Companies Act 2013:Redefining CorporateSocial Responsibility

2 | Companies Act

Gearing up for implementingSection 135

Call to action

Identify which of your legal entities Form a board-level Corporate (and subsidiaries) are covered Social Responsibility (CSR)

committee under Section 135 of the Act

Assess your current allowable Document a CSR Policy expenditure on CSR and how and develop a road map to

much more you need to spend operationalize the CSR policy

Applicability Section 135 of the Act applies to every company, which has a net worth of INR500 crore or more; or turnover of INR1,000 crore; or more or a net profit of INR5 crore or more during any financial year.

How much needs to be spent? ► The board of every covered company shall

ensure that the company spends, in every financial year, at least 2% of the average net profits (calculated as per Section 198) of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy.

Assess the alignment of existing CSR activities to Schedule VII of

the Act

Develop a monitoring mechanism to ensure implementation of activities and use of funds

according to the CSR policy

What CSR activities can you undertake? ► The company shall undertake activities or

contributions as prescribed in the Schedule VII of the Act.

► The company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR activities.

Key compliance requirements ► Constitute a CSR committee of the board ► Unlisted public company or private company, which is not required to appoint an

independent director can have CSR committee without an independent director; two directors in case of a private company having only two directors; two persons in case of a foreign company — one person nominated by the foreign company and the other person as defined in Section 380(1)(d) of the Act;

► Three directors with one independent director for all other covered companies. ► The board’s report shall disclose the composition of the CSR committee. ► The CSR Committee shall: ► Formulate and recommend to the Board, a CSR policy, which shall indicate the

activities to be undertaken ► Recommend the amount of expenditure to be incurred on the activities referred

above ► Monitor the CSR Policy of the company from time to time

► The board of every company shall: ► Approve the CSR Policy for the company after taking into account the

recommendations made by the CSR Committee; disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed

► Ensure that the activities as are included in CSR Policy of the company are undertaken by the company

► Provided further that if the company fails to spend such amount, the Board shall, in its report made, specify the reasons for not spending the amount

Key considerations ► CSR activities implemented through

third-party NGO partners will only be considered as CSR spend if such organizations have an established track record of at least three years in executing activities in related areas.

► Companies may collaborate or pool resources with other companies to undertake CSR activities and any expenditure incurred on such collaborative efforts will qualify for computing the CSR spending.

► Only such CSR activities will be taken into consideration as are undertaken within India.

► CSR projects/programs of a company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value.

3Companies Act |

Questions to be considered by a CXO

Well Requires prepared consideration

Strategy ► Have we identified what CSR activities will be undertaken by the company? Are we comfortable

that these activities make business sense, are differentiated from the competition and have high social impact?

► Have we considered the tax implications of CSR activities and related expenditure? Do we have a tax efficient CSR policy?

► Have we considered how CSR activities of multiple entities in our group shall be designed in order to minimize cost and maximize social ROI?

► Have we considered if the scope of sustainability programs focused on internal stakeholders be expanded to benefit the larger community and if this will be eligible for CSR spend according to the Act?

► Have we considered collaboration and pooling of resources to implement CSR activities with other companies who need to comply?

► Have we considered the potential risk of negative feedback from external stakeholders and influence groups as a result of making the CSR policy and report public? Do we have an action plan to manage this?

Operations ► Have we evaluated the most suitable mechanism for CSR implementation for our company – will

CSR activities be implemented in-house, through a Not For Profit organization set up by the company or through third-party NGO partners?

► Do we understand the regulatory requirements and compliances related to CSR activities? ► Are we sure that we are working with the right partners to implement our CSR policy? Do our

partners have an established track record of at least three years in carrying on activities in related areas, in order for these partnerships to be eligible for CSR spend? If not, have we identified a poolof eligible partners to implement CSR activities?

► Do we have the monitoring mechanisms to ensure that third-party NGO partners will implement the company’s CSR activities effectively and utilize funds for the intended purpose?

► Will contributions in kind and volunteer programs be eligible as CSR spend? ► Have we evaluated the accounting implications of the CSR policy, which the company intends to

frame under the Act? Have we assessed the accounting implications of unspent amount of the 2% of the CSR activities in a particular year?

Governance ► Have we assessed how the inclusion of an independent director on the board will impact its

functioning, reporting and decision making? ► Do the board members have adequate orientation on the CSR-related requirements of the Act and

its impact on the discharge of their duties? ► Have we reevaluated the structure, purpose and objectives of our existing corporate foundation

(if any). Will CSR activities according to Section 135 be implemented through this organization? ► Have you considered the implication of related party provisions in the Act on CSR spend? For

example, how will contributions to promoter’s/director’s philanthropic foundations be handled? How will this be perceived by external stakeholders and influence groups?

