Monday, 8 May 2017

Ceiling on Indirect Expenses on CSR Spend - Is 5% Enough?

The CSR Policy Rules allow only 5% of total CSR outlay as overhead & administration expenses, including capacity building of CSR personnel.

It has since been debated, if 5% would be enough. Even when the Ministry of Corporate Affairs formed a High Level Committee for improved monitoring of the implementation of Corporate Social Responsibility policies by the companies under Sec 135 of the Companies Act, 2013, in 2015, that concluded this ceiling should be increased from present 5% to not more than 10%, representatives from the Department of Public Enterprises expressed their dissent on the grounds that this limit is enough if the projects are well executed.

For more insights, BridgeSpan's study revealed that indirect costs as a percentage of direct costs on the project averaged at around 40%. The study examined the cost structures of 20 nonprofit organisations, across four different segments. At those organisations, indirect costs ranged from 21 percent to 89 percent of direct costs.

More details may be found on the following link to the article published in Forbes, India.




While it is observed with most of our clients, that NGOs usually fail to meet the corporate expectation of quality reporting, MIS and communications, such a limitation on the indirect expenses may make it almost impossible for the NGOs to invest in human resources with skills and capacities that may match the coporate expectation, despite of doing excellent work on the ground.

The far reaching effects of this have also been that most of the CSR funds have been given to the bigger NGOs that are able to absorb the higher indirect costs or that have already invested earlier in such skills for its employees. The major brunt of this is borne by the smaller NGOs that despite of doing great and meaningful work on field, lack funding due to inability of preparing good quality proposals, reporting and impact assessments which are demanded by the corporates granting CSR funds.

Monday, 17 April 2017

Integrated Reporting: The New-Age Reporting for Businesses

An integrated report is a concise communication about how an organization's strategy, governance, performance and prospects lead to the creation of value over short, medium and long term. An integrated report aims to provide insight about the resources and relationships used or affected by an organization to explain how the organization interacts these resources and relationships with the external environment.

Though financial reporting has always been the most important information referred to by investors and stakeholders, it tells just a part of the story. Integrated reporting aims to give a holistic view of the organisation by putting its performance, business model and strategy in the context of its material economic, social and environmental issues.

The Concept – 

The ability of an organization to create value for itself enables financial returns to the providers of financial capital. This is interrelated with the value the organization creates for stakeholders and society at large through a wide range of activities, interactions and relationships mainly environmental and social. When these are significant to the organization’s ability to create value for itself, they are included in the integrated report.

For example, with a lot of global awareness around climate change, investors are looking at environmentally sustainable organizations and thus also evaluate investment options based on environmental factors like GHG emissions, water, energy and also social factors apart from the traditional financial and economic factors, to understand the true value of the organization in the long term. Many institutional investors and stakeholders too require the businesses to report in on both financial and non-financial topics of significance for true assessments. 


Credit: https://www.slideshare.net/baselabuali/integrated-reporting-corporate-governance-responsible-bords 


Benefit to Businesses – 

Integrated reporting benefits the businesses not just externally, but internally too. An integrated reporting exercise helps the organization understand the real risks and opportunities in both the short and long term. It establishes the dependence of financial performance on the non-financial parameters, which generally is ignored by most of the organizations leading to unpreparedness and inability or inefficiency in coping with the same. Integrated reporting helps the organization build sustainable processes, reducing costs and improving efficiency by influencing management strategy, policy and even business plans. 

Integrated Reporting helps organizations build credibility, brand loyalty and trust by enabling stakeholders understand the organization’s true value based on both the financial and non-financial parameters. It also helps mitigating, and many a times even reversing, negative ESG (environmental, social and governance) impacts. 

Integrated Reporting in the Indian Context –

As per the report on ‘India’s top companies for Sustainability and CSR 2016’, a study undertaken by IIM Udaipur, Futurescape and Economic Times, out of top 217 companies from diverse industries under study, around 130 companies had disclosed on sustainability reporting in 2014-15. On August 13, 2012, the Securities Exchange Board ofIndia (SEBI) has mandated Business Responsibility Reporting (BRR) for top 100 listed entities in their annual reports. The said reporting requirement is in line with 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business' (NVGs) notified by Ministry of Corporate Affairs, Government of India, in July 2011. 

