Demystifying the Company Bill 2013 - Part 1

To create sustainable social impact, funding is important but often it is not directly proportionate to the depth of impact.  The Companies Bill, 2013 (Section 135 of the Indian Companies Act) makes it imperative for corporates in India to spend a portion of their profits on CSR (Corporate Social Responsibility). On Dec 19th, we initiated a conversation on twitter to discuss the various aspects of the law and how organisations can leverage this for creating lasting impact and execute this in the spirit that it was intended.

We have attempted to summarize the conversation that came up during the tweet chat in the form of two Q&As for ease of reading. The first one is around the legal aspects of Section 135 of the Indian companies Act that was passed earlier this year. The one to follow is around choosing, monitoring, evaluating and reporting on CSR projects.

If you have any questions on the Bill that have not been covered here, or have a point of view to share on any aspect of doing business in a responsible manner and creating sustainable social impact, please write to us at info@niiticonsulting.com or leave a message on our twitter or facebook pages. 

Q1.Which companies fall in the ambit of CSR under Sec 135 of Indian Companies Act?

A1.Sec 135 is applicable to listed public ltd companies having either of the following in a given financial year:

• net worth of INR 500 crore (INR 5 billion) or more

• turnover of INR 1,000 crore (INR 10 billion) or more

• net profit of INR 5 crore (INR 50 million) or more

Q2.What are mandatory requirements under the CSR Sec 135?

A2.The companies need to:

1.  Formulate a CSR committee

2. Assign responsibilities to the committee that include formulating the CSR policy for the company, proposing the means to achieve the targets and monitor from time to time

3. Company’s board to ensure that the committee comprises of atleast three directors and one of them should be an independent director

4. The Board’s report under sub-section (3) of section 134 (o) shall disclose  the composition of the CSR  Committee

5. Approve the CSR Policy for the company and disclose the contents of such Policy in its report and also place  it on the company's website, if any

6. Ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.

7. Attach to statements laid before a company in a general meeting, a report by its Board of Directors, which shall include the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year.

Q3. What are the responsibilities of the CSR committee?

A3. CSR committee shall

(a) Formulate and recommend to the board a CSR policy that shall indicate the activities to be undertaken by the company as specified in Schedule VII. Activities which may be included by companies in their CSR policy are activities relating to:

 (i) eradicating extreme hunger and poverty;

(ii) promotion of education;

(iii) promoting gender equality and empowering women;

(iv) reducing child mortality and improving maternal health;

(v) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;

(vi) ensuring environmental sustainability;

(vii) employment enhancing vocational skills;

(viii) social business projects;

(ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

(x) such other matters as may be prescribed

(b) Recommend the amount of expenditure to be incurred on the activities.

(c) Monitor the CSR policy of the company from time to time.

Q4.What is the prescribed amount to be spent on CSR activities in a year by the company?

A4. The Board shall make every endeavour to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy. For eg If the profits (profits before tax calculated as per Sec 198) of the company in the three preceding years are:

2010-11 – Rs.1000cr

 2011-12- Rs.1500cr

2012-13- Rs.2000cr

Then, CSR spend for the financial year 2013-14 should be at least 2% of (1000+1500+2000)/3 i.e. Rs.30cr.

Q5.What is the penalty for not spending the amounts for CSR activities as aforesaid?

A5.Sec 135 prescribes formulation of the CSR committee, amount to be spent by the company on CSR activities and inclusion of a report by its board of directors about the CSR policy developed and implemented by the company during the year in the statement of accounts presented by the company in its Annual General Meeting.

There are no direct penalties for not spending the moneys. However, non-inclusion of a report as aforesaid by the directors will attract penalties prescribed in Sec 134 which shall not be less than fifty thousand rupees 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 three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Q6.How is this beneficial for the companies?
A6. Although there are a few companies feeling governments have passed on its duties to businesses and neither want to be forced to spend on social initiatives nor are equipped to deal with the implementation of such a policy, there are numerous positives to this coin:

• Development of goodwill for capturing and sustaining markets. Therefore, CSR can be used as business strategy to reduce investment risks and maximize profits by taking all the key stakeholders into confidence
• Long-term gains as opposed to short term profits, which are the outcome of good CSR policies
• Environmental stability and sustainability – being an important resource for companies – is ensured
• Social stability
• With globalization, the negative aspects of businesses have been intensified, and exploitation is widespread – CSR policies may work to counter this effect
• Lastly, a successful company cannot exist in a society that fails, and therefore a company being a member of the society is required to contribute

Q7.Would donations to the PMRF or others be accepted as CSR activities?

A7.Contributions to the PMRF and such funds are included in the list of the activities that may be undertaken by the companies. However a CSR committee would highly underperform if the best option they prescribe in the CSR policy is to contribute to the fund. Project based investments, and not mere donations, which involve innovative social inventions/initiatives that factor in hazards, risks and vulnerabilities. Baselines surveys, social impact assessment and meticulous evaluation including documentation along with training and re orientation of the staff will help to contribute positively to the society.

Q7.Would donations to the PMRF or others be accepted as CSR activities?

A7.Contributions to the PMRF and such funds are included in the list of the activities that may be undertaken by the companies. However a CSR committee would highly underperform if the best option they prescribe in the CSR policy is to contribute to the fund. Project based investments, and not mere donations, which involve innovative social inventions/initiatives that factor in hazards, risks and vulnerabilities. Baselines surveys, social impact assessment and meticulous evaluation including documentation along with training and re orientation of the staff will help to contribute positively to the society.

Rethinking business behavior

It is almost an impossible task to change business behavior when there is a set (and successful, if I may add) way in which we have been operating for a very very long time. Most of us are not naturally altruistic people: we think about improving the self, be it personal or organizational before we think of the larger society. The spirit of self-preservation has become a habit, ingrained into us over the years.

Abundant and inexpensive energy has enabled the world to grow sevenfold in just two hundred years. Cheap oil fuelled the Industrial Revolution and the information revolution; it provided the inputs for the Green Revolution. All of these developments helped increase standards of health and living. However, the growth in demand for energy is increasing and the world and its’ businesses are waking up to the realization, that shortages of energy and its’ resulting price increases may make it impossible for economic growth to continue.

It is also true that in the last decade or so, the world has become a different place to do business. Globalization has integrated the world and technology has bridged distances. And what we do in a small business, in a small nook, in the corner of one country has a fairly significant impact on some other part of the country or event in the globe. How an employee in one location is treated is heard faster by her counterpart in another location than her boss who might be sitting a desk away from her. Or how a cotton crop produced in a location in Thailand has impact on the sales of a garment produced with that cotton in Germany.

And because of this it becomes imperative for businesses to be seen not just as socially relevant, but also BE socially relevant and be a part of the change. It is that self-preservation that will drive businesses to bring about a change in their business models - to do social good not because it is nice to, but because they cannot survive anymore if they don't.