Financial Reporting and CSR, Financial Statements Analysis Notes

Financial Reporting and CSR
Financial Statements Analysis Notes
B.Com Notes 6th Sem CBCS Pattern

Unit – 3: Financial Reporting and CSR

Q. What do you mean by the term Financial Reporting? What are its objectives? Explain its Importance and limitations.        2016, 2019

Q. Mention some essential or qualitative characteristics of financial reporting

Q. What do you mean by financial reporting? State the various steps adopted by business to enhance transparency in financing reporting process.                  2017

Q. What is corporate social responsibility reporting? Explain the present legal provisions of corporate social responsibility and its reporting practices in India.             2017

Q. Write a note on Corporate Social Reporting. What are the essentials of a perfect corporate social responsibility report?                

Q. Write a brief note on recent developments in the field of corporate social responsibility.

Q. Discuss the current status of Corporate Governance Reporting in India. How does Corporate Governance Reporting differ from Corporate Financial Reporting?         2019

Q. Give a brief note on mandatory and voluntary disclosures on Corporate Social Responsibility Reporting.

Q. What are the objectives of corporate governance Disclosure Practices? Describe the guidelines on corporate governance reporting as per Clause 49 of listing agreement002E


Meaning of Financial Reporting, its components and objectives

Basically, financial reporting is the process of preparing, presenting and circulating the financial information in various forms to the users which helps in making vigilant planning and decision making by users. The core objective of financial reporting is to present financial information of the business entity which will help in decision making about the resources provided to the reporting entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided. Financial reporting is of two types – Internal reporting and external reporting. The financial report made to the management is generally known as internal reporting and the financial report made to the shareholders and creditors is generally known as external reporting. The internal reporting is a part of management information system and they uses MIS reporting for the purpose of analysis and as an aid in decision making process.

 The components of financial reporting are:

a)       The financial statements – Balance Sheet, Profit & loss account, Cash flow statement & Statement of changes in stock holder’s equity

b)      The notes to financial statements

c)       Quarterly & Annual reports (in case of listed companies)

d)      Prospectus (In case of companies going for IPOs)

e)      Management Discussion & Analysis (In case of public companies)

Objectives of Financial Reporting

The following points sum up the objectives & purposes of financial reporting:

a)       Providing information to management of an organization which is used for the purpose of planning, analysis, benchmarking and decision making.

b)      Providing information to investors, promoters, debt provider and creditors which is used to enable them to male rational and prudent decisions regarding investment, credit etc.

c)       Providing information to shareholders & public at large in case of listed companies about various aspects of an organization.

d)      Providing information about the economic resources of an organization, claims to those resources (liabilities & owner’s equity) and how these resources and claims have undergone change over a period of time.

e)      Providing information as to how an organization is procuring & using various resources.

f)        Providing information to various stakeholders regarding performance of management of an organization as to how diligently & ethically they are discharging their fiduciary duties & responsibilities.

g)       Providing information to the statutory auditors which in turn facilitates audit.

h)      Enhancing social welfare by looking into the interest of employees, trade union & Government.

πŸ‘‰πŸ‘‰Financial Statements Analysis

Qualitative Characteristics of Financial Reports

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. The Qualitative characteristics of useful financial reporting identify the types of information which are likely to be most useful to users in making decision about the reporting authority on the basis of information in its financial report. Financial information is useful when it is relevant and presented faithfully. Some of the qualitative characteristics which makes the financial reports useful to its users are given below:

a)       Relevance: Information is relevant if it would potentially affect or make a difference in users’ decisions. A related concept is that of materiality i.e. information is considered to be material if omission or misstatement of the information could influence users’ decisions.

b)      Faithful Representation: This means that the information is ideally complete, neutral, and free from error. The financial information presented reflects the underlying economic reality.

c)       Comparability: This means that the information is presented in a consistent manner over time and across entities which enables users to make comparisons easily.

d)      Materiality: Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity's financial report.

