly and
contribute to economic development while
improving the quality of life of the work force
and their families as well as of the local
community and society at large.”
CS Rupanjana De
The basic Premise
When corporations get bigger in
size, apart from the economic
responsibility of earning profits,
there are many other
responsibilities attached to them
which are more of non-financial
or social in nature.

CS Rupanjana De
• Businesses are integral part of society, with a
critical role in sustenance and improvement
of healthy ecosystems, fostering social
inclusiveness and equity, and upholding
essentials of ethical practices and good
governance.

• As per Business for Social Responsibility (BSR)

“Corporate Social Responsibility is operating
a business in a manner which meets or
excels the ethical, legal, commercial and
public expectations that a society has from
the business.”
CS Rupanjana De
CSR in India
 The concept of CSR is not new in India.
 What is new is the mandate on CSR by
companies meeting a specific criterion.
 Businesses have traditionally associated
money-making with philanthropic activity.
 The idea was more embedded in
trusteeship
 CSR even had its impact on institutions
that actively participated in freedom
movement.

CS Rupanjana De
 Companies Act, 2013 & CSR
 Makes CSR mandatory for certain class of
profitable undertakings

 There are grossly two points of view

 Social Development – A welcome step by MCA as an

annual spending of over Rs. 15,000 – Rs. 20,000
crores is expected starting from FY 2014-15

 Business Houses – Generally mixed views. Some

feel it is over-taxing and ‘forced charity’ as
voluntary CSR is not being given recognition and
CSR mandate still applies to companies already
doing activity for social development.
CS Rupanjana De
Qualifying Criterion
As per section 135 of Companies Act 2013,
mandatory CSR spending of 2% of net profit is
required by the following companies:

 Net worth > Rs 500 crores, or

 Turnover > Rs 1000 crores, or

 Net profit > Rs 5 crores, or

 a foreign company defined u/s 2(42) having its

branch office or project office in India which
fulfills the criteria under pts. (i), (ii) or (iii)

CS Rupanjana De
Legal Framework
Companies Act, 2013
 Section 134(3)(o) – Disclosures in Board’s Report
 Section 134(8) – Penalty
 Section 135(1) - Companies that are required to comply
with mandatory CSR provisions
 Section 135(1) - Composition of CSR Committee
 Section 135(2) - Disclosures about CSR in Board’s report
 Section 135(3) - Role of CSR Committee
 Section 135(4) - CSR Policy
 Section 135(5) - Mandatory CSR Spending
 Section 166(2) - Duties of directors
 Schedule VII - Activities in which CSR investment can be
done
CS Rupanjana De
Legal Framework
Companies (Corporate Social Responsibility Policy)
Rules, 2014
 Rule 2(1)(c) - Definition of Corporate Social Responsibility
 Rule 2(1)(e) - Definition of CSR Policy
 Rule 2(1)(f) - Definition of ‘Net Profit’
 Rule 3 - Companies to which CSR applies
 Rule 4 - CSR activities
 Rule 5 - CSR Committees
 Rule 6 - CSR Policy
 Rule 7 - CSR Expenditures
 Rule 8 - CSR Reporting
 Rule 9 - Display of CSR activities on the website.
 Annexure – Format for Annual Report on CSR Activities to
be included in Board’s Report
CS Rupanjana De
Legal Framework
Companies (Accounts) Rules, 2014

 Rule 9: Disclosures about CSR Policy.

The disclosure of contents of Corporate Social
Responsibility Policy in the Board’s report and on the
company’s website, if any, shall be as per annexure
attached to the Companies (Corporate Social
Responsibility Policy) Rules, 2014.
 DPE Guidelines on Corporate Social Responsibility and
Sustainability for Central Public Sector Enterprises

CS Rupanjana De
Schedule VII – Specified activities
 CSR activities under the Companies Act,
2013 have to be undertaken in any of the
areas mentioned in Schedule VII of the Act.

 While traditional CSR includes within its

ambit activities directed towards Social and
Environmental upliftment and upgradation,
the Schedule VII of the Companies Act 2013
very specifically includes activities directed
at overall national development also. This is
in the right spirit for a developing country
like India.

