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The Flag Off of CSR Rules: India Inc.’s To-Do List for Compliance to Section-135

Nearly six months after the draft rules governing Corporate Social Responsibility (CSR) were released under the New Companies Act 2013, the Ministry of Corporate Affairs has issued the final rules that would apply to companies, commencing 1st April 2014.

Corporate Affairs Minister Sachin Pilot pointed out that the process of finalization of the rules included extensive consultations with all stakeholders. Putting to rest speculations and apprehensions that did the rounds in the aftermath of the draft rules, the final rules bring in greater clarity on aspects relating to the formulation of the CSR committee, the need to effectively monitor the implementation of the CSR policy and the manner of undertaking CSR activities. The Board will play a very crucial role in overseeing the implementation of the programmes. Here’s a closer look at some of the key developments that companies need to make note of-

Net Profits – As per Section 198
The calculation of net profits that determine the amount to be spent by companies under the ambit is to be done as per the requirements of Section 198 of the Act, as opposed to the concept of Profit-Before-Tax that was brought about in the interim draft rules.

Build Capacity – Take no more than 5%
The rules have created allowance for companies to make efforts to build capacities to handle CSR-related activities not only within their own organisations but also in their implementing agencies if desired. However, companies would need to ensure that the expenditure towards such activities does not exceed five percent of their total spend in that financial year.

Foreign Companies and Operations – How much to spend
Clarity has been provided for Indian subsidiaries of foreign companies on the composition of the CSR Committee and calculation of their net profits. The rules also provide insights into the determination of net profits for Indian companies with foreign operations. However, further clarity for IT-BPM companies with export income is expected to emerge over the course of time.

Expansion of Schedule VII of Companies Act – Widening the scope of impact
Schedule VII of the Companies Act enlists the key areas that the CSR interventions of companies need to align with. The final rules bring into its fold a plethora of new areas of intervention while also adding in a number of new and specific beneficiary groups. Prominent additions have been made in the areas of focus, echoing recommendations that arose in the active public commentary following the draft rules. Some of them include preventive health care, sanitation, making available safe drinking water, maintenance of ecological balance, animal welfare, conservation of natural resources, maintaining quality of soil, air and water; protection of art, heritage and culture, promotion of sports and provision of funds to technology incubators in academic institutions.

Some of the previously featured areas have been enhanced by addition of specific beneficiaries and activities. Livelihood enhancement and vocational skill-building projects for women, children, elderly and differently-abled have been added to the area of promotion of education; while setting up of old age homes, hostels, day care centers and such other facilities for women, orphans and senior citizens add to the efforts made towards gender equality and women empowerment. Notable omissions in the list include social business projects and the highly debated and open-ended aspect of “such other matters” that featured in the earlier drafts of Schedule VII.

Evidently, the Ministry has endeavored to give a clearer direction to companies on designing their CSR agenda. However, companies haven’t been prevented from opting for initiatives that may not be specifically mentioned in the list so long as the relation of their impact centers with that of the subjects in Schedule VII can be established. While such allowances and flexibilities in the legislation can usher a great deal of innovation, companies would also need to make sure that they establish the right ground rules and systems so that they are safely compliant.

To-Dos for Companies –
The rules emphasize on the need for companies to ensure that projects or programmes that feature in their CSR policy are not undertaken in pursuance of normal course of business. This is a prominent call-for-action for companies to develop frameworks that will serve to define what would qualify as ‘Business-As-Usual’ for them.

Another critical aspect of the legislation is the need for efficient and transparent monitoring mechanisms to track the flow of funds across the chain of implementation. The Act holds the Board and the CSR Committee liable and responsible for the same, making such a mechanism all the more essential.

In the next four weeks, companies would gear up to embark on the formulation and implementation of their CSR policies, the results of which need to be disclosed publicly with their Annual Reports in April 2015. More developments, clarifications and commentary on the successes and loopholes will follow as companies begin to adhere to a one-of-a-kind legislation that aims to bring smiles to the scores of underprivileged across the country.

- Prerana Manvi

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We are running a Technology Business Incubator (TBI), which is located at Shriram Institute for Industrial Research, 19-University Road, Delhi in the association of Department of Science and Technology, Govt. of India. The TBI is functioning as a technology incubation center providing services to the entrepreneurs. We can promote your business plan on prototype development & scale up along with our association through incubation programme. As we understand that you need financial support to launch your product. The mandate of the newly setup TBI is to promote, develop and multiply entrepreneurs and in turn impart substantial impact on the growth of indigenous industry. The center is acting as a major solution provider to the entrepreneurs in the domestic manufacturing segment of plastics, rubber & chemical formulations. This is a unique technology and networking resource center, functioning in northern India, equipped with state of the art facilities and supported by highly skilled professional team working in the various field of Science and Technology. The SRI-TBI offers multidimensional services to the entrepreneurs in making their ideas into business reality. State of the art plastic processing and analytical facilities available in the center will be rendered for entrepreneurship and quality up-gradation. Expertise available at the center is always ready to provide training to the staff with its focus on the growth of the industries. Besides developing the new entrepreneurs, the center also helps in sorting out existing problems of the industries and making them competitive in the market. The entrepreneurs are assisted on the aspects of resourcing of materials, plant, machinery and Technology know- how. Apart from above, technical inputs are provided to get financial support from funding institutions, approval from govt. agencies. The team of the experts available with the institutes is always ready to assist in plant inspection, site selection, machinery installation, trials and training. since, the activities is covered under Company Act for CSR the corporate house can take advantage for Tax saving by promoting MSME and startups.
Clause 135 may bring a change in India's sustainable development but unless the companies who are falling in this category also thinks on overall well being of their employees.....otherwise the mandate to spend on CSR becomes conflicting. There are lots of companies which are even listed ones does not comply to Minimum Wages Act and evade.....is the Government not aware of this ? I feel that the companies which comes under CSR mandate should also be compelled to implement SA8000

