CSRidentity
 
2% : The magic number the world will watch
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Two percent
Dr Bhaskar Chatterjee (IICA)
2% Corporate views
2% NGO Views
2% Our research
9 Principles
Section 135 (Page 278)
Companis Bill 2012

What is the 2% formula ?
In India, the concept of CSR is governed by clause 135 of the Companies Act, 2013, which was passed by both Houses of the Parliament, and had received the assent of the President of India on 29 August 2013.
The CSR provisions within the Act is applicable to companies with an annual turnover of Rs 1,000 crore and more, or a net worth of Rs 500 crore and more, or a net profit of Rs 5 crore and more. ( 1 crore is 10 million)

The new rules, are applicable from the fiscal year 2014-15 onwards, also require companies to set-up a CSR committee consisting of their board members, including at least one independent director.

The Act encourages companies to spend at least 2% of their average net profit in the previous three years on CSR activities. The ministry’s rules, define net profit as the profit before tax as per the books of accounts, excluding profits arising from branches outside India.

The company can implement its CSR activities through the following methods:
- Directly on its own
- Through its own non-profit foundation set- up so as to facilitate this initiative
- Through independently registered non-profit organisations that have a record of at least three years in similar
such related activities
- Collaborating or pooling their resources with other companies
Only CSR activities undertaken in India will be taken into consideration
Activities meant exclusively for employees and their families will not qualify
• A format for the board report on CSR has been provided which includes amongst others, activity-wise , reasons for spends under 2% of the average net profits of the previous three years and a responsibility statement that the CSR policy, implementation and monitoring process is in compliance with the CSR objectives, in letter and in spirit. This has to be signed by either the CEO, or the MD or a director of the company.

Role of Board
Form a CSR commiittee
Approve the CSR policy
Ensure implementation of the activties under CSR
Ensure 2% spend
Disclose reasons for not spending the amount (if applicable)

Role of CSR Committee
Three or more directors with at least one independent director
Formulate and recommend a CSR policy to the board
Recommend activities and the amount of expenditure to be incurred
Monitor the CSR policy from time to time

Reporting
The new Act requires that the board of the company shall, after taking into account the recommendations made by the CSR committee, approve the CSR policy for the company and disclose its contents in their report and also publish the details on the company’s official website, if any, in such manner as may be prescribed. If the company fails to spend the prescribed amount, the board, in its report, shall specify the reasons.

CSR processes
Developing a CSR strategy and policy
Identify a partner agency and due diligence of the implementation partner
Project development, approval & start the project
Monitoring the project (Its a continuous process)
Evaluation of the project (Every financial year)
Impact measurement
Report communication within the company, to shareholders, to other stakeholders like government, NGOs, media, consultants, supply chain, organisation which serve semilar communities, companies in the industry, companies and other stakeholders in other countries

Section 135 of the proposed Companies Bill 2011 indicates that every company having net worth of Rs 500 crore ($92.35 mn) or more, or turnover of Rs 1000 crore ($184.7 mn) or more or a net profit of Rs 5 crore ($0.92 mn) or more during any financial year shall constitute a CSR Committee of the Borad consisting of three or more directors, out of which at least one director shall be an independent director. The Board of every such company, shall make every endeavour 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, in pursuance of its CSR Policy: Provided that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
Download the Proposed Companies Bill 2012

Which issues will be considered as part of CSR
SCHEDULE VII

The present Schedule VII of Sections 135 indicates the activities which may be included by companies in their Corporate Social Responsibility Policies.
Activities relating to:—
(i) eradicating extreme hunger and poverty;
(ii) promotion of education;
(iii) promoting gender equality and empowering women;
(iv) reducing child mortlity and improving maternal health;
(v) combating human immunodeficiency virus, acquired immune deficiency
syndrome, malaria and other diseases;
(vi) ensuring environmental sustainability;
(vii) employment enhancing vocational skills;
(viii) social business projects;
(ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
(x) such other matters as may be prescribed.

Here is what you need to understand.
1 The Companies Bill 2012 is passed by the Lok Sabha and Rajya Sabha.

2 The 2% formula is a recommendation and not mandatory. If the company is not able to invest the 2% amount in CSR for whatever reasons, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

While many sceptics feel that companies will find it easy to justify why they have not spent the money, CSRidentity.com feels otherwise because of several reasons. First and foremost, the IICA is going to keep a close watch. And then, multiple stakeholder groups including competition, Environmental Groups, Social Groups and NGOs, Investors, Media and others will ensure that exceptional justification is justifiable.

3 While legally it is applicable to company's having net worth of Rs 500 crores ($92.35 mn) or more, or turnover of Rs 1000 crore ($184.7 mn) or more or a net profit of Rs 5 crore ($0.92 mn) or more during any financial year, it must be noted that pressure from multiple stakeholders will mean that every company will sooner than later have to think in this direction.

4 The formula is to aggregate the total new profit of the companies for the last three years, take an average and then make 2% of the average.

