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Corporate Social Responsibility and Challenges in its implementation

M. Sanaulla Khan

VP & Company Secretary

Wipro Limited

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Why CSR? – Context
Importance of inclusive and equitable growth are essential parts of India’s quest for development.

Since legislation mandated CSR, the business landscape has changed dynamically such that companies also carry mandates of responsible business conduct and of securing human rights in areas of their business incidence.

Broadly, the CSR mandate has been aligned with national priorities such as public health, education, livelihood, water conservation, natural resource management, etc.

It is expected that, corporates to play an active role in social sector. Corprotes can use their expertise/management skills and knowledge of local demographic problems and can actively participate in the development of the society at large.

Introduction on CSR & Applicability

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ESG – Environment, Social and Governance

ESG is emerging more of a board room topic and boards of large entities are spending time on this.

ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities.

ESG criteria's are of increasing interest to companies, their investors and other stakeholders. With growing concern about the ethical status of listed companies, these standards are the central factors that measure the ethical impact and sustainability of investment in a company.

ESG criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Introduction on CSR & Applicability

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Background

Ministry of Corporate Affairs had issued "Voluntary Guidelines on Corporate Social Responsibility, 2009" as a first step towards mainstreaming the concept of Business Responsibilities. This was further refined subsequently, as "National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011” released in in July 2011 (“NVG”).

This principle of NVG was subsequently translated into a mandatory provision of Corporate Social Responsibility in Section 135 of the Companies Act 2013. Section was notified on April 1, 2014.

Baijal Committee report on CSR dated September 22, 2015, provisions of section 135 are based on the principle “comply or explain”, i.e. companies are required to disclose reasons for shortfall in spending, if any.

Introduction on CSR & Applicability

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NVG focuses on encouraging business action on national development priorities, including community development initiatives and strategic CSR based on the shared value concept.

Earlier requirement was only to mention the reasons for non-compliance in Board report. Since there were serious compliance gaps, the Companies (Amendment) Act 2019 introduced punishments that included imprisonment, and hence, the approach shifted from “comply or explain” to “comply or penalty”.

Based on representation from companies, criminal liabilities were removed from the Act in 2020.

In January 2022, MCA issued the Companies (Corporate Social Responsibility) Amendment Rules, 2021 which transformed the legislative framework that governs monitoring and evaluation of CSR operations, usage of CSR funds and transfer of unspent amount.

Effective 11/02/2022 every company covered u/s 135 shall file e-form CSR-2 as an addendum to Form AOC-4/AOC-4 XBRL. For the F.Y.2020-21 it shall be filed separately by March 31, 2022. Contents are similar to CSR report annexed to Board report.

Introduction on CSR & Applicability

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Applicability: (sec. 135(1))

To all companies that have either of the following in any financial year:

Net worth of INR 500 crore or more
Turnover of INR 1000 crore or more
Net profit of INR 5 crore or more

LLPs are outside its preview as they are governed by The LLP Act, 2008

Key Challenges:

Net profit is there but no Cash profits
Small but growing companies want to focus more on business
Corporates need to invest in capacity building
Unscrupulous promoters - misuse

Introduction on CSR & Applicability

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Company may undertake CSR activities based on its CSR policy, which shall be in line with the activities mentioned under Schedule VII as follows:
Eradicating hunger, poverty and malnutrition, promoting health care
Promoting education and employment enhancing vocation skills
Promoting gender equality, empowering women, setting up homes and hostels for women and orphans
Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare
Protection of National Heritage, art and culture including restoration of buildings and sites of historical importance and works of art
Measure for the benefit of armed force veterans, war widows and their dependents
Training to promote rural sports, nationally recognized sports, Paralympic sports and Olympics
Contribution to the Prime Minister’s National Relief Fund or PM CARES fund
Contribution to incubators or research and development projects in the field of science, technology, engineering and medicine, funded by the CG or PSU
Contributions to public funded Universities
Rural development projects
Slum area development.
disaster management, including relief, rehabilitation and reconstruction activities.