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B.V.S.Prakash
Please advise, if I am right.
B.V.S.Prakash
Solar Energy generation can be considered a part of CSR. CSR Law mentions that the spend should not be for exclusive benefit of its employees or their families. There is no mention that the CSR cannot go to benefit the company itself. If a company spends money on solar power generation for captive consumption or for selling to others also it cannot be denied the benefit. Rider is that the power generated should not be given free to their employees exclusively . It should also not be their normal business. That means solar power companies cannot expand and claim relief. Unfortunately this does not make social sense - it is like feeding yourself and your family and call it annadanam ( distributing free food)!

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Could a company falling under CSR ambit, spend part of its obligation to generate electricity through Solar energy for company's premises, factories etc? I understand that solar energy installation could fall under CSR activities under environmental sustainability criteria. Thanks!
Prerana Manvi
According to the recent Circular released by the Ministry, generate electricity through Solar energy is definitely CSR. So yes, companies can now comfortably spend part of their corpus on renewable energy.
So as per what you are saying, if we replace a major part of the energy consumption in our company to solar or biomass, the same can be considered as CSR under the new rules of the CSR legislation. We were of the understanding that we cannot bring it under CSR since we are anyway consuming energy for our own use, this will be considered as "Business run in the normal course". Please confirm and clarify.
Does the revised schedule 7 also means, companies need to revise they CSR policies (for those already have one) to comply with schedule 7? For if anyone has listed activities which do not falling under schedule 7, may be considered as violation of company law guidelines. How real is the danger??
Dear Mr.Pradeep, Thanks for reaching out. The revision in Schedule VII activities has been done with additions, combinations and some deletions. All activities specified in Schedule VII earlier have been retained in some form, except Social Business Projects and "Others". The legislation does not strictly call for companies to follow only those activities that have specifically been mentioned in Schedule VII. It allows companies to undertake CSR activities that are in the CSR Policy as recommended by the CSR committee and approved by the Board of the Company. There is no real danger as long as companies justify the reason for their selection of specific CSR activities and can show impact to a marginalized beneficiary group.