CS Rupanjana De
 Schedule VII – Social Projects
under CSR
 Eradicating hunger, poverty & malnutrition
promoting preventive health care and sanitation
and making available safe drinking water;
 Promoting education, employment enhancing
vocation skills among children, women, elderly, and
the differently abled;
 Promoting gender equality, empowering women
setting up homes and hostels for women, orphans
or old age homes, day care centres etc. for the
socially and economically backward classes
 Rural development projects.
 Setting up public libraries
CS Rupanjana De
Schedule VII – Environmental
Projects under CSR
 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;
 Clean Ganga Fund
 Swachh Bharat Kosh

CS Rupanjana De
 Schedule VII – Nationalistic
Projects under CSR
 Protection of national heritage, art and culture,
 Restoration of buildings and sites of historical
importance
 Promotion and development of traditional arts and
handicrafts;
 Measures for the benefit of armed forces veterans,
war widows and their dependents;
 Training to promote rural sports, nationally
recognized sports, paralympic and Olympic sports;
 Contribution to PM National Relief Fund or any
other fund set up by CG for socio-economic
development, relief & welfare of SC, ST, OBC, other
minorities and women; CS Rupanjana De
 Schedule VII – Technology
Projects under CSR
 This is the darker side of CA 2013
 CSR in India speaks very less of technology.
 The only place in the Schedule VII where we see
specific mention of technology is - Contributions to
technology incubators within academic institutions;
 For overall development of a country technological
development and incentives for carrying on
Research and Development is very important. This
is lacking. But we can hope that in the coming days
we will see some inclusion in this regard.

CS Rupanjana De
 Water Projects under CSR

 The largest focus of the govt. for CSR projects

now appears to be WATER PROJECTS
 In a policy released earlier this year the govt.
allowed CSR spending on water projects.
 The most important areas being the irrigation
sector where water is grossly misutilised.
 Water saved through CSR initiatives will be used
for ecological needs and ensuring 'environmental
sustainability' and removal of disparity between
water supply to rural and urban areas.

CS Rupanjana De
Water Projects under CSR … contd
Companies can also spend under CSR in
 Construction of passes for wildlife over canals
passing through sanctuaries
 Create awareness among farmers about conservation
and minimizing water use
 Water saving irrigation techniques
 Renovation / modernization of old irrigation projects
 Lining of selective segments of canal reaches with
excessive water losses
 Installing flow measuring devices
 Sponsoring research activities in irrigated agriculture
 Desilting of small water bodies
CS Rupanjana De
 Spendings that do not qualify
 In project not related to activity in Schedule VII
 Spending in the ordinary course of business
 Spending outside the local area of operation of the company
(this is marked as ‘preferable’)
 Spending outside India by a Foreign company to which this
section applies (spending ‘locally’ here means in India)
 Spending that benefits only employees & their families
 Contribution given to any political party with objective of
carrying out any such specified activity
 Any spending which a company is statutorily required to do
under any other Act
 Spending in violation of any Act
 Spending beyond limit specified in CSR Policy
 Spending on One-off Events
 Spending on projects not specified in CSR Policy
CS Rupanjana De
Responsibility of the BOD
 To compose a CSR Committee
 To disclose composition of CSR Committee in its reports.
 To ensure that CSR committee meetings are held properly
 To ensure at least 2% of average net profit of the
preceding 3 years is spent on CSR activities every year.
 To approve the CSR Policy after considering
recommendations of the CSR Committee.
 To ensure that activities laid down in CSR policy are
actually undertaken as per the intent of the committee.
 To disclose CSR policy and initiatives towards
implementation in its report and in the website.
 If spending up to 2% of net profits, as required, is not
done, to report the reasons for failure in its report.

CS Rupanjana De
CSR Committee
 Board to constitute a CSR committee
 To consist of at least 3 directors of the company one of
whom shall be an independent director.
 For companies that are not mandatorily required to
appoint IDs, or companies that do not require three
directors under the Companies Act 2013 but qualify for
CSR spending the following applies:
 Private Company having only 2 directors may have only 2
directors in CSR committee
 Companies not required to have an independent directors
(ID) may have CSR Committee without an ID
 In case of Foreign company, the authorized representative
of the company in India and another person nominated by
such company in this regard

CS Rupanjana De
Duties & Functions of CSR Committee
 Review past and current CSR activities of the company,
examine their alignment with Schedule VII
 Researching on national and local development priorities
and setting up relevant CSR activities for the company.
 Studying the CSR practices of other companies and learning
from their experiences.
 Formulate and recommend to BOD, a CSR Policy listing the
activities to be undertaken by the company and to lay down
what those policies would imply in terms of the company’s
vision, mission and its core business area.
 Recommend the amount of expenditure to be incurred
 Determine the mechanism for implementation
 Monitor and supervise the implementation of the CSR
projects recommended
 Monitor the CSR Policy of the company from time to time.
CS Rupanjana De
Contents of CSR Policy
 Motto / vision of the company w.r.t. CSR
 Local area identification
 List of projects and programmes proposed to be
undertaken by the company under CSR
initiative.
 Details of the modalities of execution of the
projects – via NGO etc.
 Funds allocated under each activity, and
 The implementation schedules for them.

