Section 135 of the Companies Act, 2013 is easily the most hotly debated of the 470-something provisions in the new legislation. Bhaskar Chatterjee, the CEO and director-general of the Indian Institute of Corporate Affairs, put it well at a public event: “This single provision has evoked more discussion than all 469 others put together!” So, here’s a dummies guide to empower you:

What is Section 135? [also see here]
Simply put, it mandates that qualifying companies must spend a minimum two percent of their average profit before tax for the past three years on corporate social responsibility (CSR).

Who are these qualifying companies?
Companies that trigger any one of the three qualifying criteria: a net worth of Rs 500 crore or more; a turnover of Rs 1,000 crore or more; a net profit of Rs 5 crore or more.

What’s next?
Draft rules on Section 135 (and more) are up on the internet and Sachin Pilot, the minister of corporate affairs, expects comments to reach him by October 8. A second set of comments covering nine other chapter chapters has been made live for public comments until October 19.

Which other countries have mandatory CSR spends?
India is the first country on planet earth to mandate such an adventure (see a report by KPMG and the copy of draft rules). This follows guidelines to all state-owned undertakings in the government of India to do the same wef April 1, 2010.

“That gave us the moral authority to mandate CSR,” says Chatterjee. Not coincidentally, this Odisha cadre IAS officer was the secretary of the department of public undertakings at that time and made CSR part of the yearly assessment.

What’s so big about 2 percent?
No much, if you’re willing to consider that spends of the ministry of rural development alone are in the region of Rs 70,000 crore.

But big enough if you see estimates by Business Standard that Rs 6,500 crore will need to be spent annually by companies sitting on the BSE500 alone.

Rs 12,000-15,000 crore of annual spending is the overarching estimate by IICA as well as CELL, the Centre for Ethical Life and Leadership, a new Section 25 entity led by former chief election commissioner SY Quraishi.

How many companies will be covered?
Chatterjee estimates that out of 11 lakh companies in India, of which around 8 lakh are registered, the ambit of Section 135 covers about 8,000 companies.

What’s the opportunity?
First, mandatory 2 percent every year is different from charity or donations on whim.

It means India Inc. can make a sincere effort to energize the social sector without worrying about relative competitiveness inter se.

It also means a serious accountability of two designated directors within each company and an independent director – together described as the ‘CSR committee’ to build a more rigorous intervention. The disclosures of what has been the company’s policy on CSR and outcomes therein will need to be displayed at various places. With ‘name and shame,’ the honest company will be patted. Others will be hollered. “CSR is being brought forward from the backroom to the boardroom,” says Chatterjee.
 
Predictably, lawyers, auditors, accreditation agencies, chartered accountants, independent directors, public relations folks, and the entire civil society types, not to mention the friendly-neighbourhood neta, now have skin in the game.

The jostle isn’t limited to the Big Four advisories. Remember, there are 8,000 companies out there: so, 24,000 directors, 8,000 of them independent directors!

Coca Cola, for example, has 63 distinct companies in India that fall within one of the three qualifying criteria. Each of these 63 will now need to have an independent director and two others comprising a CSR committee! Mercifully, pooling is allowed (in fact, encouraged). So they can make a collective project hopefully without having a cynical bureaucrat, oblivious of ultra-modern trends like Porter & Kramer’s Shared Value, at their throat.

Trusts – and shadowy vehicles! – are rising to the occasion. So are good men like S Ramadorai and Ashish Kumar Chauhan of the Bombay Stock Exchange Ltd (BSE) who have joined hands with IICA to develop a CSR index. Examples of responsible investing are available in Brazil and South Africa and the index should be up a few months after the first CSR reporting kicks off on April 1, 2014.

What if a board is found wanting?
Besides ‘name and shame’ the provisions of an earlier section of the Act lay down personal liability of the officers of the board including stiff fines and imprisonment up to three years.

Talking of rules, what look like ambiguities in the draft up for comment? Let me cite a few. The CSR committee is to be manned by two directors and an independent director. But not all companies, even as they trigger the qualifying criteria on CSR, presently need to have independent directors: some exist below the threshold limits for mandatorily having independent directors.

This is also the case with private companies. They too don’t need to have independent directors.

Is the idea therefore to ensure that even such companies now need to have an independent director only to satisfy the CSR rules?

Chatterjee says “yes.”

The draft rules rightly suggest donations or activities exclusively benefiting a company’s own employees and families will not qualify as CSR. “Only activities which are not exclusively for the benefit of employees of the company or their family members shall be considered as CSR activity,” they say; or “rupee measurable initiatives,” as Chatterjee puts it.

But what of spends by companies on, say, salaries of their CSR department? Or spends in territories outside India – an important enough dilemma for those Indian companies that have a global footprint?

Chatterjee’s reply, for the moment, is that only those spends that a board can justify from its conscience and heart will be credited.

As for CSR outside India, sorry, do it if that country enjoins you, but no credit here at home. “You may make the spends in Timbuktu. But what counts is what you do here in India,” says Chatterjee.

Among nine activities where credit accrues, elder care, the differently abled or even CSR on animals hasn’t been included yet. Nor will public-service advertising by, say, radio or television channels.

There’s hope. CELL has offered to anchor all worthwhile submissions to this effect.

Is there an external auditor or even an accredited list of NGOs?
None so far. But as the Act is a reality and rules are being debated, the first sentence on outcomes, external audits and ‘accrediting the accreditors’ has begun to be written.