By- Abhay Gupte, Senior Director, Deloitte India
The Companies Act, 2013 (hereinafter referred to as ‘the Act’) Section 135 (1) states that, ‘Every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board.
It is further mentioned under Section 135 (5) that, ‘In pursuance of its Corporate Social Responsibility Policy’, the Board of every company referred to in sub-section (1) above, shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company (calculated as per Section 198) made during the 3 immediately preceding financial years.
The Act specifies the broad modalities of selection, implementation and monitoring of the CSR activities by the Boards of Directors of companies.Also, if the company fails to spend such amount, the Board in its report should specify the reasons for not spending the amount’. The activities which may be included by companies in their CSR policies are listed in Schedule VII of the Act. The provisions of Section 135 of the Act and Schedule VII of the Act apply to all companies, including Central Public Sector Enterprises (CPSEs).
Department of Public Enterprises (DPE) Guidelines on CSR and Sustainability issued on Oct 21, 2014 (specifically states that, ‘It is mandatory for all profit making CPSEs to undertake CSR activities as per the provisions of the Act and the CSR Rules. Even the CPSEs which are not covered under the eligibility criteria based on threshold limits of net-worth, turnover, or net profit as specified by Section 135 (1) of the Act, but which made profit in the preceding year, would also be required to take up CSR activities as specified in the Act and the CSR Rules, and such CPSEs would be expected to spend at least 2% of the profit made in the preceding year on CSR activities.’
However, as per DPE guidelines, the amount spent on sustainability initiatives in the pursuit of sustainable development while conducting normal business activities would not constitute a part of the CSR spend from 2% of profits as stipulated in the Act and the CSR Rules.
Besides, in case of CPSEs mere reporting and explaining the reasons for not spending this amount in a particular year would not suffice and the unspent CSR amount in a particular year would not lapse, it would instead be carried forward to the next year for utilisation towards the purpose it was allocated.
India’s top companies are ranked 1-100 based on Net Sales for the Financial Year 2012 and their spending on CSR. (Source: CSR Report Card: Where Companies Stand - Forbes India Magazine dated 18.3.2013).
In case of public sectors, revised guidelines on CSR and sustainability are being implemented from 1 April 2013, as a commitment of the CPSEs to their stakeholders to conduct business in an economically, socially and environmentally sustainable manner.
CSR spend by some of the ‘Maharatna’, ‘Navratna’ and ‘Miniratna’ CPSEs:
(Soruce: 2013-2014 annual reports published on company websites)
The CSR activity has definitely gained ground and has generated discernible investments in various sectors. However, the value addition brought in by PSUs complementing government’s efforts is something that needs to be examined. For instance, The Act is set to generate from the corporates a capital of approximately Rs. 20,000 crore (Source: Forbes India issue of 2014) which will be spent on CSR activities revolving around the subjects of Schedule VII of the Act. On the other hand, the expenditure by the Government of India exclusively towards education (among the 10 subjects of Schedule VII) in FY 2012-13 was about Rs 75,000 crore. ‘According to the Union Budget 2013- 2014, Rs.1355.48 crore has been allocated to Social and Community Services, out of which Rs.125.52 crore is specifically towards education, sports, art and culture (Source: http://indiabudget.nic.in/ub2014-15/afs/afs1.pdf and ).Based on the statistics released by Forbes India issue of 2013, total of 5,611 crores have been spent on CSR activities out of which a substantial portion goes to education initiatives.
Looking at the current CSR spend figures in the above table, there seems more opportunity for the CPSEs to allocate their over CSR budget to under-funded CSR activities rather than focusing only on one CSR sector, like education. They could invest in other CSR activities by focusing on their strengths in innovation, project management and technology. More efficient use of CSR funds by the corporates after considering the Government funding to each of the CSR activities may assist in meeting ultimate CSR objectives.
Long before the concept of CSR came into picture, PSUs have been on forefront in solving socio- economic issues, may it be national emergencies, power and energy supply issues or education or public health issues in comparison to the Private Sector.