CS Rupanjana De
CSR Corpus
CSR corpus would include the following funds:
 2% of the average net profits (calculated on the
basis of profits of past 3 years),
 Any income / profit arising therefrom
 Surplus funds arising out of CSR activities of
previous year.
 Interest earned on funds unutilised in previous
years

NOTE:
 In calculating net profit, PBT would be taken
 Does not include profit of foreign branch
 For company that has not completed 3 yrs, the period
of its existence will apply
CS Rupanjana De
Implementation mechanism
 On its own, through an in-house department
 Through its own non-profit foundation set-up to
facilitate the CSR initiative
 By partnering with registered NGOs working
independently and having experience in
implementing similar activities for not less than
three years
 Through joint collaboration with other
companies which also qualify for CSR spending

CS Rupanjana De
Tax treatment
 CSR spending is generally not tax deductible unless
specifically stated
 By making it tax deductible govt. would contribute 30%
 Lot of debate still going on in the topic
 No tax deductability u/s 37(1) of Income Tax Act, 1961
 CBDT Circular has stated that a company can get
deduction u/s 30 to 36 if relevant conditions are fulfilled
 Only clearly deductable option is investment in PM
National relief Fund with 100% (50%) deduction u/s 80G of
the Income Tax Act, 1961
 Finance Budget 2015: Investment in the following funds
under CSR would not be tax deductable although an
individual gets 100% tax deduction for investment in
1. Clean Ganga Fund and
2. Swachh Bharat Kosh
CS Rupanjana De
Word of caution
 For companies investing the CSR
amount through an NGO, just handing
over the amount does not complete
the responsibility of the company.
 Responsibility of company extends till
the time of actual utilisation and
reporting thereon

CS Rupanjana De
Salary vs. Employee Benefit
 Salary to employees of the CSR
Department may be paid out of the
CSR Fund, but
 The fund cannot be utilised for the
objective of activities beneficial only
to employees

CS Rupanjana De
Penalty for non-compliance
 As per section 134(8), penalty for non-
compliance may range from Rs. 50,000
to Rs. 25,00,000
 CSR activity reporting forms part of the
Board’s Report and hence the same
penalty applies

CS Rupanjana De
Illustrations
Illustration 1 - ABC Ltd. has provided the
following relevant financial data for
ascertaining its CSR obligation. Is it liable to
spend any amount on CSR in FY 2014-15; if so,
what amount?

CS Rupanjana De
Solution
Based on the clarification of the terms ‘any financial
year’ in section 135(1) of the Act read with Rule 3(2)
of the Companies (CSR Policy) Rule, 2014 provided by
the MCA on by its General Circular No. 21/2014 dt
18th June 2014, the term indicates ‘any of the
preceding 3 FYs’. This implies that the eligibility
criteria do not necessarily be hit on the current FY to
make it applicable. Since ABC Ltd’s net profit was Rs. 5
crores in 2012-13, although none of the criteria were
met in 2013-14, yet the company is covered by the
provisions of section 135(1) and will have to make
CSR investment in 2014-15. And the amount of
investment would be 2% of the average of (Rs. 3 Cr +
Rs. 5 Cr + Rs. 4 Cr) which comes to Rs. 8 lakhs.
CS Rupanjana De
Illustrations
Illustration 2 – The Company Secretary of XYZ Ltd. has
drawn the following chart of relevant financial data of the
company and is required to brief the management about
the applicability of section 135(1) of the Companies Act
2013 to it. Advice him as to whether the said section is
applicable to it. If not, why?