As an extension to the above mandate, on February 6th, 2017, SEBI has prescribed Integrated Reporting to top500 listed companies by market capitalization. With a view of growing importance of integrated reporting at international forums and increasing requirement of investors for both financial and non-financial information, SEBI has asked the companies to voluntarily disclose in an integrated manner. 

However, with thousands of companies listed in India, a very little percentage does reporting on non-financial parameters. This implicates that integrated reporting as a part of the business integrated process is at a very nascent stage. However, with the growing significance of integrated reporting globally and prescription from SEBI, it is a sign for India catching up with the same. 

For details on sustainability reporting – its significance to your organization, the procedures and long term benefits, do get in touch with us.

Monday, 3 April 2017

CSR & Family Businesses

Back in the days, Corporate Social Responsibility had a more philanthropic approach for businesses that were then mainly family-run, like the Tatas & Birlas. However, CSR has always remained an integral part of these business, that have now grown to become MNCs in our days.Whether CSR has been one of reasons for their growth, needs to be carefully researched - but as an established fact, CSR increases customer loyalty and brand awareness and shareholders, for that matter the stakeholders, keep their confidence on such companies.

A joint report by Citi Private Bank and UK-based family business information provider Campden Wealth Research (http://www.asiaasset.com/news/Citi_CH_nim_DM3103.aspx) says that fast-growing, mid-sized family businesses around the world have identified corporate social responsibility (CSR) as an important element for their success. According to the report, doing good for society and the environment, and philanthropy helps consumers associate and build loyalty with brands. It also says these businesses consider CSR as a way to engage the next generation of family members.

What may actually drive CSR in family businesses is their relationship with different company stakeholders and the fact that the family itself is a stakeholder, especially when it comes to the reputation sustainability with regard to the future generations. Though there is no conclusion on whether family firms are more concerned with responsible behavior or not, their long term orientation and the set of unique values give them a special drive in this area.





Friday, 3 March 2017

Technical Presentation on CSR Law in India - Implications & Analysis

MGB empowerCSR brings to you from its resources, a technical presentation on 
'CSR Law in India  - Implications & Analysis'.

For any further clarifications on the presentation below, please feel free to get in touch with us.


video

Monday, 13 February 2017

MGB empowerCSR at the ICAI-BSE organized Workshop on CSR Law

The Institute of Chartered Accountants of India (ICAI) along with the Bombay Stock Exchange, under the aegis of Ministry of Corporate Affairs, organized a workshop on ‘Implementing CSR Law – Challenges & Opportunities’ on 10th February, 2017, at the BSE International Convention Hall, Mumbai. MGB empowerCSR was invited to take the technical session on ‘CSR Law in India – Implications & Analysis’ and also the following panel discussion on Challenges in Implementing CSR Law.


Hon. Mohit Shah, retired Chief Justice of Bombay High Court was the Chief Guest at the Workshop and other dignitaries present were Mr. M. K. Shrawat, judicial member of National Company Law Tribunal, Mr. Upasani, ex-chief Secretary of Maharashtra State and advisor in Corporate Law at the Maharashtra Board, Mr. A.K. Chaturvedi, Regional Director, Western Region, Ministry of Corporate Affairs, CA Prafulla Chajjed, Chairman of CSR Committee of ICAI and Mr. Hemant Gupta, CEO, BSE Sammann Ltd., among others.


Dignitaries at the Inauguration of the Workshop

Mr. S. P. Kumar, RoC Mumbai, addressing at the technical session
The inauguration was followed by technical session with Mr. S.P.Kumar, ROC, Mumbai, Ms. Seema Rath, Deputy Director, MCA and Ms. Devanshi Dwivedi, Lead – Corporate Social Responsibility, MGB empowerCSR. While Ms. Seema Rath from MCA explained the Ministry’s point of view and expectations from corporates, Ms. Devanshi Dwivedi from MGB empowerCSR explained the various implications of the CSR law, especially in non-compliance, accounting & taxation. She also explained the implications of CSR laws for foreign companies and PSUs.

