Decoding the CSR clause in Companies Bill 2012

Decoding the CSR clause in Companies Bill 2012

Making an attempt at decoding some significant facts of the bill for easy understanding by CSR professionals…………..

Background
A new Companies Act has been in the pipeline for several years in India. The Bill revolutionizes several aspects of corporate governance including policies related to audit, transparency and requirement for independence of directors. One such pertinent change is the introduction of a mandatory corporate social responsibility (CSR) investment of two per cent provided in Section 135. 

While the concept of CSR is centuries-old in India, there has been little legislation to enforce this responsibility. The only prominent CSR legislation India has seen prior to this Bill is the Corporate Social Responsibility Voluntary Guidelines 2009. 

In 2009, when the compulsion of CSR investment was proposed, the hesitation of the legislature was evident in the way the ‘voluntary’ section was framed. Now it imposes a compulsory measure, yet the liability of the company is only to make ‘best endeavour’ to comply and then report.

How the Bill defines CSR?

CSR has many interpretations from a global perspective. However, as per the Bill it is understood to impose a liability on the Company to contribute to the society (whether towards environmental causes, educational promotion, or social causes; Part III of this article will underline all areas with examples of programmes to be undertaken) along with the reinforced duty to conduct the business in an ethical manner.

Section 135

As per Section 135 (Section) of the Companies Bill, the following companies will have to abide by this requirement:

§      Companies having a net worth of rupees five hundred crore or more

§      Companies having a turnover of rupees one thousand crore or more

§      Companies having a net profit of rupees five crore or more

Implementation: Committee and Policy

§       To ensure that the company is setting off this requirement as per the rules framed in this Section, the companies will have to constitute a committee consisting of at least three directors, one of whom shall be an independent director.

§       The committee shall also initiate a CSR Policy (Policy) that shall stipulate how, where and when they want to invest their funds with respect to this requirement. If the company does not abide by this stipulation, the board directors (Governing Board) must provide an explanation for the same.

Schedule VII

Given that this is the first time that the Indian corporate sector is seeing such a requirement, Schedule VII (Schedule) provides some direction on what will constitute as valid expenditure under this Section.

As per this Schedule of the Bill, social causes such as promotion of education and welfare funds such as the Prime Minister’s National Relief Fund may be included in the Policy of the Company. This Schedule aims only to give examples of options companies can pursue under this Section. (read What is Schedule VII? in part III of this series with examples of doable and impactful CSR programmes)

Will Companies Benefit Too?

Although a few Indian companies seem wary of this new regulation, neither wanting to be forced to spend on social initiatives nor very equipped to deal with the implementation of such a policy, there are numerous positives to this coin:

§      Development of ‘reputation capital’ for capturing and sustaining markets. Therefore, corporate social responsibility has developed as a new business strategy to reduce investment risks and maximize profits by taking all the key stakeholders into confidence

§      Long-term gains as opposed to short term profits, which are the outcome of good CSR policies

§       Environmental stability and sustainability – being an important resource for companies – is ensured

§      Social stability

§      With globalization, the negative aspects of businesses have been intensified, and exploitation is widespread – CSR policies may work to counter this effect

§      Lastly, a successful company cannot exist in a society that fails, and therefore a company being a member of the society is required to contribute

Google for ‘news’ on CSR and you’ll find almost all dailies writing something or the other around what is happening and what may be done and what all may happen. While some news articles are focusing on pros and cons of the bill (awaiting the President’s nod to become law), with opinions from industry leaders, some others are talking about opportunities in terms of jobs in the development sector. You will also find how a dozen limited companies and non-profit foundations have already introduced CSR awards, some of which have sponsors’ list quite similar to that of Filmfare or Stardust. Not to mention the number of seminars, workshops, conferences and forums on CSR.

