Companies Act 2013 and Corporate Social Responsibility

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This is a presentation at CSIM on Companies Act 2013 and CSR. The presentation is from the perspective of NGOs.

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  • The NCLT provides complete coverage of the Companies Act 2013, Companies Act 1956 and related rules, notifications, circulars, orders, forms etc and get information about Accounting Standards and Intangible Assets, Earnings Per Share, contingent liabilities and more by log on to NCLT. Visit : http://www.nclt.in
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  • Will the cost of Communication that is essential to the activity also be considered as part of the CSR. eg If Advertising is done to invite Teachers to participate in teaching street kids, will the cost of Media communications that is required to recruit a 1000 Teachers to implement also be CSR ?
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  • dear 2% of 200 crores shall be rs 4 crores and not rs 4 lacs. rest appears to be correct
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  • Respected Sir,

    It was nice presentation and informative. but one question i want to ask you that is, how we calculate the average net profit of company for last three years. because if any year loss incurred then it may deduct the loss amount or not, plz reply
    1st year Rs. 700 Cr. Profit
    2nd year Rs. 400 Cr. Loss
    3rd year Rs. 300 Cr. Profit
    700-400+300= 600
    600/3 = 200 Cr.
    2%@200 Cr. = 4 Lakhs for CSR
    Is it right or wrong?
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Companies Act 2013 and Corporate Social Responsibility

  1. 1. Companies Act 2013 and CSR Opportunity or Quibble? Dr.K.Prabhakar, Professor, SRM University 1 Centre for Social Initiatives and Management 1/11/2014
  2. 2. Some Questions  What kind of economic growth is needed for the 2 country -Developmental Growth or Welfare Based Growth?  66.33% of Profits is given for philanthropic activities by an organization. Is it possible to rate the organization as most CSR sensitive organization?  Why legislation when companies in India are already doing a lot for education (Wipro; Reddy Labs; Tata), Vedanta (Girl Child )?  Legislation is good or dysfunctional as companies may try to quibble rather than to meet the sprit of Centre for Social Initiatives and Management 1/11/2014 law.
  3. 3. Opportunity- the first legislation in the world  The new Companies Act 2013, which lays down that 2% of profits earned by a certain class of companies must be spent on corporate social responsibility activities, would mean an estimated Rs. 27,000 crore (estimates) will flow into grassroots development and social enterprise sectors every year.  According to the Indian Institute of Corporate Affairs, of the 1.3 million companies in India, about 6,000-7,000 companies are covered under the new CSR rule. 3 Centre for Social Initiatives and Management 1/11/2014
  4. 4. Development Growth vs. Welfare Based Growth  India is a country of myriad contradictions. On the one hand, it has grown to be one of the largest economies in the world, and an increasingly important player in the emerging global order, on the other hand, it is still home to the largest number of people living in absolute poverty (even if the proportion of poor people has decreased (?) and the largest number of undernourished children. What emerges is a picture of uneven distribution of the benefits of growth which many believe, is the root cause of social unrest. Ref: Handbook on Corporate Social Responsibility in India (www.pwc.in) Question marks introduced by author 4 Centre for Social Initiatives and Management 1/11/2014
  5. 5. Definitions and Operationalization CSR is “the responsibility of enterprises for their impacts on society”. To completely meet their social responsibility, enterprises “should have in place a process to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders” . 5 Ref: (http://ec.europa.eu/enterprise/policies/sustainableCentre for Social Initiatives and Management 1/11/2014 business/corporate-social-responsibility/index_
  6. 6. Definitions… 6 “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (Triple-Bottom-Line Approach), while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Ref: (http://www.unido.org/en/what-wedo/trade/csr/what-is-csr.html) Centre for Social Initiatives and Management 1/11/2014
  7. 7. CSR in Indian Context  CSR in India has traditionally been seen as a 7 philanthropic activity. And in keeping with the Indian tradition, it was an activity that was performed but not deliberated. As a result, there is limited documentation on specific activities related to this concept. However, what was clearly evident that much of this had a national character encapsulated within it, whether it was endowing institutions to actively participating in India‟s freedom movement, and embedded in the idea of trusteeship. Ref: Handbook on Corporate Social Responsibility in India (www.pwc.in) Centre for Social Initiatives and Management 1/11/2014
