Saturday, March 1, 2014



Welcome Rules

The Union Government has now notified the rules governing corporate social responsibility (CSR), clarifying the scope of CSR and, at the same time, also clarifying, that contributions to state government funds and funding of political parties will not be considered CSR activities.

CSR activities will now include -

Preventive healthcare, sanitation, providing safe drinking water, rural development projects, measures to benefit armed forces veterans, Promoting rural sports, nationally recognized sports, paralympic sports and Olympic sports, setting up homes and hostels for women, orphans and senior citizens, measures to reduce inequalities faced by socially and economically backward groups and support to technology incubators in academic institutions etc .

Working towards protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art, setting up public libraries, promotion and development of traditional arts and handicrafts would also come under CSR ambit. 

Promoting education, environment sustainability, gender equality and eradicating hunger, poverty and malnutrition are some of the other activities that will be considered CSR activities.

Other CSR activities would be ensuring ecological balance, protection of flora and fauna, animal welfare, agro-forestry, conservation of natural resources and maintaining quality of soil, air and water.

Every company having a net worth of Rs.500 Cr or more or revenue above Rs.1,000 Cr or a net profit above Rs.5 Cr needs to spend at least 2% of average net profits for past three years on the CSR activities.

The definition of net profit will not include dividend income received from another Indian company following the provisions of the companies law or from profits of its own overseas branches.

Corporate affairs minister  Sri Sachin Pilot said that the rules have been finalized after extensive discussions with all stakeholders and will come into effect from 1 April,2014.

The CSR activities need to be undertaken as per approval of the company’s board in accordance with its CSR policy and the decision of its CSR committee.

A company can also carry out CSR works through a registered trust or society or a separate company.

Also, the CSR spending will have to be undertaken in India and should not benefit any employees of the company.

“The rules provide for the manner in which CSR Committee shall formulate and monitor the CSR Policy, manner of undertaking CSR activities, role of the board of directors therein and format of disclosure of such activities in the board’s report,” Said Shri Sachin Pilot, the Union Minister.
The CSR Notifications have been issued for Section 135 and Schedule VII of the Companies Act, 2013, that relate to CSR spending by companies.  The final rules notified by the government will be applicable to both domestic companies and to foreign companies operating in India.

The rules removed contributions to any state government fund as recognized CSR spending, probably to avoid likely misuse by state governments. But, instead, the Union Government could have specified in the rules that state Governments shall not have power to impose any such obligations in respect of CSR on companies functioning in their States.

Most companies function across several states and states must not have the Power to control companies in respect of such activities. Companies must have complete freedom to choose their line of CSR activities. Further, if states also impose similar burden, it will be double the burden on the companies and is not at all Healthy.

This is, by and large,  a very sensible and welcome legislation. Some modifications and improvements are however necessary. The term “ at least 2% of average net profits for past three years” imposes an unnecessary burden on companies currently incurring Net losses. The sensible thing is to limit the application to Years where there is a net Profit. In most cases, the latest Net profit is more than the 3 years average and the company will be spending more in the current year on that basis, rather than on the basis of 3 years average. On the other hand, if a company incurs net losses for one or two years, it is not fair to burden it in that year with CSR, simply because, it had net profits in the third previous year.

Dividend distribution must be allowed only after setting apart CSR funds. Where a company spends more than 2% in a year, the excess must be allowed for tax benefit in the next year, to the extent of 50% in some cases and 100% in respect of some priority goals of the nation.

In my view, maintaining Orphanages, education for orphans, education of girl child must be taken as Priority Goals for the Nations. 

There are no other Most backward classes than Orphans in our country. Orphan is the most unfortunate and most uncared for one in the society, cruelly left out by his / her own parents – and usually grows into a Beggar, thief, or a goonda, if he survives in this world.  India must not have a single child as Orphan child. 

Second, there are no other more insecure persons than girls in our country right now. If an orphan child is a girl child, she ends up in a brothel or dies in rapes, gang rapes or through sexually transmitted diseases. How many new, young girl children are abducted and thrown into Brothels across the country – God knows – but we as society and as Government don’t even think about it. We cannot afford to have one more girl child being thrown into a Brothel or otherwise exploited helplessly.

Every single report of molestation, rape and gang rape makes us look like a mentally sick society. And, everyday, new paper pages are filled with these news.

Empowerment of Orphans and Girls is therefore the most important aspects of CSR. These two – orphans and Girl children must be top two national priorities for us and in respect of CSR as well.  Next comes Good Old age homes. For these Goals, any amount of encouragement can be given to companies.

In respect of these goals, any contribution made by other smaller companies must also be encouraged by more attractive tax benefits. For supporting Orphans and Girl children, why only 50% tax deductibility? What Government must be doing, private Individuals and companies are doing even now. So, why not 100 % tax benefit? Government must think about it.  Promoting good charity is also an art of Governance.

Environment, sports etc are secondary Goals.

Overall, the rules for CSR are welcome. And, the young Union Minister, Shri Sachin Pilot, deserves all appreciation for the same.

That said, these, like many other things that are coming up painfully slowly – were required in 1947 – and represent our woefully Missed Opportunities.

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