CS Rupanjana De
Solution
In none of the 7 FYs the company came under applicability of
section 135(1) under the Turnover or Net worth criteria. As for Net
profit criteria, it hit the applicability provisions only in FY 2013-
14. So it has duly complied with Section 135 by making necessary
CSR investment. It is not satisfying any of the 3 criteria for the
next 3 FYs, 2014-15, 2015-16 and 2016-17. Rule 3(2) of the
Companies (CSR Policy) Rules, 2014 provides that a company which
is covered u/s 135(1), will continue to attract the provision for a
maximum of 3 years even if none of the criteria are hit during the
period. On completion of 3 years since it ceases to be covered u/s
135 it shall be out of purview of the provisions. The company has
rightly complied with the section by doing CSR investment in FY
2014-15, 2015-16 and 2016-17, but since during all these 3 years it
has already ceased to fall u/s 135(1), it will not be required to
make any investment in 2017-18. But we can see that XYZ Ltd. has
again hit the Net profit criteria in 2017-18. So from FY 2018-19
onwards it will again be required to comply with the provisions of
section 135. This means the company is getting a relief from CSR
expenditure only during the year 2017-18.

CS Rupanjana De
Net Worth, S. 2(57)
It is the aggregate of
 paid-up share capital;
 all reserves created out of the profits; and
 Securities Premium Account.
The following are the implied inclusions:
 any reserve created out of profits,
 (including statutory reserves); and
 does not matter whether or not dividend can be paid out of it;
Deductions therefrom
 accumulated losses;
 deferred expenditure;
 miscellaneous expenditure not written off.
The following shall be excluded in calculation on net worth
 reserves created out of revaluation of assets;
 reserves created out of write-back of depreciation; and
 reserves created out of amalgamation. CS Rupanjana De
Turnover, S. 2(91)

Turnover is the aggregate value of realization

made by the company during a financial year
from:
 the sale, supply or distribution of goods or
 on account of services rendered or
 both of the above

The definition looks very simple but practical

difficulties arise for which ICAI has issued some
guidelines

CS Rupanjana De
Net profit, R. 2(1)(f)
Rule 2(1)(f) “Net profit” means the net profit of a company
as per its FS prepared in accordance with the applicable
provisions of the Act, but shall not include the following,
namely :—
 profit arising from any overseas branch or branches
whether operated as a separate company or
otherwise; and
 dividend received from other companies in India,
which are covered under and complying with the
provisions of sec 135
 The net profit in respect of a FY for which the relevant FS
were prepared in accordance with the provisions of the
Companies Act, 1956 shall not be required to be re-
calculated in accordance with the provisions of the Act:
 In case of a foreign company net profit means the net
profit of such company as per P & L A/c prepared in terms
of Section 381(1)(a) read with section 198 of the Act.
CS Rupanjana De
A Critique

“The Social Responsibility of

Business is to increase its
profits”.

- Milton Friedman, New York Times,

September 1970

CS Rupanjana De
A Critique

But in an underdeveloped
country like India the CSR
mandate is a welcome step to
make business houses
responsible corporate citizens

CS Rupanjana De
A Critique – the points of review

1. Spending should be done in

the local area of operation

How about
Automobile companies?
Software companies?

CS Rupanjana De
A Critique – the points of review

2. No cause and effect linkage.

Why not directly mandate

correcting the wrong done?
e.g. Automobile companies again

CS Rupanjana De
A Critique – the points of review

3. Comply or Explain !?!?

Lock your door properly and

give the key to the thief!

CS Rupanjana De
A Critique – the points of review

4. Direct linking of turnover /

profit with CSR spending

What if
The company has already taken care
of Schedule VII activities in earning
profit … e.g. Hospitals, Rural
Development organisations, etc.
CS Rupanjana De
A Critique – the points of review

5. 2% - on what basis? How do

you quantify liability? 2% may
be very less for big
companies but a huge amount
for SMEs.

Isn’t is discouraging
entrepreneurship?
CS Rupanjana De
A Critique – the points of review

6. No monitoring agency.
Directors in CSR Committee
may not be sufficiently
qualified to judge the social
impact of companies

CSR policy may end up becoming a

money usurping mechanism in the
hands of those in power
CS Rupanjana De
A Critique – the points of review

7. No time limit for compliance.

CSR implementation of a single
year can go on perpetually

Result?
Increase in paperwork
Less implementation
CS Rupanjana De
A Critique – the points of review

8. Voluntary Charitable work

not recognised. Too much
focus on Schedule VII

This is myopic vision. Those who willingly

do charitable work will get discouraged.
There should be a system of CG approval
of existing charitable activities under
mandatory CSR
CS Rupanjana De
Conclusion
For a country like India, mandatory
CSR seems to be a step in the right
direction. But the codification is
definitely poor.
We are in a Trial and Error phase
with not much of specific guidelines
to follow. The coming years will see
a lot more stringency and clarity of
provisions.
Until then we can ‘Wait and Watch’

CS Rupanjana De
CS Rupanjana De