Company CSR spend delinked from group's finances

Companies, reporting a standalone net profit during a year, will now have to spend mandatorily on corporate social responsibility (CSR), even if the parent group is registering a loss. In other words, even if a corporate group is reporting a loss, its subsidiaries, clocking a profit, will have to spend two per cent of their average net profit on CSR.

If a company fails to spend the amount, it will have to explain the reason for it.

“The new law makes it compulsory for companies to spend on CSR on a standalone basis. Hence, not only they have to make this expenditure irrespective of the group’s loss or profit, but also as a percentage of their standalone average net profit,” said N Venkatram, managing partner, audit, Deloitte Haskins & Sells.

ETHICAL CAPITALISM
A company having a net worth of Rs 500 crore or more, or a turnover of Rs 1000 crore or more, or a net profit of  Rs 5 crore or more, during a year, will have to constitute a CSR Committee of the Board

• The committee will comprises three or more directors, with at least one independent director.
• It will formulate and recommend a CSR policy to the board, indicating activities to be undertaken by the company
• It will recommend the amount of expenditure on the activities 
• It will monitor the CSR policy of the company from time to time
• The board will have to ensure it spends at least 2% of the average net profit of the company made during the three immediately preceding financial years, in pursuance of the CSR Policy

Some say, in the absence of a penalty for defaulters, the whole exercise might turn futile. Besides, companies may use the “explain” clause to get away with the norm.

“Companies may explain their parent had booked a loss for the year, and, therefore, will not contribute towards CSR,” says Pavan Kumar Vijay, managing director, Corporate Professionals.

According to him, companies are required to think of CSR spend as a good practice and not a tax: “It is important companies inculcate CSR as a habit, so if there is a profit, there is a spend on it, too.”

There were no mandatory provisions in the old law as regards CSR. However, the new one, with various amendments to the 1956 Act, makes it mandatory for a company having a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more, during a year, to constitute a CSR committee of the board. This is required to ensure the amount attributed to CSR is utilised effectively, preferably in areas adjacent to where the company has operations.

Experts say the norms will cover a significant number of companies under their purview.

According to the newly-amended law, companies will also have to give additional information, by way of notes, to the statement of profit and loss, regarding aggregate expenditure on CSR activities.

The Bill also lists specific activities that qualify as CSR initiatives.

For instance, eradicating hunger and poverty, promotion of education and gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, malaria and other diseases, ensuring environmental sustainability, imparting vocational skills and contribution to the prime minister’s national relief fund or any other fund set up by the Centre or a state for socio-economic development and relief and funds for the welfare of the schedule castes, the scheduled tribes, other backward classes, minorities and women are as CSR initiatives.