  8. 8. Philosophy of Business and Charity  As water collected in a tank gets pure by filtration, so accumulated wealth is preserved by being employed in charity- CHANAKYA, Vridda-Chanakya 8 Centre for Social Initiatives and Management 1/11/2014
  9. 9. CSR in Indian Context  Sustainability (corporate sustainability) is derived 9 from the concept of sustainable development.  “ Sustainable development is meeting the needs of the present without compromising the ability of future generations to meet their own needs” Brundtland Commission.  Corporate sustainability essentially refers to the role that companies can play in meeting the agenda of sustainable development and entails a balanced approach to economic progress, social progress and environmental stewardship. For a discerning reader: History of CSR in India Centre for Social Initiatives and Management 1/11/2014 (http://soulace.in/blog/)
  10. 10. The Missing Link  CSR in India tends to focus on what is done with 10 profits after they are made.  Sustainability is about factoring the social and environmental impacts of conducting business, that is, how profits are made.  Hence, much of the Indian practice of CSR is an important component of sustainability or responsible business, which is a larger idea, a fact that is evident from various sustainability frameworks. National Voluntary Guidelines for social, environmental and economic responsibilities of business (issued by the Ministry of Corporate Affairs in June 2011) principle eight relating to inclusive development encompasses Centre for Social the aspects covered by the CSR clause of the 1/11/2014 most of Initiatives and Management
  11. 11. Context “The Companies Act, 2013 aims to improve corporate governance by simplifying regulations, enhance the interests of minority investors and for the first time legislates the role of whistle-blowers. The new law will replace Companies Act, 1956”. “ The corporate regulations are made contemporary and made as a model for other economies with similar characteristics. It is a rule based legislation with more than 180 sections prescribing rules. CSR which was voluntary is legislated for the first time”. 11 Centre for Social Initiatives and Management 1/11/2014
  12. 12. Principles VS Rule Based Legislations  Principles-based legislation focuses on accountability and outcomes (for example, service delivery, financial statements and annual reports). This approach provides senior management with greater flexibility to determine the processes and functions to be used in the delivery of an agency‟s objectives and services.  Rules-based legislation contains detailed legislative requirements demanding agency compliance and tends to be detailed in content, complex in interpretation, and prescriptive in application. It attempts to address the current social, economic and legal environment in which the legislation has been framed, and results in the legislation requiring constant revision as these factors change. 12 Ref:(http://www.treasury.qld.gov.au/office/knowledge/docs/fina Centre for Social Initiatives and Management ncial-accountability-handbook/1-3-principles-based- 1/11/2014
  13. 13. 13 Centre for Social Initiatives and Management 1/11/2014
  14. 14. CSR Legislation-Quibble?  In terms of fiction, a quibble is a plot device, used to fulfill the exact verbal conditions of an agreement in order to avoid the intended meaning. Typically quibbles are used in legal bargains and, in fantasy, magically enforced ones.  In one of the best known examples, William Shakespeare used a quibble in The Merchant of Venice. Portia saves Antonio in a court of law by pointing out that the agreement called for a pound of flesh, but no blood, and therefore Shylock can collect only if he sheds no blood. (Wikipedia) 14 Centre for Social Initiatives and Management 1/11/2014
  15. 15. Initiatives of State  PM‟s Ten Point Social Charter  Voluntary Guidelines on CSR, 2009  From the year 2010-11, the Department of Public 15 Enterprises, India has substantially incentivised Sustainable Development & CSR for Public Sector Enterprises (PSEs);  National Voluntary Guidelines on Social, Environmental and Economic Responsibilities 2011 (NVGs: the revised, elaborated version of 2009 CSR Guidelines )  Planning Commission and Task Force on Business Centre for Social Initiatives and Management 1/11/2014 Regulation
  16. 16. UN Global Compact  Human Rights  Principle 1: Businesses should support and respect the protection of       internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses. Labour Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in respect of employment and occupation.  Environment  Principle 7: Businesses should support a precautionary approach to 16 environmental challenges;  Principle 8: undertake initiatives to promote greater environmental responsibility; and  Principle 9: encourage the development and diffusion of environmentally friendly technologies.  Anti-Corruption  Principle 10: Businesses should work against corruption in all its forms, including Centre for Social Initiatives and Management 1/11/2014 extortion and bribery.
