NOTE: THIS PAGE HAS BEEN REVISED TO REFLECT THE FINAL RULES AS PUBLISHED ON 27 FEBRUARY 2014, AND INCLUDED AMENDMENTS MADE TO THE RULES ON 31 MARCH 2014, 6 AUGUST 2014, 24 OCTOBER 2014.
On 8th August 2013 the proposed new Companies Bill, 2012 was passed by Rajya Sabha. This became the new Companies Act, 2013 - it replaces the Companies Act, 1956, which has governed Indian business for over 50 years.
The new Act contains an important clause (Clause 135) that mandates CSR regulations for Indian companies. After a conultation of the draft rules, the final rules were notified on 27th Feburuary 2014, coming into force on 1st April 2014.
Below is our one-stop guide to the clause, the rules surrounding it, and how these rules affect your business.
If your company would like a consultation session on the new rules please contact us: firstname.lastname@example.org
HOW IT AFFECTS YOU:
1 / which companies are included
Only companies of a certain size are included in Clause 135...
The rules define the companies affected as those having net worth of Rs 500 crore or more; or annual turnover of Rs 1000 crore or more; or annual net profit of Rs 5 crore or more (net profit before tax, not include profits arising from branches outside India).
2 / what you have to do
There are four major directives your company will have to comply with:
1. Create a “CSR Committee”, made up of three or more Directors, one of whom must be an independent director.
2. Allocate at least two percent of net profits* to implementing CSR activities.
3. Create a “Corporate Social Responsibility Policy” that details which activities will be undertaken by the company, and what budget will be spent on them. This should be published on the company’s website.
4. At the end of each year, the details of all CSR initiatives undertaken by the company must be reported in the Directors’ Report and on the company website.
*(The two percent CSR spending needs to be computed as two percent of the average net profits made by the company during every block of three years. For the purpose of the first CSR reporting, the net profit should be calculated as average of the annual net profit of the preceding three financial years ending on or before 31 March 2014.)
3 / what the money can be spent on
Below are the ten areas exactly as worded in Schedule VII:
i) Eradicating hunger, poverty and malnutrition, promoting preventative health care and sanitation(including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation) and making available safe drinking water;
ii) promoting education including special education and employment enhancing vocation skills especially among children, women, elderly, and the 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 other such facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
iv) ensuring environmental sustainability, ecological balance, protections of flora and fauna, animal welfare, agroforestry, conversation of natural resources and maintaining quality of soil, air and water (including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga).
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
vii) training to promote rural sports, regionally recognised sports, Paralympics sports
viii) contribution to the Prime Minister’s 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, minorites and women;
ix) contributions or funds provided by technology incubators located within academic institutions which are approved by the Central Government;
x) rural development projects;
xi) [added 06/08/14] slum area development - where the term ‘slum area’ shall mean any area declared as such by the Central Government or any State Government or any other competent authority under any law for the time being in force.”
4 / creating your CSR policy
The rules of the new Act have some guidance on what the policy should and shouldn’t include:
* The policy should specify the projects and programmes that are to be undertaken.
* It should include a list of CSR projects/programmes which the company plans to undertake during the implementation year, specifying modalities of execution and an implementation schedule for each.
* In specifying the CSR projects/programems, the policy should “give preference” to the local areas around it and where it operates.
* The CSR projects/programmes may focus on integrating business models with social and environmental priorities and processes in order to create shared value.
* It should be clear that any financial surplus arising out of CSR activity will not be part of business profits of a company.
* The Committee should prepare a transparent monitoring mechanism for ensuring implementation of the projects/programmes proposed in its policy.
5 / foundations, trusts, and collaborations
If a company has already set up a Trust or Section 8 Company, or Society or Foundation, to implement its CSR activities, the company would have to specify the exact projects and programmes to be implemented by the organisation as per the company’s CSR policy. In addition the company would have to set up a monitoring system to ensure that its two percent contribution (under Clause 135) was spent for this purpose only.
A company may also funnel its CSR spending through a Foundation, Trust or Section 8 company that is not set up by the company itself. However, this is acceptable only if the organisation has a track record of more than three years in implementing activities in the specified areas, and if the company has a monitoring system in place to ensure the funds were spent as per the activities set out in its CSR policy.
Companies may collaborate or pool resources with other companies to undertake CSR activities, within the areas specified in their CSR policy. Any expenditure incurred on such collaborative efforts would qualify for computing CSR spending for the year.
6 / capacity building
CSR funds can also be spent on capacity building for both the CSR team inside your company, and for management at beneficiary organisation. This means you can use your spend to train your own staff to think strtegically about how and where the money is being spent, as well as how to effectively manage NGOs and other organisations, to communicate stories, and write useful reports.
You can also spend it on training the NGO or organisation you are supporting. Our recommendation is that a small investment training them in manageing money effectively, measuring impact, reporting effectively, and doing all this in a professional manner, will save your company a considerable amount of time, money and probably frustration in the long term.
There are two provisions to this rule:
a// the amount spent on this cannot make up more than 5% of the overall CSR spend for the year
b// the organisation providing the capacity-building training must have a track record of more than three years in implementing such training
7 / employee benefits
The Rules specify that CSR initiatives exclude any activities undertaken in pursuance of the normal course of business of a company. So even though point (vii) above references “employment enhancing vocational skills”, this does not extend to vocational training undertaken in your company as part of your normal HR operations.
The rules state further that activities or programmes that are solely for the benefit of your employees and their families will not be considered part of the CSR spending. Our interpretation of this is that it's acceptable for your employees and their families to benefit from any projects/programmes set up for the broader community, assuming they are in the target social demographic of the programme.
8 / important links
The full Companies Act 2013 can be found here, skip to page 80 to find Clause 135 on CSR: http://egazette.nic.in/WriteReadData/2013/E_27_2013_425.pdf
And don't forget you can contact us for advice or a consultation session any time.