Regulatory framework final

REGULATORY AND POLICY FRAMEWORK

REGULATORY & POLICY FRAMEWORK
CONTENTS
• PROVISIONS OF THE COMPANIES ACT 2013
• SEBI’s GUIDELINES
• PSU’s GUIDELINES
• UN GLOBAL COMPACT
• INTERNATIONAL STANDARDS

• PROVISIONS OF THE COMPANIES ACT 2013 AND
SECTION 135
• RULES IN RESPECT OF THE ABOVE ACT
• CLARIFICATIONS ISSUED BY THE MINSTRY OF
CORPORATE AFFAIRS , GoI

 They will promote and facilitate the efforts
of corporates to reach out to
poor/marginalized/deprived sections of
the community through responsible, capable
and credible implementing agencies;
 They are expected to foster collaboration
and synergy among corporates to make a
significant impact on our development-centric
agenda;
 They will facilitate a movement from cheque
book charity/philanthropy to strategic
CSR.
CSR PROVISIONS AS FACILITATORS
4

MILESTONES IN CSR
6
1 Apr
2010
18
Dec
2012
08
Aug
2013
30
Aug
2013
27
Feb
2014
• Companies
Bill 2013
approved by
Lok Sabha
• DPE
Guidelines
on CSR
• Companies
Bill 2013
approved by
the Rajya
Sabha
• Gazette
Notification
of the New
Companies
Act 2013
• Rules on
section 135
Notified on
MCA’S
website

HIGHLIGHTS
OF THE
LEGISLATION
(Section135)
7

QUALIFYING CRITERIA
 Section 135, sub-section 1 of the Companies Act,
2013 provides the qualifying criteria;
 Every company having
i. net worth of rupees five hundred crore or more,
ii. or turnover of rupees one thousand crore or
more,
iii. or a net profit of rupees five crore or more
during any financial year is mandated to constitute a
Corporate Social Responsibility Committee of the Board.
Any financial year refers to any of the three preceding
financial years.
8

COMPOSITION OF CSR COMMITTEE
A Corporate Social Responsibility Committee of
the Board consists of three or more directors,
out of which at least one director shall be an
independent director.
An unlisted public company or a private
company covered under Section 135(1) of the
Act, which is not required to appoint an
independent director, shall have its CSR
Committee without such director .
8 9

COMPOSITION OF CSR COMMITTEE
(CONT’D)
A private company with two directors on
Board should constitute its CSR Committee
with only two directors;
The CSR Committee shall institute a
transparent monitoring mechanism for
implementation of the CSR projects or
programs or activities undertaken by the
company.
10

CSR Committee
Three or more directors with at
least one independent
Formulate and recommend a
CSR policy to the board
Recommend activities and the
amount of expenditure to be
incurred
Monitor the CSR policy
ROLE OF THE CSR COMMITTEE
11

 The Board’s report shall disclose the
composition of the Corporate Social
Responsibility Committee;
 Amount to be spent - at least two per cent
of the average net profits of the company made
during the three immediately preceding FYs;
 For CSR activities company shall give
preference to the local area/areas around where
it operates.
12

Role of the Board
Form a CSR Committee
Approve the CSR Policy, disclose its
contents in the Board’s Report and
place it on the company's website
Ensure Implementation of CSR
activities
Ensure 2% spend
Disclose reasons for not spending
under clause (o) of sub - section (3)
of Section 134 13

Sub Section (8) of Section 134
If a company contravenes the provisions of this
section clause (o of sub - section (3) of Section 134)
,the company shall be punishable with fine which
shall not be less than fifty thousand rupees but which
may extend to twenty-five lakh rupees and every
officer of the company who is in default shall be
punishable with imprisonment for a term which may
extend to three years or with fine which shall not be
less than fifty thousand rupees but which may extend
to five lakh rupees, or with both.
PENALIZATION PROVISIONS for COMPANIES
14

Schedule VII – CSR THEMATIC AREAS
1. Eradicating hunger,
poverty and malnutrition,
promoting health care,
sanitation & safe drinking
water
2. Promotion of
education, special
education and
vocational skills
3. Gender Equality,
Women
empowerment ,
senior citizens and
economically
backward groups
4.
Protection
of National
Heritage,
art and
culture
5.
Benefits to
armed
forces
veterans,
war
widows 15

Schedule VII – CSR THEMATIC AREAS…
6. Ensuring
environmental
sustainability,
ecological
balance, wildlife &
natural resources
conservation
7.
Technology
incubators
within
academic
institutions
8. Rural
sports,
Paralympic
and Olympic
sports
9. PM National Relief Fund and
any other funds setup by the
Central Govt. for socio economic
development & welfare of
SC/ST/OBC
10. Rural
Development
projects
16