  17. 17. Principles of NVG  Principle 1: Ethics, Transparency and Accountability  Principle 2: Providing Goods and Services that are        17 Sustainable over entire Life Cycle Principle 3: Well-being of Employees Principle 4: Being Responsive towards Stakeholders, especially the disadvantaged Principle 5: Respecting and Promoting Human Rights Principle 6: Protecting and Restoring the Environment Principle 7: Responsible Policy Advocacy that enhances Public Good Principle 8: Supporting Inclusive Growth and Development Principle 9: Providing Value to Customers responsibly Centre for Social Initiatives and Management 1/11/2014
  18. 18. Application and Constitution of Committee (Sec 135 of the Companies Act 2013) Every company - net worth of Rs 500 crore or more, or - turnover of Rs 1000 crore or more ,or - net profit of Rs 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board.  The committee would comprise of three or more directors, out of which at least one director shall be an independent director .  The Board of every company referred to above shall after taking into account the recommendations made by CSR Committee. 18 Centre for Social Initiatives and Management 1/11/2014
  19. 19. mandate of the said CSR committee  To formulate and recommend to the Board, a Corporate Social 19 Responsibility Policy, which shall indicate the activities to be undertaken by the company as specified in Schedule VII;  To recommend the amount of expenditure to be incurred on the activities  To monitor the Corporate Social Responsibility Policy of the company from time to time  To 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, and  To ensure that the activities as are included in CSR Policy of the company are undertaken by the company, and - ensure that the company spends, in every financial year, at least two per cent of the average net profits  • If the Company fails to spend such amount, the Board shall, in its report specify the reasons for not spending the amount.  “Average net profit” shall be calculated in accordance with the provisions of section 198 of the 2013 Act. It is profit before tax and not including profits made outside country. Centre for Social Initiatives and Management 1/11/2014
  20. 20. Schedule VII- An inclusive definition 20 CSR activities to include: 1. Eradicating extreme hunger and poverty; Promotion of education; Promoting gender equality and empowering women; Reducing child mortality and improving maternal health; Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; Ensuring environmental sustainability ;Employment enhancing vocational skills ;Social business projects. 2. 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 - such other matters as may be prescribed. Centre for Social Initiatives and Management 1/11/2014 3. The 2013 Act provides that the company shall give
  21. 21. Draft CSR rules  • „Net Profit‟ for the section 135 and these rules shall mean, net profit before tax as per books of accounts and shall not include profits arising from branches outside India.  • Reporting will be done on an annual basis commencing from FY 2014-15  • Tax treatment of CSR spend will be in accordance with the IT Act as may be notified by the Central Board of Direct Taxes (CBDT)  • CSR activities may generally be conducted as projects or programmes (either new or ongoing) excluding activities undertaken in pursuance of the normal course of business of a company 21 Centre for Social Initiatives and Management 1/11/2014
  22. 22. What CSR Committee Should do?  • The CSR Committee shall prepare the CSR Policy of the     22 company which shall include the following: Specify the projects and programmes to be undertaken Prepare a list of CSR projects/programmes which a company plans to undertake during the implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same CSR projects/programmes of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value surplus arising out of the CSR activity will not be part of business profits of a company and should be credited to CSR initiative. Would specify that the corpus would include 2 percent of the average net profits, any income arising there from, and surplus arising out of CSR activities need to be credited to CSR Corpus. Centre for Social Initiatives and Management 1/11/2014