Corporate social responsibility (CSR) has started to sound like the new cool. The social sector does not meet khadi kurta and desi jhola anymore. A young creed of social entrepreneurs can now be seen pitching around CSR departments of corporate groups with ideas that they believe can bring about the change while fulfilling the company’s CSR obligation. This was expected. Any business-oriented yet socially thinking mind with common sense will want a share of the Rs 15,000 crore pie – the expected size of this new responsibility sector – this being a rough estimate if all companies in the ambit spend two per cent of their net profits towards CSR (as per Section 135 in the new Companies Bill).

Whether or not they deserve a part of the pie is another question altogether. Before moving on to that (Decoding CSR Bill – Part 3), let’s have some clarity on Section 135 – what it says, what it means and what companies are actually expected to do.

Who falls in its ambit?

Every company having net worth of five hundred crore rupees or more, or turnover of one thousand crore rupees or more, or net profit of five crore rupees or more during any financial year shall constitute a CSR committee of the board consisting of three or more directors, out of which at least one director shall be an independent director.  

Step1: Form CSR committee – it is a must Now that you fall in the bill’s ambit, the first thing to do is to create a CSR committee. The bill says that the company’s board's report, under Sub-Section (3) of Section 134, shall disclose the composition of the CSR committee. This means that the names, designations and responsibilities of the members of the committee have to be a part of the annual CSR report. Yes, this also means that the company shall bring out an annual CSR report.

Step 2: Assign responsibilities to the committee

As per the bill, the CSR committee shall: (a) Formulate and recommend to the board a CSR policy that shall indicate the activities to be undertaken by the company as specified in Schedule VII. [What’s schedule VII? It is basically a list of issues around which your CSR activity should be conceptualized. Read about it in detail with examples of doable and impactful CSR programmes in Part 3 of this series.) (b) Recommend the amount of expenditure to be incurred on the activities. (c) Monitor the CSR policy of the company from time to time.

Responsibilities of the company’s board

CSR shall be sharing the berth with finance, marketing and brand positioning decisions of the company. While the programmes and their impact analysis may be done by the CSR committee along with outside partners (including consultants or voluntary organizations), the review, the scrutiny and the approvals are to be done by the board of the directors. The board has to closely monitor and evaluate the ‘impact’ of each penny of the organization that is going towards the development of the grassroots. Here, the return on investment (RoI) for the company will not be seen in a rise in revenue but in terms of change on the ground – this will inevitably impact the way the company will be looked at from the outside.

1. After taking into account the recommendations made by the CSR committee, the board shall approve the CSR policy for the company and disclose the contents of the policy in the CSR report, and also place it on the company's website in such manner as may be prescribed.
2. The board shall ensure that the activities included in the CSR policy are undertaken by the company.
3. The board shall ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy.

It should be noted here that while defining the responsibilities of the board (Point ‘c’ above), the bill says that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR. Also, these programmes shall preferably be implemented in association with non-government organizations, voluntary organizations, social societies, members of the civil society and social entrepreneurs.

Here, the bill also says that if the company fails to spend such amount (two per cent of the said amount), the board shall in its report specify the adequate reasons for not spending the amount.

After one quick read of Section 135 in the Companies Bill, you will think how simple and practical it is. Then, if you will think again, you will realize that the 10 points in Schedule VII which are written on the last page of the Bill are the core of Section 135, and focus on them is a must for the country’s progress.

Yes, naysayers do exist, but they are in the minority and most of them are business owners. They are crying foul, saying governments have passed on its duties to businesses. (It may be noted here that the ministry of corporate affairs has clearly said that none of them will be penalized for ‘not’ spending on CSR – just that they will have to give concrete reasons for their inability to do so.) Do these people have concrete reasons, is yet another story.

For the rest of us, here are the 10 points to follow in Schedule VII – elaborated with examples of possible programmes to make them read and sound better and, of course, make a meaningful impact – benefitting the company as also the programmes’ intended beneficiaries.

What is in Schedule VII?