SIGNIFICANT
ASPECTS
OF THE
RULES
17

 Provisions apply to every Indian
company including its holding company
or subsidiary company;
 Surplus arising out of the CSR Projects
or programs or activities shall not form
part of the business profit of a company;
 CSR projects or programs or activities
undertaken in India only shall amount to
CSR Expenditure.
18
RULES EFFCETIVE FROM 1st APRIL’2014

 Section 135 applies to foreign companies having
their branches or project offices in India;
 Net profit of such companies shall be determined
as per the profit and loss account prepared under
section 381(1)(a) read with section 198 of the
Companies Act, 2013;
 CSR Committees of such companies shall
comprise of at least two persons of which one
shall be as specified under clause (d) of sub-
section (1) of section 380 of the Act and another
person to be nominated by the foreign company.
PROVISIONS for FOREIGN COMPANIES
19

 The policy shall include a list of CSR projects
or programs which a company plans to
undertake falling within the purview of the
Schedule VII of the Act, specifying modalities
of execution of such projects or programs and
implementation schedules for the same;
 It will also elaborate the Monitoring process
for such projects or programs.
CSR POLICY
20

CONTENTS OF CSR POLICY OF A
COMPANY
The CSR Policy of a company would include,
among others, the following:
Company’s vision about CSR;
Projects/programs envisaged to be undertaken
by the companies under CSR;
Amount allocated for each of those
projects/programs;
21

CONTENTS OF CSR POLICY OF A
COMPANY (CONT’D)
Implementation schedules;
Indication about the implementing
agency/agencies for executing such projects,
Modalities of monitoring the implementation
of CSR projects,
Provisions for impact evaluation.
22

 CSR expenditure shall include all expenditure
including contribution to corpuses of
trusts/societies/section 8 companies which are
created exclusively for undertaking CSR
activities or for purposes directly relatable to a
subject covered in Schedule VII;
 A company cannot make any contribution to
any political party or political purpose.
CSR EXPENDITURE
23

 Activities undertaken in pursuance of the
normal course of business of the company
will not count as CSR;
 CSR Projects or programs or activities that
benefit only the employees of the company
and their families shall not be considered as
CSR activities.
CSR EXPENDITURE
24

 For building CSR capacities of their own
personnel as well as of those of their
implementing agencies, companies may incur
expenditure up to 5 per cent of their CSR
budgets;
 Must be done through institutions with
established track records of at least 3 years.
CSR EXPENDITURE ON CAPACITY
BUILDING
25

METHOD OF IMPLEMENTATION
OF CSR
The Board of a company may decide to
undertake its CSR activities approved by the
CSR Committee, through
a registered trust
or a registered society
or a company
established by the company or its holding or
subsidiary or associate company under
section 8 of the Act or otherwise:
26

METHOD OF IMPLEMENTATION OF
CSR (CONT’D)
Provided that:
If such trust, society or company is not
established by the company or its holding or
subsidiary or associate company, it shall have an
established track record of three years in
undertaking similar projects or programs;
The company has specified the project or
programs to be undertaken through these
entities, the modalities of utilization of funds on
such projects and programs and the monitoring
and reporting mechanism.
•
27

COLLABORATION AMONG COMPANIES
FOR IMPLEMENTING CSR
 A company may also collaborate with
other companies for undertaking projects
or programs or CSR activities;
 Provided CSR Committees of respective
companies are in a position to report
separately on such projects or programs in
accordance with these rules.
28

1.
Sr
N
o.
2.
CSR
project/ac
tivity
identified
3.
Sector in
which the
project is
covered
4.
Projects/P
rogramme
s
1.Local
areas/ot
hers
2.Specify
the
state/di
strict
5.
Amount
outlay
(budget
)
project/
program
me wise
6.
Amount
spent on the
programme
/project
Subheads
1.Direct
expenditu
re on
projects
2.Over
heads
7.
Cumu
lative
spen
d
upto
the
repor
ting
perio
d
8.
Amount
spent
Direc
t or
throu
gh
imple
menti
ng
agen
cy*
28
REPORTING TEMPLATE
* Give details of Implementing Agency

Signed
…………………………………………..
(CEO/Managing Director/Director)
……………………………………
(Chairman CSR Committee)
……………………………………
(Person specified under clause (d) of sub-section (1) of section 380
of the Act) (wherever applicable)
Reporting on CSR Initiatives
30

