20 April, 2017
Co-authored by Prerana Manvi
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.