Indian Regulatory Regime

Social accounting is not much popular in India as there as no legal binding on the business industries to report the social activities in their financial accounts. Although social reporting is much significant from the point of view of many parties unfortunately it is not mandatory in any country still it is optional and not even recommendatory many conflicting terms have been used. The disclosure of social information is considered as additional and voluntary information (not required by law).

Sachar Committee Report – In 1978, the Sachar Committee laid the emphasis that the companies should not ignore their social responsibility and publish social accounts in annual accounts. The acceptance of concept of “social responsibility” must be reflected in the information and disclosure that the companies make available for the benefit of the shareholders, creditors, workers and community. It was suggested that as far as possible social report must be cast both in quantity and monetary terms. The committee also felt the need that the board should also report on the future plans of the company it has made, to discharge its social responsibility and duties.

Companies Act, 1956 – The 217(1)(e) of the Companies Act, 1956 read with Companies (Disclosure of Particulars in the Report of the Board of Directors) Rules, 1998 regarding the following matters

1. Conservation of energy

(a) Energy conservation measures taken

(b) Additional investments and proposals, if any, being implemented for reduction of energy consumption

(c) Impact of measures at (a) and (b) above for reduction of energy consumption and consequent impact on the cast of production of goods

(d) Total energy consumption per unit of production in prescribed Performa in respect of industries specified in schedule thereto.

1. Technology absorption

Efforts made in technology absorption in the prescribed Performa

1. Foreign exchange earnings and outgo requires

(a) activities relating to exports ; initiatives taken to increase export ; development of new export markets for products and services and plan

(b) total foreign exchange used and earned

Securities and Exchange Board of India –

1. a) Employee Stock Option Plans (ESOP) – The information is required to be provided in compliance with Clause 12 of the Securities and Exchange Board of India (Employee Stock Option Scheme) and (Employee Stock Purchase Scheme) Guidelines, 1999, as amended.
2. b) Particulars of Employees – In terms of the provisions of Section 217 (2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, the names and other particulars of employees are required to be set out in the Annexure to the Directors’ report. However, having regard to the provisions of Section 219 (1) (b) (IV) of the Companies Act, 1956, the annual Report is required to be sent to all members of the Company, excluding the aforesaid information. Any member interested in obtaining such particulars may write to the Company Secretary at the registered office of the respective Company.

Bureau of Public Enterprises – The Bureau of Public Enterprises which regulates Central Public Enterprises puts some additional disclosure requirements in their annual reports. For example, BPE vide its letter no. BPE-1(17)/ADV/F/69 has made it obligatory for this enterprise to disclose the expenditure incurred by them on

(a) Social overheads

(b) Welfare work towards weaker section of society

(c) Employment to SC/BC

(d) Capital expenditure on townships in their annual reports.

In addition, Criminal Procedure Code (CPC) in 1898 under sec 133 empowers the District Magistrate to abandon industries which cause water pollution. Information under section 217(2A) of the Companies Act, 1956 read with Company (Particulars of employees) Rules, also requires some information to be disclosed regarding the employees. Factories Act, 1948 makes provisions for minimum facilities for the workers and cleanliness of the factory premises. The Act also levies various penalties for non compliance. The Prevention and Control of pollution Act, 1981 makes rules for controlling air pollution. laws at Central Government level include Prevention and Control of Pollution Act, 1974 to control water pollution by the industries. These Acts at have been supplemented by parallel state Governmental level like Municipality Act, 1951 of Calcutta.

Here, the role of industry associations deserves a mention for example; CII has various committees for social development activities and also developed a voluntary code for its members. Chambers like FICCI, PHDCCL and Bharat Chamber of Commerce and such others have set up foundations for this purpose. So, it seems established that although legal framework for environmental exposures has been developed in much part of the world, the frameworks requiring social impact have been relatively undeveloped.

ICAI role although is appreciative encouraging and regulating the corporate disclosure practices in India still it has not been able to bring out more concrete and innovative proposals for corporate social disclosures.

The companies have the tendency of complying with only mandatory requirements regarding disclosures. The fact that almost in all the countries, the companies disclosed the information which is compulsorily required by law has logic. Epstein et al (1976) made a similar observation when they attributed the increase in corporate social disclosure due to pressures from government regulatory bodies like Securities Exchange Commission.

Presidential Directives and Guidelines – Presidential Directives and guidelines issued by the Government of India from time to time regarding reservation for Schedule Castes, Schedule Tribes and Other Backward Classes in letter and spirit. Liaison Officers are appointed at various Units/Offices all over the Country to ensure implementation of the Government Directives.

Government Directives need public companies to disclose information on reservation for Persons with Disabilities and Ex-Servicemen and their representation.

The Companies Act, 2013

Mandatory CSR is to be implemented in India and which 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 1,000 crore INR and more, or a net worth of 500 crore INR and more, or a net profit of five crore INR and more.

The new rules, which will be 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 draft rules, that have been put up for public comment, define net profit as the profit before tax as per the books of accounts, excluding profits arising from branches outside India.

The Act lists out a set of activities eligible under CSR. Companies may implement these activities taking into account the local conditions after seeking board approval. The indicative activities which can be undertaken by a company under CSR have been specified under Schedule VII of the Act. The draft rules (as of September 2013) provide a number of clarifications and while these are awaiting public comment before notification, some the highlights are as

• Surplus arising out of CSR activities will have to be reinvested into CSR initiatives, and this will be over and above the 2% figure
• 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

Governance – Clause 135 of the Act lays down the guidelines to be followed by companies while developing their CSR programme. The CSR committee will be responsible for preparing a detailed plan on CSR activities, including the expenditure, the type of activities, roles and responsibilities of various stakeholders and a monitoring mechanism for such activities. The CSR committee can also ensure that all the kinds of income accrued to the company by way of CSR activities should be credited back to the community or CSR corpus.

A CSR committee of the board should be constituted. It should consist of at least three directors out of whom at least one is an independent director. This composition will be disclosed in the board’s report as per sub-section (3) of section 134. The CSR committee shall

• formulate and recommend a CSR policy to the board, indicating the activities as specified in Schedule VII of the Act
• recommend the amount of expenditure to be incurred on the activities indicated in the policy
• monitor the CSR policy regularly

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.