Project Mode (slide no. 37 & 38);
One-off events such as
marathons/awards/charitable
contributions/advertisements/sponsorships of
TV programmes etc. would not qualify as CSR.
CLARIFICATIONS IN MCA CIRCULAR
(18.06.2014)
32

LIBERAL INTERPRETATION OF
ACTIVITIES COVERED IN SCHEDULE
VII
It has been clarified through issuance of a
General Circular dated 18th June 2014 which
provides, inter alia, the following:
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.
33

Beyond compliance: Expenses incurred by
companies for the fulfillment of any
Act/Statute or regulations would not count;
Salaries paid to regular CSR staff &
volunteers (in proportion to company’s time
spent specifically on CSR) can be factored into
CSR project cost;
 Any FY referred in under Sub-section (1) of
Section 135 of the Act, implies “any of the
three preceding FYs”.
CLARIFICATIONS….
34

Expenditure incurred by Foreign Holding
Company for CSR activities in India will
qualify as CSR spend of the Indian subsidiary
if expenditures are routed through Indian
subsidiaries and if it is required to do so as per
Section 135;
Supplementing & complementing (but not
duplicating) govt. schemes & programs will
count as CSR;
‘Registered Trust’ would include Trusts
registered under Income Tax Act 1956, for
those States where registration of Trust is not
mandatory.
CLARIFICATIONS….
35

 Contribution to Corpus: CSR expenditure
shall include contribution to corpuses of
trusts/societies/section 8 companies which are
created exclusively for undertaking CSR
activities or for purposes directly relatable to a
subject covered in Schedule VII;
Other specific issues are covered in Annexure
to this circular (MCA circular no. 21/2014
dated 18.06.2014, www.mca.gov.in).
CLARIFICATIONS….
36

PROJECT MODE APPROACH
Baseline survey
Detailed Project Report (DPR)
Duration of the Project (Start
Date / End Date)
Amount allocated to the Project
Amount allocated to the Project
in current FY
37

PROJECT MODE APPROACH
Selection of Implementing
Agency (IA)
Release of fund to IA
Documentation & Monitoring
Objective Evaluation
(Concurrent, Final & Impact
Assessment)
38

ACTIVITIES NOT FALLING IN THE AMBIT
OF CSR
 The CSR projects that benefit only the
employees of the company and their families
shall not be considered as CSR activities in
accordance with section 135 of the Act;
 One-off events such as marathons/ awards/
charitable contribution/
advertisement/sponsorships of TV programmes
etc. would not be qualified as part of CSR
expenditure;
Activities which are not taken up in project
mode. 39

ACTIVITIES NOT FALLING IN THE
AMBIT OF CSR
Expenses incurred by companies for the
fulfillment of any Act/ Statute of regulations (such
as Labour Laws, Land Acquisition Act etc.) would
not count as CSR expenditure under the
Companies Act;
Contribution of any amount directly or indirectly
to any political party shall not be considered as a
CSR activity;
Activities undertaken by the company in
pursuance of its normal course of business.
40

COMPUTATION OF NET PROFIT
METHOD FOR COMPUTATION OF PROFIT UNDER SECTION 198
Particulars Amount
(A)Profit before tax as reported in the Statement of Profit and
Loss
xxxxx
(B)Less
(i) Profits of a capital nature including profits from the sale of
the undertaking or any of the undertakings of the company or
of any part thereof
xxxxx
(ii) Profits in excess of the difference between the original cost
of that fixed asset and its written- down value on sale of any
immovable property of fixed assets.
xxxxx
(iii) Change in the fair value of assets or liabilities, recognised
as income in the Statement of Profit and Loss
xxxxx
41

COMPUTATION OF NET PROFIT(CONT’D)
(iv) Unabsorbed excess of expenditure over income of
previous years computed as per section 198
xxxxx
(C)Add
(i) Excess of depreciation over the amount specified in
section 123
xxxxx
(ii) Any compensation, damages or payments made
voluntarily
(iii) Loss of a capital nature including loss on sale of
the undertaking or any of the undertakings
xxxxx
(iv) Change in the fair value of assets or liabilities,
recognised as income in the Statement of Profit and
Loss
xxxxx
Profit as per section 198 (A-B+C) xxxxx
42

COMPUTATION OF NET PROFIT(CONT’D)
Further, the following would not be included:
Any profit arising from any overseas branch
or branches of the company, whether
operated as a separate company or
otherwise; and
Any dividend received from other companies
in India, which are covered under and
complying with the provisions of section 135
of the Act.
43