e)      Verifiability: This means that different knowledgeable and independent observers would agree that the information presented faithfully represents the economic phenomena it claims to represent.

f)        Timeliness: Timely information is available to decision makers prior to their making a decision.

g)       Understandability: This refers to clear and concise presentation of information. The information should be understandable by users who have a reasonable knowledge of business and economic activities and who are willing to study the information with diligence.

h)      Transparency: This means that users should be able to see the underlying economics of a business reflected clearly in the company’s financial statements.

i)        Comprehensiveness: A framework should encompass the full spectrum of transactions that have financial consequences.

j)        Consistency: Similar transactions should be measured and presented in a similar manner across companies and time periods regardless of industry, company size, geography or other characteristics.

International Financial Reporting Standards (IFRS)

IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions. IFRS are issued by the International Accounting Standards Board (IASB).

IASB issued only thirteen (13) IFRS which are as follows:

a)       IFRS 1 - First-time adoption of International Financial Reporting Standards

b)      IFRS 2 - Share-based payment

c)       IFRS 3 - Business combinations

d)      IFRS 4 - Insurance contracts

e)      IFRS 5 - Non-current assets held for sale and discontinued operations

f)        IFRS 6 - Exploration for and evaluation of mineral resources

g)       IFRS 7 - Financial instruments: disclosures

h)      IFRS 8 - Operating segments

i)        IFRS 9 - Financial instruments

j)        IFRS 10 - Consolidated financial statements

k)       IFRS 11- Joint arrangements

l)        IFRS 12- Disclosure of interests in other entities

m)    IFRS 13- Fair Value measurement

Need and Importance of IFRS

The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting. Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a comprehensive view of finances. 

Merits of IFRS

1. IFRS brings improvement in comparability of financial information and financial performance with global peers and industry standards. This will result in more transparent financial reporting of a company’s activities which will benefit investors, customers and other key stakeholders in India and overseas.

2. The adoption of IFRS is expected to result in better quality of financial reporting due to consistent application of accounting principles and improvement in reliability of financial statements.

3. IFRS provide better access to the capital raised from global capital markets since IFRS are now accepted as a financial reporting framework for companies seeking to raise funds from most capital markets across the globe.

4. IFRS minimize the obstacles faced by Multi-national Corporations by reducing the risk associated with dual filings of accounts.

5. The impact of globalization causes spectacular changes in the development of Multi-national Corporations in India. This has created the need for uniform accounting practices which are more accurate, transparent and which satisfy the needs of the users.

6. Uniform accounting standards (IFRS) enable investors to understand better the investment opportunities as against multiple sets of national accounting standard.

7. With the help of IFRS, investors can increase the ability to secure cross border listing.

Limitations of IFRS

1. The perceived benefits from IFRS’ adoption are based on the experience of IFRS compliant countries in a period of mild economic conditions. Any decline in market confidence in India and overseas coupled with tougher economic conditions may present significant challenges to Indian companies.

2. IFRS requires application of fair value principles in certain situations and this would result in significant differences in financial information currently presented, especially in relation to financial instruments and business combinations.

3. This situation is worsened by the lack of availability of professionals with adequate valuation skills, to assist Indian corporate in arriving at reliable fair value estimates.

4. Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of financial statements.

5. IFRS are formulated by the International Accounting Standards Board (IASB) which is an international standard body. However, the responsibility for enforcement and providing guidance on implementation vests with local government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be differences in interpretation or practical application of IFRS provisions, which could further reduce consistency in financial reporting and comparability with global peers.