  23. 23. …  Where a company has been set up with a charitable objective or is a Trust/Society/Foundation/any other form of entity operating within India to facilitate implementation of its CSR activities, the following shall apply:  Contributing company would need to specify the projects/ programs to be undertaken by such an organization, for utilizing funds provided by it;  Contributing company shall establish a monitoring mechanism to ensure that the allocation is spent for the intended purpose only 23 Centre for Social Initiatives and Management 1/11/2014
  24. 24. How Organizations make decisions and NGO‟s Suggested Plan 24 Centre for Social Initiatives and Management 1/11/2014
  25. 25. 25 Centre for Social Initiatives and Management 1/11/2014
  26. 26. 26 Centre for Social Initiatives and Management 1/11/2014
  27. 27. 27 Centre for Social Initiatives and Management 1/11/2014
  28. 28. 28 Centre for Social Initiatives and Management 1/11/2014
  29. 29. Clarifications already given  Surplus arising out of CSR activities will have to be reinvested 29 into CSR initiatives or corpus, and this will be over and above the 2% figure.  The company can implement its CSR activities through the following methods:  Through its own non-profit foundation set- up so as to facilitate this initiative  Through independently registered non-profit organizations that have a record of at least three years in similar such related activities  Collaborating or pooling their resources with other companies  Only CSR activities undertaken in India will be taken into consideration  Activities meant exclusively for employees and their families will not qualify  A format for the board report on CSR has been provided which includes amongst others, activity-wise , reasons for spends under 2% of the average net profits of the previous three years and Social Initiatives and statement Centre fora responsibility Management that the CSR policy, 1/11/2014 implementation and monitoring process is in compliance with the
  30. 30. Clarity is needed and some thoughts  There is a debate as to whether any penal consequences will emanate on failure to spend, or an explanation in the directors‟ report. "serious offence“ says Sachin Pilot.  There may be reluctance in compliance for loss making companies.  It is not clear what all constitutes CSR activities as the list specified under Schedule VII of the Act seems is an inclusive list and not exhaustive. It is narrow. But it cannot be so broad for practical reasons. 30 Centre for Social Initiatives and Management 1/11/2014
  31. 31. Business responsibility reporting  The other reporting requirement mandated by the government of India, including CSR is by the SEBI which issued a circular on 13 August 2012 mandating the top 100 listed companies to report their Environmental, Social and Governance initiatives.  These are to be reported in the form of a BRR as a part of the annual report.  Business responsibility reporting is in line with the NVG published by the Ministry of Corporate Affairs in July 2011. Provisions have also been made in the listing agreement to incorporate the submission of BRR by the relevant companies.  The listing agreement also provides the format of the BRR. The BRR requires companies to report their performance on the nine NVG principles. Other listed companies have also been encouraged by SEBI to voluntarily disclose information on their ESG performance in the BRR format. 31 Centre for Social Initiatives and Management 1/11/2014
  32. 32. References Comments and Information http://www.safrg.org/uploads/getready4csr.pdf http://the4thwheel.com/Blog/companiesbill2011/ http://www.indiacsr.in/en/  Research on NGOshttp://www.indiacsr.in/en/ Perception (http://samhita.org/voices-from-the-field-social-sectors-feedback-andpreparedness-on-section-135/)  Sanjay Kumar Sharma(2013),A 360 degree analysis of Corporate Social Responsibility (CSR) Mandate of the New Companies Act, 2013  National Voluntary Guidelines on SEE Responsibilities of Business (http://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011 _12jul2011.pdf )  Global Compact http://www.unglobalcompact.org/  SEBI Guidelines for BRR (http://www.sebi.gov.in/cms/sebi_data/attachdocs/1344915990072.pdf) 32 Centre for Social Initiatives and Management 1/11/2014

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