Every CSR activity of the company, starting from the creation of the policy to the writing of the impact report, will depend upon the objective and the intent of the company, and these 10 points will help in shaping the same. No, the 10 activities do not justify the CSR spectrum and scope as per global CSR norms and practices, but they are relevant in the Indian context – the country needs development at a fundamental level, beginning from the grassroots. The most interesting part here is that if the first 8 of the 10 prescribed points are implemented with zeal and enthusiasm, the country can expect to see the beginning of the change process that it really wants to see. All of these causes or issues are interrelated.

Here are the listed activities. Note that all the activities undertaken by the company have to be focused at the outside public and not at the company’s employees or their families.

THE 10 POINTS

1. Eradicating extreme hunger and poverty

Well, the Food Security Bill has been passed, but the government surely knows the implementation hassles and practical limitations thereof. So, a larger and focused role has to be played by the corporate groups in eradicating hunger and poverty.

(Is it a business function? Well, the moment you will think like this or ask similar questions to yourself or the governments, the intent with which the CSR should be done will suffer and so will the social programme. Let’s accept the law the way it is and not compromise on what we ‘really’ have been wanting to do – that is, our bit towards bringing about the change.)

So, what all can a company do? Well, one simple way is to adopt a few families in abject poverty and start giving them food – funded by your CSR budget – on everyday basis. But if the company decides to pull the plug for whatever reasons, the hunger will remain. Hence, a sustainable CSR programme wherein the poor are not given a fish to eat, but are trained to do fishing as well as taught to sell it in the market, will make some difference. Create self-help groups, train them, and then fund them for micro businesses and use your business expertise in developing their business alongside. How about creating a self-help group that can somehow be a vendor of the company? Who’ll not benefit? 

No, those langars and bhandaras, and food for Amarnath and Vaishno Devi pilgrims or biryani at Haji Ali will not eradicate hunger. It rather makes its eradication more difficult and cannot be considered a part of corporates’ responsibility, or of the Bill in this case. For charitable purposes and with regard to religious respect, they may make some sense. 

2. Promotion of education

Yes, the country has a Right to Education wherein schooling is free for all, but since the government does not want us to continue to crib about inefficient systems, they have given the baton in the hands of businesses.

How can a corporate group help? One of the best case studies on ‘promotion of education’ by a corporate group’s foundation is the Satya Bharti School Program. It is a rural education initiative of Bharti Foundation, the philanthropic arm of Bharti Enterprises. You can Google and see the sustainability and scalability aspects of the same.

For a smaller business, who just about falls within the CSR Bill’s ambit, adopting a running school in a remote village and upgrading its infrastructure as well as running campaigns across villages to inform and educate people to pursue them to send children to schools shall make a difference.

Something to note: It is not that most children or their parents do not want to avail of free education, but there are multiple factors, primarily the poverty-generated troubles, that stop them. So, the education programme cannot be deemed a success unless every child in its vicinity is attending the school.

3. Promoting gender equality and empowering women

We need not delve into the Women’s Reservation Bill for the same reasons as mentioned for the free food and free education acts. We all know the condition of women in the hinterland and understand why this needs attention.

To begin with, identify the humiliated and exploited women at the grassroots and empower one so much that she becomes a role model for the ones around her. This has always worked.

How? There are plenty of ways. The women empowerment project should follow these steps (in the given order): motivation, introduction to freedom, creation of union, education and employment.

Over 95 per cent of the self-help groups are being run by women. More than 99 per cent of them are successful and growing.

4. Reducing child mortality and improving maternal health

Crores of rupees have been earmarked for Nirmal Bharat Abhiyan, which promises to ensure toilets in the remotest of villages in India. Numerous funds have been pumped into developing primary health centres and setting up of anganwadis across the country. (We need not discuss their impact here.) The corporate groups have been given an opportunity (that is how we shall look at it) to contribute, and it is a serious cause.

The root cause of infant as well as child mortality in India is the ill health of the mothers. The CSR programme can help in creation of necessary medical facilities or upgrading of the existing ones, and ensure they are being used appropriately.