Along with the clearly seen social, economic and environmental benefits, The Act may directly impact PSUs and thereby pose numerous challenges;
· PSUs, being public organisations have greater social responsibilities in addition to their independent annual revenue targets. They are subject to more stringent scrutiny by parliament, the Comptroller and Auditor General (CAG) of India and other organisations, and are hence expected to be more cautious and transparent about their CSR portfolio.
· CPSEs may face the organizational level issues such as absence of a dedicated CSR team, active involvement of key stakeholders, budgetary issues and identifying apt CSR projects and their beneficiaries. Most PSUs may undertake investments without evaluating the impact of their CSR spend on the society, ultimately leading to inefficient utilization of funds.
· Also, lack of financial and non-financial incentives may not provide encouragement to PSUs to undertake CSR projects. PSUs would expect some financial and/or non-financial incentives that would act as an encouragement to undertake and promote CSR activities.
· The Act has made it mandatory for the PSUs to spend on the CSR activities. The unspent CSR amount in a particular year would not lapse and it would be carried forward to the next year. If the company makes losses in the following years may fail to spend such amount and the Board shall, in its report specify the reasons for not spending the amount. With lack of focused CSR policy, the company may get itself into a sticky situation.
Revised CSR and sustainability guidelines for CPSEs intend to attain the nation’s aim of inclusive growth. Although, these changing policies may face start-up challenges during its initial phase, the larger objectives like stakeholder gratification, socio-economic growth and development, these policies bring with them cannot be overlooked.
The Companies Act, 2013 (hereinafter referred to as ‘the Act’) Section 135 (1) states that, ‘Every company having net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more or a net profit of Rs. 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board.
It is further mentioned under Section 135 (5) that, ‘In pursuance of its Corporate Social Responsibility Policy’, the Board of every company referred to in sub-section (1) above, shall ensure that the company spends, in every financial year, at least 2% of the average net profits of the company (calculated as per Section 198) made during the 3 immediately preceding financial years.
The Act specifies the broad modalities of selection, implementation and monitoring of the CSR activities by the Boards of Directors of companies.Also, if the company fails to spend such amount, the Board in its report should specify the reasons for not spending the amount’. The activities which may be included by companies in their CSR policies are listed in Schedule VII of the Act. The provisions of Section 135 of the Act and Schedule VII of the Act apply to all companies, including Central Public Sector Enterprises (CPSEs).
Department of Public Enterprises (DPE) Guidelines on CSR and Sustainability issued on Oct 21, 2014 (specifically states that, ‘It is mandatory for all profit making CPSEs to undertake CSR activities as per the provisions of the Act and the CSR Rules. Even the CPSEs which are not covered under the eligibility criteria based on threshold limits of net-worth, turnover, or net profit as specified by Section 135 (1) of the Act, but which made profit in the preceding year, would also be required to take up CSR activities as specified in the Act and the CSR Rules, and such CPSEs would be expected to spend at least 2% of the profit made in the preceding year on CSR activities.’
However, as per DPE guidelines, the amount spent on sustainability initiatives in the pursuit of sustainable development while conducting normal business activities would not constitute a part of the CSR spend from 2% of profits as stipulated in the Act and the CSR Rules.
Besides, in case of CPSEs mere reporting and explaining the reasons for not spending this amount in a particular year would not suffice and the unspent CSR amount in a particular year would not lapse, it would instead be carried forward to the next year for utilisation towards the purpose it was allocated.
India’s top companies are ranked 1-100 based on Net Sales for the Financial Year 2012 and their spending on CSR. (Source: CSR Report Card: Where Companies Stand - Forbes India Magazine dated 18.3.2013).
In case of public sectors, revised guidelines on CSR and sustainability are being implemented from 1 April 2013, as a commitment of the CPSEs to their stakeholders to conduct business in an economically, socially and environmentally sustainable manner.