Introduction on CSR & Applicability

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The above list is not exhaustive

Broader interpretation can be taken

Projects or Programs under CSR are allowed

One off sponsorship of an event cannot be considered as CSR

Some examples:

Providing sports goods to promote rural sports is allowed. Buying IPL tickets to distribute to the poor is not
Covid vaccination to general public is allowed, Vaccination to employees not allowed
Act requires corporates to spend the amount – distribution of medicines by pharma co not a CSR

When in doubt comply and take a conservative interpretation rather than agreeing to doubful spends

Introduction on CSR & Applicability

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However, following shall not form part of CSR activity:
Activities undertaken in pursuance of normal course of business – excludes, research and development activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22, 2022-23. Provided, it is carried out in collaboration with the institutes mentioned in item (ix) of Schedule VII and details are provided in Board’s report.
Contribution to political party
activities benefitting employees of the company
activities supported by the companies on sponsorship basis
activities carried out for fulfilment of any other statutory obligations under any law in force in India.
Every company including its holding or subsidiary, and a foreign company having its branch office or project office in India, which fulfils the criteria on Net worth, Turnover or Net Profit , shall comply with the provisions of Section 135 of the Act and these rules.
Net worth, Turnover or Net Profit of a foreign company of the Act shall be computed in accordance with balance sheet and Profit and loss account of such company prepared in accordance with the provisions of Section 381(1) (a) and Section 198 of the Act.

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Composition

Compromising of 3 or more directors with at least 1 Independent Director
Composition should be disclosed in the annual board of directors’ report
Where a company is not required to appoint an independent director under Section 149(4), CSR committee shall be without such director.
Private company with only two directors on its Board shall constitute its CSR Committee with two such directors.
For a foreign company, CSR Committee shall comprise of at least two persons of which one person shall be resident in India as per Section 380(1)(d) of the Act and another person shall be nominated by the foreign company.
If the CSR spend does not exceed Rs.50 lakhs in a year – no need to constitute the Committee

Responsibility of the Committee

Formulate and recommend CSR Policy to the Board
Formulating and recommending an annual action plan in pursuance of CSR Policy
Monitor the CSR Policy of the company from time to time

CSR Committee and Board Responsibility

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Board’s Responsibilities towards CSR

After considering the recommendations made by the CSR Committee, approve the approach and directions for CSR.
Approve the annual action plan recommended by the CSR Committee and amendment thereto during the financial year, if any.
Ensure that the activities as are included in CSR Policy of the Company are undertaken by the Company.
The Board’s Report shall disclose:
CSR Committee’s composition
The contents of CSR Policy
In case CSR spending does not meet 2% as per CSR Policy, the reasons for the unspent amount, and details of the transfer of unspent amount relating to an ongoing project to a specified fund (transfer within a period of six months from the expiry of the financial year).

CSR Committee and Board Responsibility

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Approve a project as on-going multi-year project and extend the duration for spending beyond one year based on reasonable justification
Monitor the implementation of on-going projects
Satisfy itself that the funds so disbursed have been utilized for the purposes and in the manner as approved by it
Ensure that the administrative overheads do not exceed 5% of total CSR expenditure of the company for the financial year.

CSR Spending

Board to ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years.
Where a company has not completed 3 financial years since its incorporation, the average net profits shall be calculated for the FYs since its incorporation.
The company shall give preference to the local area where it operates, for spending the amount earmarked for CSR activities

CSR Committee and Board Responsibility

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Net Profit

Net profit means the net profit shall be calculated in accordance with the provisions of section 198 of the Act.
Net Profit shall not include any profit arising from any overseas branch or branches of the company and any dividend received from other companies in India, which are covered under the provisions of section 135 of the Act and complying with the same.
For a foreign company covered under these rules, net profit means the net profit as per P&L A/c prepared as per Section 381(1) (a), read with section 198.

CSR Implementation

Company's CSR operations can be carried out either directly or through implementing agencies
Company may engage international organisations for designing, monitoring and evaluation of the CSR projects or programmes as per its CSR policy.
Company may also collaborate with other companies for undertaking projects or programmes or CSR activities provided CSR committees of respective companies are in position to report separately on such projects or programmes.