How about engaging the company’s medical staff or hiring one to maintain health records of all – especially the ones who are pregnant – and ensure assistance until the infant becomes a toddler. Such programmes cannot be self-sustaining. Hence, a programme to empower the women shall run alongside, so that the women can earn what they deserve. The success shall be measured not on the basis of reduced mortality but on the basis of ‘how many women paid to avail of the facility’.

5. Combating human immunodeficiency virus, acquired immune deficiency

For those who do not know: The US$2.5 billion National AIDS Control Plan III (NACP) was set up by India in 2007, while NACP IV is in the making.  The programme also received support from UNAIDS, while charities like Clinton Foundation, with strong financial backing, are also engaged in eradication of the disease.

And now, businesses are expected to join the league. Well, yes, awareness campaigns help. Street plays and campaigning at the grassroots have been cited as the best communication tool. Adopt an area, engage with its youth, and create awareness teams comprising the company’s representatives, local influencers, theatre artists and, if possible, a celebrity, and reach as many people as you can, and as many times as you can.

The idea should be this: The team should be able to sit on a cot with the AIDS patient and announce that this man/woman will be the last one to have AIDS.

 6.  Ensuring environmental sustainability

The country has a full ministry to ensure environment sustainability, which is an aspect that by all means is a part of the basic hygiene practised by professional companies.

All large corporations, at least the ones who bring out their annual sustainability report, have been ensuring this for a long time now. From using various means for conservation of all natural resources to engaging in replenishment activities including plantation, harvesting and recycling, corporate groups have been doing their bit.

However, these activities now have to move out of the company’s premises, to places where these are most needed. For example, developing the waste patches of land, adopting the barren grounds, and joining hands with conservation projects are some of the ways of fulfilling your CSR obligation.

Yes, programmes focused towards conservation of natural resources, anti-pollution activities and biodiversity conservation, especially the endangered species of animals, birds and plants, too can be included under this header.

7. Employment-enhancing vocational skills

Hundreds of vocational courses are being conducted in thousands of government institutes and polytechnics across the country. And now, businesses are expected to create more such programmes, if not centres. Or at least help some of the existing ones run. This is important. How can you otherwise empower the individual?

The best way to go about this will be to find what sort of workforce you need on a regular basis and what skills are required. Identify the underprivileged individuals, train them in a particular trade, and hire them. If you do not have the space to accommodate them all, set up an employment exchange, communicate with your vendors and clients – the chain can go up to their vendors and clients – and help in finding jobs for them.

The programme should be deemed successful when the exchange has more offer letters and worker seekers than job seekers.

8. Social business projects

Now, what are these? Shouldn’t your business be also called the same since a considerable amount of your profits will be channelled towards social projects?

Well, any argument on this front will lead you nowhere as ‘social business projects’ here clearly means the projects whose return in investment (ROI) is not in terms of the revenues but in the form of social impact.

No, social business project should not be confused with social media projects. Facebook and Twitter campaigns alone cannot make a full impact, they can only support one. Do not think of spending the CSR fund towards a social media campaign.

Businesses like microfinance in rural areas, setting up of direct retail channels for rural artisans, cooperatives that empower the women and youth, modern businesses focused at people and planet – basically the businesses that earn to sustain themselves as well as the cause that they are working towards need corporate groups’ assistance. They fall in the CSR Bill’s ambit.

9. Contribution to the Prime Minister's National Relief Fund or any other fund set up by the central government or the state governments for socio-economic development, and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women

This point should not be that difficult to decode. It simply says that if you are not being able to choose a CSR programme, let your funds go the government. It knows where, how and when to spend for a cause.

However, when CSR programmes have a lot more to them than just spending towards a social cause, this second-last point should be the last option for a corporate group to look at.

10. Such other matters as may be prescribed…

Like it always happens in most of the government’s documents – it is a screw that has been left loose so that it can help in tuning (or tweaking?) whenever needed. For instance, if a company is spending/spends towards a programme that does not fall in the categories listed above but still makes a social impact that the makers of the Bill failed to see/visualize when the Bill was being drafted, such spends or that particular programme can fit in the last point.

This also happens to be the last point on the last page of Companies Bill 2012.