Mrs. Devanshi Dwivedi, Lead - CSR, MGB empowerCSR, addressing the audience
The technical session was followed by a panel discussion moderated by Mr. Tarun Mopara, CSR Head, Navneet Education Ltd., with panel members MGB empowerCSR, TISS – CSR National Hub, Reliance Foundation & the Ministry of Corporate Affairs. Various discussions on what were the actual challenges in implementing the CSR Law and solutions for such challenges.

Panel Discussion
The panel discussion was followed by vote of thanks by Mr. S.P.Kumar, RoC, Mumbai which was followed by high tea & networking.


Tuesday, 24 January 2017

FAQs on Execution

Following our previous post, on FAQs on Compliance, this post presents FAQs on the execution of CSR projects in line with Sec 135 along with Schedule VII.



1.    Which activities are covered under CSR?

Schedule VII to the Companies Act, 2013 enlists the broad areas under which the Companies shall undertake their CSR activities. MCA has clarified that the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities. The projects or programs must be in line with the CSR Policy of the Company, which, in turn, has to comply with Schedule VII.

Areas broadly covered under Schedule VII:

 Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water
 Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently-abled and livelihood enhancement projects
• Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backwards groups
 Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water
   Rural development projects
  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
   Measures for the benefit of armed forces veterans, war widows and their dependents
  Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympic sports
  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, minorities and women
 Contributions or fund provided to technology incubators located within academic institutions which are approved by the Central Government
  Slum area development
  Spending on relief operations in disaster-hit areas (as per recent clarification by Central Government

2.      Which activities will not qualify under CSR?

•   Social Activities meant exclusively for employees and their families
•   Activities undertaken in pursuance of normal course of business
•   Expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.)
•   Training of enforcement personnel (Govt. officials) 
•   Capacity building of Govt. Officials and elected representatives
•   Sustainable urban development and urban public transport systems
•   Contribution directly or indirectly for any religious purpose
•   One-off events such as marathons/ awards/ charitable contribution/ advertisement/ sponsorships of TV programmes, etc.
•   Contribution directly or indirectly to any political party

3.    Many Companies have been undertaking CSR activities from past. Should such companies continue to follow that activity without seeking clarification from Ministry of Corporate Affairs?

If the activities are in line with Schedule VII of the Act, then the Companies can continue to follow what they were doing in the past and incorporate the said activity in CSR Policy.

4.  Whether the Law mandates any location preference for implementing CSR projects?

Section 135 mandates that the Company shall give preference to the local area where it operates and areas around it, for spending the amount earmarked for Corporate Social Responsibility activities.

Only CSR activities undertaken in India will be taken into consideration for the purpose of Section 135.

5.   How can a Company implement its CSR activities? Can it establish a trust to undertake CSR activities for all the Group companies?

The Company can implement its CSR activities through the following approaches:

•   Directly on its own through its employees
•  Through registered trust or registered society or non-profit company established by the company or its holding or subsidiary or associate company. No minimum experience is required for such registered trust or registered society or non-profit company
• Through other registered trust/registered society/Section 8 Company with an established track record of >= 3 years in undertaking similar programs or projects
•  Collaborate with other companies in such manner that the CSR Committees of respective companies are in a position to report separately
•  Contribution to Prime Ministers National Relief Fund or any other fund set up by Central Government for socio-economic development and relief and welfare of the Schedule castes, tribes, minorities and women
•  Contribution to technology incubators located within academic Institutions approved by Central Government (such as IIT)

6.    A company makes payment to a registered trust for carrying out CSR activities. Should the company treat payment made to the trust or actual expenditure incurred by the trust as its CSR expenditure?

As per the provisions of the Act, the CSR committee has to monitor and the Board has to ensure that Company spends 2% on CSR every year. The emphasis is on spending and not on contribution.  The intent of the Legislature seems to ensure that the Companies spend on CSR. Further, CSR rules require the CSR committee to monitor the activities of the agency.

7.     Whether the activity a company is required to do as per statutory obligation under any law, would be termed as CSR activity?