Explanation of Some Important IFRS

IFRS 1 – First-time adoption of International Financial Reporting Standards: The IASB issued the IFRS 1 on June 19, 2003. It applies to all those business concerns which are going to converge their accounting statements with IFRS from the first time. The IFRS1 has come into with effect from 1st January 2004. The main purpose of IFRS1 is to set out the basic rules or regulations for preparing and presenting first IFRS financial statements and interim financial statements by business concerns. The IFRS1 applies to first IFRS complied financial statements and each interim  report which is presented under IAS 34 for part of the period is covered by first IFRS financial statements of a business concern

IFRS 2 - Share-based payment: The major objective of this IFRS is to reflect the effect of share based transitions in the financial statements of an entity, including expenses associated with transactions in which share options are granted to employees. It is entailed for an entity to mention all the transactions which are associated with employees or other parties to be settled either in cash or other equity instruments of the business entity.

IFRS 3 - Business combinations: The major objective of this IFRS is to specify all requirements for an entity when it undertakes a business. Business combination means combining two separate entities in to a single economic entity. As a result of this, an enterprise obtains the control over the net assets or operations of other enterprises.

IFRS 4 - Insurance contracts: An insurance contract is that where one party (the insurer) accepts the insurance risk of another party (the policy holder) by agreeing to reimburse the amount of policy to the policy holder if any specified uncertain future events occur and adversely affect the policy holder. The primary objective of this IFRS for an entity is to determine the financial reporting for the issued insurance contracts (described in this IFRS as an insurer) until the Board completes the second phase of its project on insurance contracts.

IFRS 5 - Non-current assets held for sale and discontinued operations: The main purpose of this IFRS is to measure the accounting for the assets held for sale, and the preparation and disclosure of discontinued operations in the financial statements of an entity. Particularly, the IFRS requires those assets which can be categorized as held for sale to be measured at the lower degree of carrying amount and fair value less costs to sell, and the amount of depreciation on such assets to cease.

IFRS 6 - Explorations for and evaluation of mineral resources: The primary objective of this IFRS is to specify the effects of exploration for and evaluation of mineral resources in the financial reporting of an entity. This IFRS state that initially an entity should measure mineral resources assets on cost and subsequently measurement can be at cost or revalued amount. The IFRS demands for an entity to perform an impairment test when there are indications that the carrying amount of exploration and evaluation assets exceeds recoverable amount.

IFRS 7 - Financial instruments disclosures: The main purpose of this IFRS is to compel entities to prescribe disclosures that enable financial statements users to measure the significance of financial instruments for the entity’s financial position and performance; the nature and extent of their risk and how the entity manage these risks. This IFRS applies to all type of entities, either that have few financial instruments or those that have many financial instruments. This IFRS does not apply to those financial instruments which are associated with insurance contracts and financial instruments, contracts and obligations under share based payment transactions.

IFRS 8 - Operating segments: The primary objective of this IFRS is to disclose such information that enables the users of financial statements to evaluate the nature and financial effects of the business activities in which it is engaged and the economic environments in which it operates. This IFRS applies to the separate or individual financial statements of an entity and to the consolidated financial statements of a group with a parent whose debt or equity instruments are traded in a public market. If the parent company presents both separate and consolidated financial statement in a single financial report then segment information should be presented only on the basis of consolidated financial statements.

IFRS 9 - Financial instruments: This IFRS is replacement of IAS 39 and its major objective is to set some principles for the financial reporting of financial assets and financial liabilities of an entity’s financial statements and providing useful information to the users of these financial statements so that they can take rational decisions. This IFRS prescribes general guidelines such as how an entity should classify and determine the financial assets and financial liabilities.

Transparency in Financial Reporting

When it comes to investing in a business most of the decision making process is based on the company’s financial reporting. This means that maintaining complete transparency in their reports is very important to both the corporation and its potential investors. They require as much information as possible about the corporate financial before they can decide on whether or not this would be a good investment.

In financial reporting, transparency is considered to be reports that have high quality and clear information which makes them easy to understand. The company’s budgeting and forecasting should be readily available for possible as well as existing investors to access and comprehend.

When preparing reports there are companies that go to great lengths to mislead potential investors in order to be more appealing. It goes without saying that these companies should be avoided at all costs. Some companies ignore their knowledge of why it is necessary to be transparent in their financial reporting. Consequently, this makes them a significantly higher risk investment with the possibility of lower returns.