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Nishant Phadtare
1) How frequently the CSR committee should be met?? 2) Do the company have to paid sitting fees to the Directors for attending the CSR committee meeting?? 3) Whether the minutes of meeting of committee is required to prepare???
Dear Mr. Phadtare, Thanks for writing in. Below are answers to your queries: 1) There is no written rule in the legislation as to the frequency of the CSR committee meetings. 2) The legislation requires companies to have in their CSR Committee three directors, one of whom is independent. There is no written provision on the payment for the directors in the CSR committee. It would be an internal matter for companies as the CSR committee would function like any other board committee so far as the compensation goes. 3) Companies would need to disclose their performance in the CSR report that would be have to be furnished along with their Annual Reports. The CSR report would include the company's performance with respect to the targets that they had set themselves in their CSR policy. Any explanation of a possible deviation from the targets, or any restatements in the policy that may arise during committee meetings will have to be captured and specified in the report.
chandra prakash
If a company makes zero profit for avg of last three years, than what should be the fund investment for CSR? (as per policy 2% of avg net profit)
Dear Mr.Prakash. Thanks for writing to us with your query. For companies to fall under the ambit of the legislation, they are required to qualify under one or more of the below criteria: - Net worth of Rs. 500 crore or more - Turnover of Rs.1000 crore or more - Net Profit of Rs. 5 crore or more. In case a company qualifies as per the first two criteria, but with no profits, thus leading to zero avg net profits, then the company is exempted from spending the 2%. However, as the company falls under the ambit of the Act due to one of the first two criteria, it will need to constitute a CSR Committee and have a CSR policy that will explain the company's stand on the legislation.
Have a lake in our layout and also a company which is making a good profit. Can we approach the company to support us in reviving the lake under CSR. Also what about International Schools which are making huge profits. Why are they not brought under CSR.? with best wishes mamtha B.S.
Dear Ms. Mamtha, Thanks for writing to us. Schedule VII of the Companies Act includes activities such as "maintenance of ecological balance, conservation of natural resources, maintaining quality of soil, air and water". Reviving lakes can be undertaken by companies under any of the aforementioned activities listed in Schedule VII as long as the activity is undertaken in a project mode with specific targets, budgets and timelines associated with the activity. The provisions of the Act apply to all companies formed or registered under the Companies Act of 1956. Section 135 of the Companies Act 2013 also applies to all such registered company, irrespective of their sector of work. If an international school or its subsidiary is registered in India as per Companies Act 1956 and satisfies one of the criteria of Net Profits greater than Rs. 5 crore, Net worth greater than Rs. 500 crore or Turnover greater than Rs. 1000 crore, then it would fall under the ambit of mandated CSR spend.
adv sunil bhowate
we r running the school at mankhurd mumbai our ngo have fcra and 80g how to get fund for school
Dear Mr.Bhowate, Thanks for writing. Schedule VII of the Companies Act lists Promotion of Education as one of the areas that companies are encouraged to invest their CSR capital in. The Act also allows for companies to undertake their CSR initiatives through implementing agencies such as NGOs. You can reach out to companies that can invest in the school by taking up initiatives in a project-based mode, which will also help them comply with the requirements of the Act.
P.M. Rajasekharan
I am still not sure if Companies have the liberty to chose activities not specified in Schedule VII, so as to qualify the mandatory CSR spend. Could Prerana Manvi enlighten me on this in the context of the statement "However, companies haven’t been prevented from opting for initiatives that may not be specifically mentioned in the list so long as the relation of their impact centers with that of the subjects in Schedule VII can be established",? Is it an interpretation or is it explicit in the Rules?
Dear Mr.Rajasekharan, Thank you for writing to us. The statement of the article referred to by you in the above comment stems from sub-section (ii) under 2(c) of the final rules that says - "Projects or programs relating to activities undertaken by the board of directors of a company(Board) in pursuance of recommendations of the CSR Committee of the Board as per declared CSR Policy of the company subject to the condition that such policy will cover subjects enumerated in Schedule VII of the Act." While the intent of the word 'subject' may be open to discussion and interpretation, it is clear in the broader sense that so long as a company specifies activities in its CSR Policy (which is recommended by the Committee and approved by the Board) and shows connect to Schedule VII, it could still qualify as a valid CSR intervention. We will update on any clarifications that the Ministry may issue in the days to come.
Ms. Krishna Dave Padia
hello, Our is a Section 25 not-for-profit company. Does 'educating' peer Chemical companies on emerging trends, advancements and practices of 'Green Chemistry and Green Engineering', can be considered as a CSR focus for a chemical company. Under 'promoting education' and 'ensuring environmental sustainability' subjects of schedule 7. thanks, krishna
 
 
NextGen
NextGen is India's leading Sustainability and CSR Management company, working with Fortune 500 clients across 16 sectors in 6 countries. NextGen works across the value chain from strategy development to on-ground implementation to reporting and audit of CSR and Sustainability initiatives. NextGen is also working closely with Ministry of Corporate Affairs, Government of India on the CSR ecosystem development as per Section-135. NextGen was previously incubated at IIM-Bangalore and BITS-Pilani.

NextGen is a consulting affiliate of the Shared Value Initiative, a global community of practice to drive adoption and implementation of shared value strategies among leading companies, civil society, and government organizations. The Initiative is operated by FSG, a nonprofit consulting firm specializing in strategy, evaluation, and research, co-founded by Harvard Business School Professor Michael E. Porter and Mark Kramer. Today, FSG works across sectors in every region of the world—partnering with corporations, foundations, nonprofits, and governments to develop more effective solutions to the world’s most challenging issues. Learn more and join the community at sharedvalue.org.
 
 
 
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August 12, 2014 10:01 am by Bhupesh Sharma
We are running a Technology Business Incubator (TBI), which is located at Shriram Institute for Industrial Research, 19-University Road, Delhi in the association of Department of Science and Technology, Govt. of India. The TBI is functioning as a technology incubation center providing services to th...
August 11, 2014 17:56 pm by Abhijit Saha
Clause 135 may bring a change in India's sustainable development but unless the companies who are falling in this category also thinks on overall well being of their employees.....otherwise the mandate to spend on CSR becomes conflicting. There are lots of companies which are even listed ones does ...
July 26, 2014 17:38 pm by Ms. Krishna Dave Padia
hello, Our is a Section 25 not-for-profit company. Does 'educating' peer Chemical companies on emerging trends, advancements and practices of 'Green Chemistry and Green Engineering', can be considered as a CSR focus for a chemical company. Under 'promoting education' and 'ensuring environmental su...
July 24, 2014 10:06 am by Kishan
So as per what you are saying, if we replace a major part of the energy consumption in our company to solar or biomass, the same can be considered as CSR under the new rules of the CSR legislation. We were of the understanding that we cannot bring it under CSR since we are anyway consuming energy fo...
July 11, 2014 18:12 pm by D. Talks – The “Sweet Spot” of Social Impact and Business Value: CSR Lessons from Christine Bader | D. Blog
[...] three years to CSR initiatives. The new law has been called everything from “vague” to a “one-of-a-kind legislation,” raising both hopes and questions about the role of Indian corporations in charitable ventures. [...]