No, the activity undertaken in pursuance of any law would not be considered as CSR activity. In this regard, Ministry of Corporate Affairs Circular No. 21/2014 dated June 18, 2014 clarifies that the expenses incurred by companies for the fulfilment of any Act/ Statute of regulations (such as Labour Laws, Land Acquisition Act etc.) would not count as CSR expenditure under the Companies Act, 2013.

8.     Where CSR activities lead to profits then what about such surplus?

Rule 6(2) of the Companies (Corporate Social Responsibility Policy) Rules, 2014 provides that the CSR policy of the Company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company. This impliedly means that the surplus arising out of CSR projects or programs or activities of the company need to be spent on CSR.

Accordingly, the surplus should be added to the minimum amount of 2% to be spent on CSR.

9.     CSR provisions talk about “registered trusts”. In many states there is no trust Act or registration of trust is not mandatory, then in such case how CSR spending can be done through a registered trust?


As per clarifications issued by MCA on June 18, 2014, ‘Registered Trust’ (as referred in Rule 4(2) of the Companies CSR Rules, 2014) would include Trusts registered under Income Tax Act 1956, for those States where registration of Trust is not mandatory. As a corollary, for those States where registration of Trust is mandatory, the Trust needs to be duly registered under the laws of such State.

FAQs on Compliance


We bring to you, from our Knowledge Resource Center, FAQs on the Compliance to Sec 135 of Companies Act, 2013. Also to follow, FAQs on Execution - 


1.        Which Companies are covered under Section 135 of the Companies Act, 2013 to undertake CSR activities?

All companies fulfilling any one of the following three criteria during any of the immediately preceding three financial years (clarification issued by MCA on June 18, 2014) are required to undertake CSR activities:

(1)      Net Profit of INR 50 million or more; or
(2)      Net Worth of INR 5 billion or more; or
(3)      Turnover of INR 10 billion or more.

2.        What is the first step for a Company required to undertake CSR activities?

The Board of Directors of the Company shall constitute a Corporate Social Responsibility Committee of the Board.

3.        How many Directors should be there on the CSR Committee?

Public Company required to appoint Independent Director
Minimum 3 directors out of which minimum 1 shall be an independent director
Public Company not required to appoint Independent Director
Minimum 3 directors
Private Companies with 3 or more Directors
Minimum 3 directors
Private Company with 2 Directors
Both Directors

4.        What is the role of the Board of Directors in CSR?

·         Constitute CSR committee
·         Approve the CSR Policy
·         Ensure implementation of the activities
·         Ensure that the company spends, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in India in pursuance of its CSR Policy.
·         Specify reasons for not spending such amount, if such amount not spent
·         Disclose CSR policy, composition of CSR Committee and Annual Report on CSR in the Directors’ Report and publish it on the Company’s website

5.        What is the role of the CSR Committee?

·         Formulate and recommend a CSR policy to the Board indicating the activities as specified in Schedule VII of the Companies Act, 2013
·         Recommend the amount of expenditure to be incurred on the activities indicated in the policy
·         Monitor the CSR policy regularly
·         Institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken
·         Issue a responsibility statement every year that implementation and monitoring is in compliance with CSR objectives and Policy

6.        For compliance under Section 135 i.e. Corporate Social Responsibility, from which financial Year CSR expenditure and reporting begins?

Every company which meets the threshold financial criteria is required to comply with CSR requirements with effect from April 1, 2014. Companies have to spend the amount on CSR activities as required by section 135 starting from FY 2014-15.

7.        How much money should be spent by the Companies on CSR activities?

The company is required to spend, in every financial year, at least 2% of the average net profits made during the three immediately preceding financial years, in India in pursuance of its CSR Policy.

8.        While calculating Net Profit as per the Companies Act, 2013, for Section 135, what about the Net Profit calculated as per the Companies Act, 1956 for any of the immediately three preceding financial years?

It has been clarified in the rules that Net Profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956 shall not be required to be re-calculated in accordance with the provisions of the Companies Act, 2013.