In order to maintain transparency, a business must consider the following points:


GAAP, or Generally Accepted Accounting Principles, is a commonly recognized set of rules and procedures designed to govern corporate accounting and financial reporting. GAAP is a comprehensive set of accounting practices that were developed jointly by the Indian Accounting Standards Board (IASB) and ICAI. The purpose of GAAP is to create a uniform standard for financial reporting. When financial information is made available to the public, it should serve the purpose of helping investors make informed decisions as to where to put their money. Similarly, it should enable lenders to properly assess the financial condition of companies looking to borrow money.

When applied to non-profits and government organizations, the goal of GAAP is to ensure complete transparency on the part of the reporting entities. Information provided under GAAP needs to be not only clear, comprehensive, and easily understood, but verifiable by auditors and other outside parties.

The Generally Accepted Accounting Principles further set out specific rules and principles governing such things as standardized currency units, cost and revenue recognition, financial statement format and presentation, and required disclosures.

(B) Convergence with IFRS

IFRS is a set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are generally principles-based standards and seek to avoid a rule-book mentality. Application of IFRS requires exercise of judgment by the preparer and the auditor in applying principles of accounting on the basis of the economic substance of transactions. IFRS are issued by the International Accounting Standards Board (IASB).

IFRS Standards aims at providing a high quality, internationally recognised set of accounting standards that bring transparency, accountability and efficiency to financial markets around the world.

IFRS Standards bring transparency by enhancing the international comparability and quality of financial information, enabling investors and other market participants to make informed economic decisions.

IFRS Standards strengthen accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money. Our Standards provide information that is needed to hold management to account. As a source of globally comparable information, IFRS Standards are also of vital importance to regulators around the world.

And IFRS Standards contribute to economic efficiency by helping investors to identify opportunities and risks across the world, thus improving capital allocation. For businesses, the use of a single, trusted accounting language lowers the cost of capital and reduces international reporting costs.

(C) Follow up of Accounting Standards

Accounting Standards are formulated with a view to harmonize different accounting policies and practices in use in a country. The objective of Accounting Standards is, therefore, to reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises with a view to provide meaningful information to various users of financial statements to enable them to make informed economic decisions. The Companies Act, 2013, as well as many other statutes in India requires that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this effect. The Accounting Standards are issued with a view to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view. The Accounting Standards not only prescribe appropriate accounting treatment of complex business transactions but also foster greater transparency and market discipline. Accounting Standards also helps the regulatory agencies in benchmarking the accounting accuracy.

(D) Segment Reporting

Segment reporting is the reporting of the operating segments of a company in the disclosures accompanying its financial statements. Segment reporting is required for publicly-held entities, and is not required for privately held ones

The key advantage of segment reporting is transparency. For businesses that operate in different categories or geographic areas, segment reporting can reveal which areas are profitable and which are drains on the bottom line. If the segment reporting shows a business its overseas operations are more profitable than domestic operations, it could prompt a change in strategic direction. Done properly, it keeps managers from hiding unprofitable ventures.

Segment reporting also allows stakeholders to get a better sense of the fluctuations that might affect overall numbers. If a business reports much higher earnings than expected, for example, segment reporting shows where those earnings are coming from. A stakeholder can look at the same report to determine if the numbers are sustainable. It's designed to help investors better understand the business and its potential cash flow.

Meaning of Corporate Governance

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. This article outlines the relationship between corporate governance and corporate social responsibility (CSR). It begins by examining the role of corporate governance in creating value for shareholders. It focuses on the actions of the corporation and the board toward its shareholders and other stakeholders, i.e., how corporate governance serves or fails to serve their interests. It covers the assumptions that underlie theories of corporate governance and the expected outcomes of various board structures and compositions. It then examines the state of corporate democracy, the issue of accountability, and key legislation relative to corporate governance.

James D. Wolfensohn "Corporate Governance is about promoting corporate fairness, transparency and accountability".

