Updated Understanding of the India Companies Act
By Anita Whitehead, Managing Director, KPMG LLP
On April 1, 2014, the India Companies Act went into effect, including requirements for corporate social responsibility (CSR) contributions in the country. For a while, several questions regarding what constituted a CSR activity remained, but clarifications have been released. Here, we consider developments since the initiation of the act and look at how some of India’s biggest companies are fulfilling their obligations.
To recap the rules: Every year companies with operations in India are required to spend 2 percent of rolling average net profits from the past three financial years on specific CSR activities. Companies that meet the following financial thresholds must adhere to these regulations:
- Net worth above INR500 crores (~US$82 million)
- Turnover above INR1000 crores (~US$ 164 million)
- Net profit above INR5 crores (~US$820,000).
In addition to the 2 percent spending requirements, companies must also:
- Establish new governance processes for CSR, including the development of a CSR committee
- Prepare a CSR policy and an annual report.
CSR activities
When the Indian government first introduced the act, section VII stipulated CSR programs that would be applicable for CSR spending. These were:
- Eradicating hunger, poverty and malnutrition
- Promoting healthcare (including preventive health care, sanitation and safe drinking water)
- Promoting education, including special education and vocation skills (especially among children, women , the elderly and the differently abled), as well as livelihood enhancement projects
- Promoting gender equality and empowering women
- Ensuring environmental sustainability
- Protecting national heritage, art and culture (e.g., establishing libraries and supporting traditional arts)
- Providing support for armed forces veterans and their families
- Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports.
The government has since expanded this list to include:
- Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
- Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government
- Rural development projects
- Slum area development.
In addition, there is further guidance on the implementation of CSR programs and associated financial contributions:
- CSR activities, whether new or existing, must be documented within the company’s CSR policy. These activities must exclude activities that are undertaken in the normal course of a business or a company.
- Companies may implement CSR programs through nonprofit organizations that are not set up by the company itself - provided the organization has a three-year track record and provided there is a sound monitoring and reporting mechanism established for the partnership.
- Companies may also collaborate or pool resources to fund CSR activities, but both companies must report separately about the projects.
The Clean India Mission
Other than the CSR priorities outlined above, companies can direct their 2 percent funding requirements to Prime Minister Modi’s Clean India Mission. In his Independence Day speech on August 15, 2014, the Prime Minister emphasized the transformative power of cleanliness. In 2019, India will celebrate the 150th birth anniversary of Mahatma Gandhi, who famously said that sanitation is more important than independence. Prime Minister Modi noted that the most fitting tribute to Gandhi would be to ensure that every road, school, office, locality and neighborhood is clean. The Prime Minister’s Clean India Mission has sparked two major initiatives: Swachh Bharat and Clean Ganga.
Swachh Bharat aims to pave access to sanitation facilities for every Indian by 2019. This includes access to toilets, solid and liquid waste disposal systems, village cleanliness, and safe and adequate drinking water supplies. To achieve this goal, Prime Minister Modi has asked everyone to become an active part of Swachh Bharat, so that it can be a public movement rather than just a government mission. The government has established the “Swachh Bharat Kosh,” a fund to attract contributions from various entities—including corporations—for activities related to the Swachh Bharat initiative.
Similarly to Swachh Bharat, the Clean Ganga initiative includes a fund to pool money to help achieve its goals, in this case cleaning the Ganges River. The “Clean Ganga Fund” will focus on the following immediate interventions:
- Rehabilitating and upgrading existing sewage treatment plants
- Sewerage infrastructure
- Industrial pollution abatement.
Efforts such as Clean Ganga have received global recognition, particularly from countries like Israel, which has expressed interest in sharing its expertise on water purification, waste water treatment, and water reuse with India. The Clean Ganga initiative would benefit enormously from Israel’s capabilities.
Company case studies
Companies throughout India are taking the act seriously and implementing community initiatives to meet the requirements. Let’s take a look at two of these efforts.
Reliance Industries is one of India’s largest conglomerates, with revenues of nearly $75 billion. In 2014, the company contributed $118.3 million towards CSR activities, or 3.24 percent of its net profit. That’s among the highest percentages in the country.
Reliance’s CSR Board Committee approves all the company’s CSR projects. It comprises three directors, is headed by an external director and has recently focused on making employee volunteering a core part of the corporate culture. Within the next five years, the company aims to have at least 10 percent of its employees volunteering.
The company has also targeted other major CSR initiatives on education, health, safety, and environment.
[Source: Reliance Industry Annual Report 2013-2014]
Coal India is the world’s largest coal producer, employing more than 350,000 people. Following a parliamentary panel in December 2013 that pointed out Coal India’s failure to meet CSR targets, the state-owned enterprise enhanced its efforts to meet the new requirements.
Most significantly, Coal India established a team of 120 officers to oversee the company’s CSR activities and it has prepared a revised CSR policy that is approved by the Board. In FY15, Coal India plans to spend $78 million on CSR efforts, many of which support Prime Minister Modi’s Clean India Mission. This will include $39 million towards sanitation in schools and households, plus the construction of toilets in over 35,000 schools.
Moreover, the company plans to build $1.2 billion worth of solar projects to offset carbon pollution, a measure that will also contribute to the Prime Minister’s plan to provide round-the-clock electricity to homes and factories.
[Sources: Coal India’s Annual Report FY2014; Coal India’s Sustainability Report FY2014; Debjoy Sengupta, “Coal India to Recruit 120 Officers for CSR Initiatives, The Economic Times, 2014; Rajesh Kumar Singh, “Coal India Said to Plan Building $1.2 Billion of Solar Projects,” Bloomberg, 2014]
Disclaimer
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
About the author:
Anita Whitehead
Managing Director
KPMG
Anita Whitehead is a Managing Director with KPMG’s Development and Exempt Organizations practice. Based in Washington, DC, she assists global commercial organizations strategize their philanthropic vision and manage the legacy they wish to leave behind. KPMG’s DEO professionals are uniquely familiar with the trends affecting corporate responsibility, corporate philanthropy and charitable activities – including tax compliance services related to giving within the commercial environment.