TAX BENEFITS EXTENDED TO CSR
SPENDING
As on date no specific tax exemption has been
extended to expenditure incurred on specified
CSR activities;
Spending on several activities like
contributions to Prime Minister’s Relief Fund,
scientific research, rural development projects,
skill development projects, agricultural
extension projects, etc., which find place in
Schedule VII, already enjoy such exemptions
under different sections of the Income Tax Act,
1961.
44

An illustrative list is provided below:
TAX BENEFITS EXTENDED TO EXPENDITURE ON SOCIAL/DEVELOPMENTAL
ACTIVITIES UNDER DIFFERENT SECTIONS OF THE INCOME TAX ACT, 1961
Sl.
No
Section Donation
Based/Activity
Based
Deduction available for Quantum of
Deduction
1. 80G Donation
based
Donation to PM’s National
Relief Fund
100%
2 80G Donation
based
Approved university or
educational institution of
national eminence
100%
3. 35(1)(ii) Donation
based
Sum paid to research association
university, college or other
institution to be used for
scientific research
1.75 times of
sum paid
4. 35(1)(iia) Donation
based
Sum paid to a scientific R&D
company to be used by it for
scientific research
1.25 times of
sum paid
5. 35(1)(iii) Donation
based
Sum paid to research
association, university college or
other institution to be used in
social science or statistical
1.25 times of
sum paid
45

6. 35(2AA) Donation based Any sum paid to National
Laboratory or a University or
IIT or a specified person with a
direction that such sum is to be
used for scientific research
2 times of sums
Paid
7. 35CCC Expenditure on
agricultural
extension project
Any expenditure on agricultural
extension project notified by
CBDT
1.5 Times of
sums paid
8. 35CCD Expenditure on
skill
development
project
Any expenditure (not being
expenditure in the nature of cost
of any land or building) on any
skill development project
notified by CBDT
1.5 Times of
sums paid
9. 35AC Donation based Sum paid to public sector
company/local authority/etc for
carrying out any eligible notified
project for promoting social and
economic welfare of the public
1Time of sums
paid
46

Impact of New Act
Findings of study conducted by NGO Box of 100
companies from 33 sectors whose results are in public
domain. PSUs and Public Sector Banks not included as
results are not available .
• 27 % of the companies only spent more than the
mandated limit
• 64% spent less than the limit
• 2% of companies spent no amount
• 9% spent only the prescribed amount

Impact of New Act
Top ten companies as per expenditure made :
1.Wipro - 103.7 %
2.Tata Power – 104.4 %
3. Bhart Forge – 106.3 %
4. Torrent Pharma – 109.6 %
5.Marico – 117.8 %
6.Godrej Consumer Products – 129.6 %
7.Relaince Industries Ltd – 142.7 %
8.UPL Ltd – 153.2 %
9.Tech Mahindra – 172.3 %
10 VIP Industries Ltd – 210.1 %

Impact of New Act
company Exp ( 2013-14) % of PAT Exp (2014-15) % of PAT
TCS Rs 93.58 Cr 0.48 % Rs253.55 Cr 1.53 %
Reliance Rs 712.00 Cr 3.24% Rs 761.00 Cr 3.35 %
HDFC
Bank
NA 0.74 % Rs 118.55 Cr 1.20 %
ITC Rs106.63 Cr 1.2 % Rs 214.06 Cr 2.01 %
Infosys Rs 9.00 Cr NA Rs 239.50 Cr 1.96 %
This is for 5 top private companies by market
capitalisation
Source : www.GovernanceNow.com

SEBI’S GUIDELINES

SEBI’S GUIDELINES
SEBI in 2012 made it mandatory to report the sustainability
performance against 9 principles related to Environmental,
Social and Governance (“ESG”) for 100 listed companies
based on capitalisation.
A Business Responsibility Report (BRR) in a prescribed
format is to submitted to SEBI each year by these listed
companies along with their Annual Reports.

GLOBAL COMPACT NETWORK
 UN Global Compact is a strategic policy initiative for
businesses that are committed to aligning their
operations and strategies with ten principles.
 It is voluntary organisation of businesses and at present
there are about 8500 corporates and institutions from 161
countries are its members.
 It has its chapter in India and about 200 companies are its
members and NTPC is also one of them.

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 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 extortion and bribery.
Members are required to report their performance in respect
of 10 principles every year

INTERNATIONAL STANDARDS
ISO 2 6000 : Voluntary social responsibility standard
ISO 14000 : Standard for Environment Management
SA 8000 ; Certification for adopting socially acceptable
practices
Global Reporting Framework : Reporting Framework for
Sustainability

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