Corporate Social Responsibility

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Implementing Agencies

CSR projects can be implemented either directly or through implementing agency.
Cat 1:Entity established by the company itself or along with other company - Companies formed under Section 8 of the Act, or a registered society or registered public trust formed under Sections 12A and 80G of the Income Tax Act, 1961.
Cat 2: Entity established by central govt or state govt under Section 8 of the Act, and/or registered societies and/or registered trusts.
Cat 3: Entities created by a law passed by the legislature of a state or by a law passed by Parliament.
Cat 4: Companies that are incorporated under Section 8 of the Act, or a registered public society or registered trust under Sections 12A and 80G of the Income Tax Act, 1961, and which have at least 3 years of experience in similar activities.

If above entities under category 4 having established track record of minimum 3 years for undertaking similar CSR activities and wish to engage in CSR activities, it shall register with the Central Government by filing Form CSR-1. CSR registration number will be generated on filing of the form.

Implementing Agency

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Corporate Social Responsibility

CSR- “Administrative Overheads"

Board shall ensure that the Administrative overheads shall not exceed 5% of total CSR expenditure of the company for the financial year. - Rule 7(1) of CSR Rules.

There is no limit on the amount of money that can be spent on monitoring, evaluating, and planning a CSR project.

Surpluses generated through CSR

Rule 7(2) aims to prevent surplus earned through CSR from being used for non-CSR reasons. Following can be done with the surplus:

It shall be returned to the same project.
Deposited in the Unspent CSR Account and used in accordance with the CSR Policy;
Transferred to any of the Act's Funds listed in Schedule VII.

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Corporate Social Responsibility

Funds listed in Schedule VIII

Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga.
The Prime Minister’s national relief fund or PM cares fund or any other fund set up by the central govt. for socio economic development and relief and welfare of the schedule caste, tribes, other backward classes, minorities and women

CSR Policy

Every CSR Committee shall formulate and recommend the CSR policy to the Board for their approval. The CSR policy must contain the activities as specified in Schedule VII as guiding the area of implementation.

CSR policy provides the approach and direction of the Company towards its CSR activities, and contains guiding principles for selection, implementation and monitoring of CSR activities as well as formulation of the annual action plan.

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Corporate Social Responsibility

"Set-off" of excess CSR expenditures

According to Rule 7(3), the excess CSR amount must be set-off within the next three financial years, with following conditions:

Any surplus earned from CSR operations should not be included in the excess CSR amount
The Board of the company shall pass a resolution to that effect.

Capital Assets

As per Rule 7(4) of CSR Rules, the CSR amount may be spent by the company for ‘creation or acquisition’ of a capital asset. This capital asset ‘created or acquired’ out of CSR funds cannot be held directly by the company. It can only be held by any of the entities prescribed (Section 8 corporation, a registered trust/society, and so on).

Any capital asset created by a company prior to the commencement of the CSR Amendment Rules, 2021, shall be transferred to any of the above-mentioned entities within a period of 180 days from commencement (i.e January 22, 2021), which may be extended by a further period of not more than ninety days with the approval of the Board based on reasonable justification.

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Corporate Social Responsibility

Annual Action Plan

Rule 5 of CSR rules provides that CSR Committee shall formulate and recommend to the Board, an annual action plan in pursuance of its CSR policy, which shall include the following, namely-

(i) the list of CSR projects or program that are approved to be undertaken in areas or subjects specified in Schedule VII of the Act;

(ii) the manner of execution of such projects or programs;

(iii) the modalities of utilization of funds and implementation schedules for the projects or programs;

(iv) monitoring and reporting mechanism for the projects or programs; and

(v) details of need and impact assessment, if any, for the projects undertaken by the company

Impact Assessment - Impact assessment reports shall be placed before the Board and shall be annexed to the annual report on CSR.

Companies with minimum average CSR obligation of Rs.10 crores in the immediately preceding 3 financial years should get an impact assessment done through an independent agency for those CSR project that cost Rs.1 cr or more after 1 year from the date of completion of project.