CSR spend by some of the ‘Maharatna’, ‘Navratna’ and ‘Miniratna’ CPSEs:
|
Name of the CPSE
|
NPAT
(Rs. in Crore)
|
CSR spend
(Rs. in Crore)
|
CSR as a %
of NPAT
|
||
|
Maharatna CPSE
|
|||||
|
Bharat Heavy Electricals Limited
|
3461
|
46.54
|
1.34
|
||
|
Indian Oil Corporation Limited
|
6967
|
81.91
|
1.18
|
||
|
Steel Authority of India Limited
|
2616.48
|
44.87
|
1.71
|
||
|
NTPC Limited
|
11,403.40
|
128.35
|
1.13
|
||
|
Name of the CPSE
|
NPAT
|
CSR spend
|
CSR as a % of NPAT
|
||
|
Navratna CPSE
|
|||||
|
Bharat Petroleum Corporation Limited
|
4060.88
|
34.38
|
0.85
|
||
|
Steel Authority of India
|
2616.48
|
44.87
|
1.71
|
||
|
Oil India Limited
|
2981.30
|
43.90
|
|
||
|
The Shipping Corporation of India Limited
|
247.66
|
1.24
|
0.50
|
||
|
Miniratna CPSE
|
|||||
|
NHPC Limited
|
978.79
|
31.88
|
3.26
|
||
|
Dredging Corporation of India Limited
|
37.55
|
0.40
|
1.06
|
||
The CSR activity has definitely gained ground and has generated discernible investments in various sectors. However, the value addition brought in by PSUs complementing government’s efforts is something that needs to be examined. For instance, The Act is set to generate from the corporates a capital of approximately Rs. 20,000 crore (Source: Forbes India issue of 2014) which will be spent on CSR activities revolving around the subjects of Schedule VII of the Act. On the other hand, the expenditure by the Government of India exclusively towards education (among the 10 subjects of Schedule VII) in FY 2012-13 was about Rs 75,000 crore. ‘According to the Union Budget 2013- 2014, Rs.1355.48 crore has been allocated to Social and Community Services, out of which Rs.125.52 crore is specifically towards education, sports, art and culture (Source: http://indiabudget.nic.in/ub2014-15/afs/afs1.pdf and ).Based on the statistics released by Forbes India issue of 2013, total of 5,611 crores have been spent on CSR activities out of which a substantial portion goes to education initiatives.
Looking at the current CSR spend figures in the above table, there seems more opportunity for the CPSEs to allocate their over CSR budget to under-funded CSR activities rather than focusing only on one CSR sector, like education. They could invest in other CSR activities by focusing on their strengths in innovation, project management and technology. More efficient use of CSR funds by the corporates after considering the Government funding to each of the CSR activities may assist in meeting ultimate CSR objectives.
Long before the concept of CSR came into picture, PSUs have been on forefront in solving socio- economic issues, may it be national emergencies, power and energy supply issues or education or public health issues in comparison to the Private Sector.
Along with the clearly seen social, economic and environmental benefits, The Act may directly impact PSUs and thereby pose numerous challenges;
· PSUs, being public organisations have greater social responsibilities in addition to their independent annual revenue targets. They are subject to more stringent scrutiny by parliament, the Comptroller and Auditor General (CAG) of India and other organisations, and are hence expected to be more cautious and transparent about their CSR portfolio.
· CPSEs may face the organizational level issues such as absence of a dedicated CSR team, active involvement of key stakeholders, budgetary issues and identifying apt CSR projects and their beneficiaries. Most PSUs may undertake investments without evaluating the impact of their CSR spend on the society, ultimately leading to inefficient utilization of funds.
· Also, lack of financial and non-financial incentives may not provide encouragement to PSUs to undertake CSR projects. PSUs would expect some financial and/or non-financial incentives that would act as an encouragement to undertake and promote CSR activities.
· The Act has made it mandatory for the PSUs to spend on the CSR activities. The unspent CSR amount in a particular year would not lapse and it would be carried forward to the next year. If the company makes losses in the following years may fail to spend such amount and the Board shall, in its report specify the reasons for not spending the amount. With lack of focused CSR policy, the company may get itself into a sticky situation.
Revised CSR and sustainability guidelines for CPSEs intend to attain the nation’s aim of inclusive growth. Although, these changing policies may face start-up challenges during its initial phase, the larger objectives like stakeholder gratification, socio-economic growth and development, these policies bring with them cannot be overlooked.