9.        What should be the contents of CSR Policy?

CSR Policy of the Company shall contain the following:
·         List of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII
·         Modalities of execution of such project or programs
·         Implementation schedules for the same
·         Mechanism for monitoring process of such projects or programs
·         Statement that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit.

10.    What should be the content of Annual Report on CSR to form part of the Directors’ Report?

•   Brief outline of the CSR policy including overview of projects with a reference to the web-link to the CSR policy and projects
•   Composition of the CSR Committee
•   Average net profit of the company for last three financial years
•   Prescribed CSR expenditure (2% of Average net profit as above)
•   Total amount to be spent for the financial year
•   Amount unspent, if any
•   Activity-wise details of the amount spent during the financial year (Sector / Location / Budget / Direct expenditure / Overheads / Cumulative expenditure / Breakup of amount spent directly and through implementation agency)
•   If the prescribed CSR expenditure is not fully spent, reasons thereof
•   Responsibility statement of the CSR Committee that the implementation and monitoring is in compliance with CSR objectives and Policy

This Annual Report shall be signed by Chairman of CSR Committee and CEO / MD / Director.

11.    What is the time limit for CSR spending and reporting?

As per Section 135(5), the Board shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR policy in India. This implies that the Companies which meet the threshold financial criteria under Section 135 would be required to spend at least 2% in the financial year 2014-15 i.e. up to March 31, 2015. Further, the reporting has to be done by the Board in its Report for the financial year 2014-15.

12.    Are there any penal provisions in case a Company does not spend the required amount in CSR activities in any financial year?
      
The provisions are currently based on “Apply or Explain” principle. Even if the Company, meeting the financial threshold criteria, is not able to spend the required amount or not required to spend due to negative average net profit, it is still required to follow all disclosure requirements.

If the Committee or Board fails in its duties, the Company is punishable with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 25,00,000 and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5,00,000, or with both.

13.    Whether CSR expenditure done by Foreign Holding Company will constitute as CSR expenditure for Indian Subsidiary Company assuming that Indian Subsidiary is required to comply with CSR provisions?

As per clarifications issued by MCA on June 18, 2014, expenditure incurred by Foreign Holding Company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to spend as per Section 135. However the reporting and compliance of CSR provisions has to be done by the Indian Subsidiary.

14.    If the Company fulfils turnover criteria but the Company is incurring loss since last 5 years?

The provisions of Section 135 will still be applicable. However, the 2% of the average net profit in the instant case will be negative, and hence the Company is not required to spend any amount on CSR in the current year.

15.    Whether a PE of a foreign company or a foreign company doing business through its agents and paying taxes in India for income accrued/received in India would be considered as a foreign company for the purpose of CSR?

As per Section 2(42) of Companies Act, 2013, a foreign company means any company or body corporate  incorporated outside India which has a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

Neither Section 135 nor sections 379 to 393 dealing with foreign companies nor the Foreign Companies Rules refer to applicability of the CSR requirements to foreign companies.

However, in terms of Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2013, a foreign company having its office or project office in India which fulfils the criteria specified in Section 135(1) is required to comply with the provisions of Section 135 of the Act and the rules there-under. Therefore, foreign company having its branch office or project office in India which fulfils the criteria specified under Section 135(1) is required to comply with the provisions of Section 135.

The net worth, turnover or net profit of a foreign company is to be computed in accordance with the balance sheet and profit and loss account of the foreign company prepared with respect to its Indian business operations in accordance with Schedule III or as near thereto as may be possible for each financial year.

CSR Committee of such foreign company will comprise of at least two persons of which one person shall be as specified under clause (d) of sub-section (1) of section 380 of the Act (AR) and another person shall be nominated by the foreign company. It is to be noted that these individuals need not be Directors of the foreign company.

The Annual Report on CSR needs to be signed by AR. The Balance Sheet filed under Section 381(1)(b) shall contain an Annexure regarding report on CSR.

16.    When CSR provisions cease to be applicable to a Company?


A Company which ceases to be covered under the threshold criteria (net profit/ turnover/ net worth) for 3 consecutive financial years shall not be required to comply with CSR provisions till such time it meets the threshold criteria.