Cap of 5% of total spend or Rs.50 lakhs whichever is lower

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Corporate Social Responsibility

Display on website

The CSR Policy and Projects approved by the Board of Directors, as well as the composition of the CSR Committee, should be displayed on the website

Transfer of unspent CSR amount

Transfer the unspent amount of ongoing projects in a special account called Unspent CSR Account within 30 days of the end of the financial year for use within a period of three financial years from the date of such transfer.
Transfer an unspent amount not relating to ongoing projects to such funds as mentioned in Schedule VII within 6 months of the end of the financial year.
During the period of 6 months, Company shall not utilize the same for CSR activity.
Apart from transfer of the unspent amount to the specified CSR funds, Board in its report, shall explain the reasons for not spending the CSR liability (unless it relates to any ongoing project).

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Corporate Social Responsibility

Penalty provision

Any violation pertaining to spend of CSR liability, transfer of unspent amount, as per sub-section (5) and (6) of Section 135 company and officers shall be penalized as follows:

Company - Twice the amount required to be transferred to the fund specified in Schedule VII or the Unspent CSR Account, or 1 crore rupees, whichever is less.
Officer – 1/10^th of the amount required to be transferred, or two lakh rupees, whichever is less.

For any other violations under the section/rules, the general penalty provisions under Section 450 of the Act shall apply.

Non-compliance under Section 135 is a civil liability and not a criminal liability. Penalty is over and above the obligated amount required to be transferred and not an alternative.

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Corporate Social Responsibility

Ideal process of selection of implementing agency

Identification of Implementing agency

Due diligence of Implementing agency

Interview/discussion with NGO and each functions to understand the vision of Implementing agency

Review of project implemented by such agencies in past

Preparation of case document and presenting it to the board of the Company for approval

1. Community visit

2. Relationship of community with agency

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Corporate Social Responsibility

Ideal process of selection of implementing agency

Board may accept or reject the choice of implementing agency

Deciding on the grant, based on risk, need and complexity of the project based on the annual action plan

Monitoring of project

Employee Engagement in CSR project

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Corporate Social Responsibility

CSR – suggested areas of focus

Disadvantaged communities, socio economic status, vulnerability of population
Economically backward areas. Village – far from the city – no roads, school, tribal area
Natural calamities – Cyclone, landslides, floods every where every year
Focus on rehabilitation than on relief

Collaborate with Experts

We are not experts, engage with NGO’s, civil society experts, local bodies
Due diligence is important: social media search, ROC, IT department website search, Litigations if any, media reports
Profile of people associated with the NGO
Values – Vision Mission statements should align

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Corporate Social Responsibility

Challenges faced in implementation of CSR project

Lack of flexibility in duration of project – currently a CSR project can be maximum of 3 years
Law shall not mandate the funding of CSR project – CSR grants shall be based on milestone and not Financial Year
The requirement that all the grant money should be utilized by the partner in the same year is unreasonable. Imposing such time limits for utilization of fund may lead to deterioration in quality of CSR projects.
Company should not be mandated to transfer unspent CSR amount to a separate bank account- amounts utilized for CSR spending originate out of the taxed profits of companies.
Board of Directors need not be mandated to review and approve the CSR activities, utilization of funds, etc., The obligation of CSR implementation to be caste upon the CSR committee.
Chief Financial Officer or the person responsible for financial management shall certify that the funds disbursed is utilized for the purpose and in the manner as approved by the Board.

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Corporate Social Responsibility

Challenges faced in implementation of CSR project

Currently there is no specific definition for the terms “projects” or “programs” under CSR Rules. There may be a challenge among corporates and to differentiate between these two terms in order to display the details on the website.
It is complicated to assess the impact of the CSR projects particularly where the number of CSR projects undertaken is large.
Impact assessment is a subjective term it is difficult to quantify the impact in a social project. Further, method of evaluating the effectiveness of CSR programs be left to the choice of the companies.
Capital asset acquired by the Companies prior to CSR Rules, shall remain with the Company and shall not be mandated to transfer.

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