5 Each company should constitute a CSR Committee of the Borad consisting of three or more directors, out of which at least one director should be an independent director. This is no ordinary committee. The members have great responsibility not only to ensure transparency and accountability, but action on the ground.

What would be the CSR budgets ?
CSRidentity.com has analysed the repurcussion of the 2% formula to leading 500 public listed companies and is trying to get informal indications of budgets of MNCs which are not listed but which invest significant amount of money on CSR.

We believe many companies with less than Rs 1000 crore turnover, specially the cooperative banks and large number of enlightened entrepreneurs running SMEs and MSMEs have their own CSR budgets. While the absolute number per company may not be large, the sheer number of such companies is such that it might add a couple of thousand crores to the overall CSR investment. And the pressure from companies which want their Supply Chain to have proper CSR initiatives, the peer pressure and self enlightement means this funding is going to see geometric increase and will match or overtake the funding by the top 500 listed companies sooner than later.

CSRidentity.com feels that if we are really talking about 2% CSR in not just 18000 corporates the IICA is analysing but of compnaies with less than Rs 1000 crore turnover or not Rs 500 crore net worth or not making profits if Rs 5 crore per year, and use this as a CSR law for every registered corporate, then we are talking CSR Funding of much over Rs 10000 crores per year.

Will the new formula make a serious difference to the CSR scene in India ?
There are two ways to look at this
One : The bill has the potential to ensure that substantial funds are available for nation building initiatives. And this was necessary considering the fact that a lot of international funding is getting diverted to deserving countries like Afghanistan or some of the African countries. So it is a good step.

When we talk with companies and NGOs, the big question mark seem to be on whether the money will be invested or wasted.

CSRidentity.com believes that there are good chances of the money being invested because companies are smart enough to realise that if they have to invest the money anyway, and the 2% formula does not take into account the funds invested in employee welfare and many other issues, then, they better invest it in a way which will give good ROI, in terms of goodwill with the government, communities, customers as well as global partners. Plus, now that the companies have to share where they have used the money or why they have not used the money, many community groups or media, will play the role of the watch dog.

All in all, it will make more sense in putting more time and strategy in the philanthropic investments now, more than ever.

The larger issue is whether this bill will take us backward because of the focus on philanthropy.
.
Indian companies are going global and globally there is more attention on sustainability and not philanthropy. So people who are part of CSR for over a decade or so, are somewhat worried because the 2% attention may hijack the larger sustainability agenda because companies will now have to spend time on complying action and reporting for the 2% rather than focusing on CSR in business processes or supply chain initiatives ...

CSRidentity.com believes that while some concerns may be genuine , Indian companies, specially those who are already global, will never loose their direction. The more global our companies become, the more they will think about their business processes or human rights or local employment or signatory issues, regulations, compliances, systems, indices ....And the global reporting practices are more comprehensive and this will anyway include what they have to report to the government and people of this country.

There is a significant interest in other countries on the 2% issue. If Indian companies do well, other countries specially the developing and underdeveloped countries may be tempted to look at this route, and this will then be seen as a game changing decision not just for India but sustainability globally.

Will the new formula increase paperwork & bureaucracy ?
CSRidentity.com does not believe it will increase paperwork.

Infact companies and their investors should thank the government for this, simply because while companies are serious about every other investment and spend substantial energies on financial audits, CSR budgets are not scrutinised as they ideally should have been (given the quantum of investments). Plus the impact of these investments on communities, country and the company is also not analysed.

If CSR departments are going to be questioned on their investments, they will have to strategise their investments in terms of issues, geographies and impact. CSR teams will also ensure more professionalism from their NGO partners. And all this will benefit the community, country and therefore the companies more.

Globally shareholders demand information on sustainability initiatives because they are concerned about the sustainability of the company they invest in, in terms of whether there are image risks, or financial risks related to environment or risks related to loosing business because of manpower availability etc. Investors in India, today or tomorrow, will start asking questions, and this documentation will be a blessing for the companies, because it will make them serious about all the branches and leaves of their CSR Tree.

CSRidentity.com does not believe that the new Companies Bill will increase paperwork and bureaucracy. Infact it will make CSR departments ask other departments to report, which directly ensures more "Buy in" for CSR across the company. And we feel that when the companies start reporting on their own, look at their investments, processes and challenges, companies themselves will come out with innovations or applications of innovations in every investment, business process and so on.

Ministry of corporate affairs
'A' Wing, Shastri Bhawan
Rajendra Prasad Road
New Delhi - 110 001
Phone : 011-23384660, 23384659
Email : hq.delhi@mca.gov.in
oandm.dca@sb.nic.in

Shri Naved Masood
Secretary
Ministry of Corporate Affairs
New Delhi.

Dr Bhaskar Chatterjee
Director General & CEO
Indian Institute of Corporate Affairs
Plot No. :- P 6,7,8
Sec. 5, IMT Manesar,
Dist. Gurgaon 122 050
Haryana
Phone : 91 124-2290400
Phone : 91 124-2291064