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CSR POLICY 20143/3/14

ABSTRACTThe changes that the new

CSR bill can bring in the

companies and its

implications

Ankush RawatPGDM 03 /A5

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The provisions of the Companies Act, 2013 and the rules thereon pertaining to corporate social

responsibility (CSR) have been notified on January 2014. They will take effect from April 1, 2014.

As for the specific CSR activities, Schedule VII of the Companies Act containing the list of permitted

activities has been amended.

It appears that the rules are fairly prescriptive as to the nature of CSR activities that companies can

carry out. Moreover, it has been explicitly stated that political funding by corporates it outside the

purview of CSR, and understandably so. Some of the other issues discussed previously continue in the

new version as well, including the fact that employee benefits will not be encompassed within CSR.

April 1 this year would mark a new era in corporate law and governance in India with companies being

required to comply with the quasi-mandatory obligations regarding CSR, an approach that is fairly

unique in the global context.

Considered first of its kind, the new legislation requires certain class of companies to spend at least

2% of their three-year average annual net profit towards CSR activities. Companies having net worth

of at least Rs500 crore or having minimum turnover of Rs1,000 crore or those with at least net profit

of Rs5 crore, have to make CSR spend. In case the firms are unable to spend the money, they have to

provide reasons and disclose the same. The regulation makes it mandatory for the Directors of thecompany to supervise these spends and to set up a CSR committee to plan, strategize, implement,

document and disclose the activities. Failure to comply could lead to consequences but the implications

have not yet been outlined.

From April 1, all 16,245 registered companies have to nominate three members for their CSR

committee from their board. Companies cannot do whatever they want and claim it as a CSR activity

according to the new law. Under the new rules coming into effect, anything done for employees is not

CSR, it is a human resource activity. Compliance with any rule or regulation is not CSR. Companies

should take up this role and voluntarily do it beyond the rule

Under the new rules coming into effect, anything done the employees is not CSR, it is a human resourceactivity. Compliance with any rule or regulation is not CSR. Companies should take up this role and

voluntarily do it beyond the rule. Under the new Companies Act, mid and large companies have to

spend 2% of their three-year annual average net profit on CSR activities. The government expects a

significant step up in spending on CSR projects by companies.

The activities which can be included by companies in their CSR policies include: eradicating hunger,

poverty, malnutrition and promoting preventive healthcare, promoting sanitation and availability of

safe drinking water, promoting education, promoting gender equality, ensuring environmental

sustainability, protection of national heritage. Those spending for the benefit of armed forces veterans,

war widows and their dependents would be eligible to cover the expenses under CSR spending rules.

Under gender equality activities related to empowering women, setting up homes and hostels for

women and orphans, setting up old age homes, day-care centers and similar facilities for senior citizens

and projects on reducing inequalities faced by socially and economically backward groups have been

included. Spending on training to promote rural and nationally recognized para-Olympic and Olympic

sports would also qualify for credit under the CSR rules. Rural development projects and contributions

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or funds to technology incubators located within academic institutions and approved by the

government would also be approved under this category.

Companies have no shortage of CSR opportunities or issues areas to address as the needs in India are

immense. A 2011 study by the Oxford Poverty and Human Development Initiative estimated that

approximately 650 million people, or fifty-three percent of Indias population, live in poverty. In 2010,

the World Bank estimated that about 400 million people in India live on less than U.S. $1.25 a day.

Poverty is also intertwined with illiteracy, gender inequality, and disease. Vast environmental issues

confront India, such as deforestation, illegal wildlife trading, loss of biodiversity, water pollution, air

pollution, and the particular vulnerability of Indian populations to natural disasters, among other issues.

Crucially, companies should not view the CSR Clause as an onerous reporting requirementi.e., a

necessary cost of doing business in India. Instead, they should utilize the two percent amount of the

CSR Clause as an opportunity to effect positive impact in the communities where they work and in the

communities they affect. These concerns are not mutually exclusive to enhancing a companys brand

value and market equity through CRS activities. Indeed, some companies feel CSR is simply the right

thing to do and already give beyond the tentative requirements of the CSR Clause. Regardless of a

companys given ethos, if done strategically, spending under the CSR clause can develop businessgoodwill with the shareholders, consumers, the Indian government, Indian citizens and the

international public at large.

While the Companies Bill promulgates strong language for CSR, companies can, in practice, spend

nothing on CSR. The CSR Clause is a type or regulation commonly referred to as a comply or explain

clause. Therefore, as long as an explanation for not spending the required amount is contained in the

annual board report, a targeted company has thereby performed its statutory duty under the CSR

Clause. Such a policy makes sense if the company is facing deficits or downsizing, and the CSR Clause

foresees and accommodates such situations.

However, hazarding ethics and reputational perceptions from the public, boards of directors can

include explanatory statements in their report simply because they do not want to engage in CSR. Moreappropriately, board of directors may feel it is in the companys best interest to spend the money

elsewhere. As the Companies Bill does not provide a definition of what constitutes a valid explanatory

statement, such explanations could plausibly contain reasoning that the money was better spent on

research and development, information technology infrastructure, or acquisitions, among many other

valid reasons.

There are several behaviors we expect companies to exhibit following the laws passage. Some

companies will make the structural changes to their board to avoid fines, only to explain in their board

report why they are unable to spend on CSR. Others will allocate an additional portion of their budget

to meeting the reporting requirements and/or use the board report as an opportunity to showcase their

CSR activities. Many companies are likely to re-categorize current quasi-CSR activities so as to fallwithin the scope of the new law. This is not altogether contrary to the spirit of the CSR Clause, so long

as actual benefits inure in the forms listed in schedule VII. Whether the CSR Clause actually

encourages more CSR spending or not, it will certainly enforce companies to contemplate social

responsibility or risk becoming a conspicuous non-spender among peers who spend heavily in it.