► Do we have the systems and processes in place to provide assurance to the board that CSR spend is according to the CSR policy?

4 | Companies Act

Strategy

Operations

Governance

Notes

Some of our CSR experience

Client Context Our Solution Value Delivered

► We aligned the company’s CSR plan with the guidelines issued by the Department of Public Enterprises, Government of India.

► We addressed various stakeholder requirements including beneficiaries.

► We rationalized the number of CSR activities

► We provided recommendations to strengthen capacity of the CSR team.

A large public sector enterprise

► The company was already implementing a diverse range of CSR activities.

► It wanted to revisit its CSR policy to rationalize activities, increase impact and develop a comprehensive long-term plan.CS

R Policy design and

implementation road map

► We conducted an extensive eco system review to understand the needs and perspective of different stakeholders on the existing and future CSR activities of the company.

► We assisted the company in developing CSR strategy including CSR policy, organizational strategy, operational strategy; monitoring and evaluation reporting framework.

► We assisted the client develop a road map to facilitate implementation of the CSR strategy.

Listed Indian operations of a global FMCG

► The company recognized the fact that water scarcity is one of the biggest crises facing India.

► It needed advice on program design and monitoring.P

rogram design and

concurrent monitoring

► We supported in designing innovative and cost effective programs to be implemented by the company’s partners.

► We handheld partners in terms of concurrent program and financial monitoring of ongoing programs.

► We provided insights to strengthen the program design and results management framework.

► We provided recommendations to the partners to improve implementation of the program and financial management of grants.

Leading unlisted telecom operator

► The company implements its CSR activities through third party NGOs.

► The client wanted to assess the results achieved by projects and evaluate grant expenditure.

Programmatic an d financial

evaluation of CSR activities

implemented by NGO partners ► We conducted field visits

to project locations to assess the status of project implementation

► We identified if the benefits under the projects had reached the intended beneficiaries.

► We reviewed the utilization of funds provided to the project partners.

► We provided recommendations to improve the programmatic and financial management processes at the partner level.

6 | Companies Act 6

How can EY assist you with CSR?

Strategy

Operations

Monitoring and

Reporting

Areas of intervention Do I need support?

► Identify existing CSR activities that can be leveraged to enable compliance with the Act

► Identify additional CSR activities (allowable as per Schedule VII) that make business sense to be undertaken by the company

► Identify opportunities for pooling of resources with other companies to implement CSR

► Provide orientation to the board members on Section 135 and their responsibilities

► Develop the CSR policy considering the requirements of the Act

► Evaluate operating models and alternate forms of legal presence for CSR implementation

► Facilitate registration of a not-for-profit entity; and obtain tax and regulatory approvals

► Identify potential third party NGOs to facilitate implementation of CSR activities and conduct partner due diligence

► Design CSR accounting policy, standard operating procedures and develop monitoring mechanism for CSR

► Design MIS and board reporting framework

► Capacity development of CSR team and partners

► Conduct concurrent programmatic and financial monitoring of CSR activities and implementing partners (including internal audit of CSR operations)

► Evaluate programmatic impact of CSR activities and grant expenditure evaluation

► Prepare and validate CSR reports to facilitate board reporting

► Document good practices and learning from CSR activities for knowledge sharing in the wider community

To measure the gap that you need to bridge to comply with the Act and understand more about how we are assisting our clients with CSR, please contact us at csr.solutions@in.ey.com

Practical approach ► Our experience in working

with corporates and social sector organizations allows us to provide you real world solutions to CSR that makes both business sense and meets social objectives.

Relevant experience ► We have assisted leading corporate entities across industry sectors

and corporate foundations in India with CSR Advisory including designing social business models.

► We have significant experience in policy advisory for the Central and State governments in India allowing us to design CSR activities aligned with national priorities.

► The depth and breadth of our experience will give you a head start in realizing your CSR vision.

► We have worked with not-for-profit organizations globally allowing us an in-depth appreciation of what really works and to benchmark the performance of your CSR activities.

Requisite Skills ► Our team includes professionals with

development sector, tax and advisory experience, operating as one team.

► Our team includes professionals who have program design and implementation experience in health, education, skills development and environment, among other areas relevant to Schedule VII.

WhyEY?

8 | Companies Act

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