Corporate Social Responsibility

CSR is different from charity or philanthropy. Charity is for vulnerable sections but CSR is
broader, it is giving back to society. It is a management concept whereby the stakeholders (the
society) are taken care of and the benefits of the company are distributed among the stakeholders.

CSR also improves the brand value and the good will of the company. Consumers are more
attracted to companies which give back to society and it improves relations with local community
around the company. It makes business sense to give back to the community they work in, the
labour and the human capital is derived from the community, the community also increases
consumption of the company and increases its revenue, thus CSR should also be seen as an
investment in a community.

CSR also takes into account the interests of the shareholders where the company is being run in
the interest of the public which invests in the company. Charity or philanthropy is smaller
concentric circle within CSR, Sustainable development is the larger circle of which CSR is a part
of.

Under Section 135 of the Companies Act, a legal duty has been imposed for CSR to be done
with 2% of the net profits of the companies. It makes sense to mandate CSR for certain types of
companies as it can hamper the company’s growth. Thus company having net worth of rupees
five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of
rupees five crore should conduct CSR as per the Act. The legal implication is not part of the
stakeholder approach as it is enforced on the company.

The triple bottom line approach : A company should not only look at its economic performance,
it must also focus on 3 different elements or targets which it needs to meet:

1. Environment / Planet

2. Society / People

3. Economic performance / Profits

Schedule VII of the Companies Act, 2013 recognizes the different types of CSR works which
includes the environmental and society beneficial works.
However working for benefit of the workers and employees will not be considered CSR.

In 2009, MCA had established the voluntary CSR guidelines which was adopted by some of the
large companies. However it was found that most companies did not spend more than 2% of the
profits for CSR activities.

The CSR Committee needs to be mandatorily established in the specified companies but Section
135(5) proviso states that if 2% is not spent, then the reasons should be recorded.

Net profit calculated in Rule 2(d) of the CSR Rules.

2(f) CSR rules states that calculation of net profit does not include profits of subsidiaries abroad
nor the dividends from other companies already paying CSR. If the company in which this
company holds shares is spending CSR, then the dividends derived from it shall not be included.

The CSR Committee must have 3 or more directors, at least one director should be an
independent director. It formulates the CSR policy approved by the BOD and its implementation
is overseen by the CSR Committee. BOD finally makes the decision whether to spend the 2% or
not.

The CSR policy has to be attached to the AGM and made available on the website of the
company.

Some feel by placing the legal duty of CSR, it is another taxation.

MCA in 2014 said the Schedule VII works must be seen in a broad manner.

CSR cannot be a onetime affair eg- Organize one event for vulnerable sections. CSR must be an
investment or a continuing programme, something which lasts for a few years.

Rule 4 (1) of the CSR Rules – CSR expenditure must be part of projects not a one off activity.

The CSR must be spent in India, it cannot be spent abroad.

Any surplus arising out of CSR activities should be invested in CSR and will not be included the
2% figure.

CSR cannot be used for political parties. There should be no political connection.
CSR of private companies is scrutinized by MCA, SEBI can check for public companies

There are 4 main ways in which CSR activities can be conducted: specified in Rule 4;

Read the write up by PWC.

1. The company can engage in CSR on its own, with a department of its own and run the CSR
activities. Large companies can have their own CSR departments.

2. The company can set up a trust or a Section 8 company (Non Profit) and route CSR through it
for expenses.

3. It can hire an independent registered NGO and run the CSR activities. However there are
certain specific categories of NGOS, only NGOs which have been running for 3 years. MCA has
also provided a list of NGOs, recommended to approach them.

The company must maintain communication with an NGO and provide specific projects which
the NGO must implement. The company does not end its responsibility by giving money to
NGOs.

Several companies can work together to draft a common CSR policy.