In the words of Robert Ian (Bob) Tricker, "Corporate Governance is concerned with the way corporate entities are governed, as distinct from the way business within those companies is managed. Corporate governance addresses the issues facing Board of Directors, such as the interaction with top management and relationships with the owners and others interested in the affairs of the company"

Need/Objectives and Importance of Corporate Governance

Corporate Governance is integral to the existence of the company. Corporate Governance is needed to create a corporate culture of Transparency, accountability and disclosure. It refers to compliance with all the moral & ethical values, legal framework and voluntarily adopted practices.

a) Corporate Performance: Improved governance structures and processes help ensure quality decision making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies, independent of the type of company and its sources of finance. This can be linked with improved corporate performance- either in terms of share price or profitability.

b) Enhanced Investor Trust: Investors consider corporate Governance as important as financial performance when evaluating companies for investment. Investors who are provided with high levels of disclosure & transparency are likely to invest openly in those companies. The consulting firm McKinsey surveyed and determined that global institutional investors are prepared to pay a premium of up to 40 percent for shares in companies with superior corporate governance practices.

c) Better Access to Global Market: Good corporate governance systems attract investment from global investors, which subsequently leads to greater efficiencies in the financial sector.

d) Combating Corruption: Companies that are transparent, and have sound system that provide full disclosure of accounting and auditing procedures, allow transparency in all business transactions, provide environment where corruption will certainly fade out. Corporate Governance enables a corporation to compete more efficiently and prevent fraud and malpractices within the organization.

e) Easy Finance from Institutions: Several structural changes like increased role of financial intermediaries and institutional investors, size of the enterprises, investment choices available to investors, increased competition, and increased risk exposure have made monitoring the use of capital more complex thereby increasing the need of Good Corporate Governance. Evidence indicates that well-governed companies receive higher market valuations. The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company.

f) Enhancing Enterprise Valuation: Improved management accountability and operational transparency fulfill investors' expectations and confidence on management and corporations, and return, increase the value of corporations.

g) Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures efficient risk mitigation system in place. The transparent and accountable system that Corporate Governance makes the Board of a company aware of all the risks involved in particular strategy, thereby, placing various control systems to monitor the related issues.

h) Accountability: Investor relations' is essential part of good corporate governance. Investors have directly/ indirectly entrusted management of the company for the creating enhanced value for their investment. The company is hence obliged to make timely disclosures on regular basis to all its shareholders in order to maintain good investor‘s relation. Good Corporate Governance practices create the environment where Boards cannot ignore their accountability to these stakeholders.

Corporate Governance in India

Concept of corporate Governance in India is not very old. For the first time, the CII had set up a task force under Rahul Bajaj in 1995. On the basis of this CII had released a voluntary code called “Desirable Corporate Governance” in 1998. SEBI had also established few committees towards corporate governance of which the notable are Kumar Mangalam Birla report (2000), Naresh Chandra Committee (2002) and Narayana Murthy Committee (2002). While Kumar Mangalam Birla committee came up with mandatory and non-mandatory requirements, Naresh Chandra committee extensively covered the statuary auditor-company relationship, rotation of statutory audit firms/partners, procedure for appointment of auditors and determination of audit fees, true and fair statement of financial affairs of companies. Further, Narayan Murthy Committee focused on responsibilities of audit committee, quality of financial disclosure, requiring boards to assess and disclose business risks in the company’s annual reports.

Clause 49 of SEBI Listing Agreement

As a major step towards codifying the corporate governance norms, SEBI incorporate the Clause 49 in the Equity Listing Agreement (2000), which now serves as a standard of corporate governance in India. With clause 49 was born the requirement that half the directors on a listed company’s board must be Independent Directors. In the same clause, the SEBI had put forward the responsibilities of the Audit Committee, which was to have a majority Independent Directors. Clause 49 of the Listing Agreement is applicable to companies which wish to get themselves listed in the stock exchanges. This clause has both mandatory and non-mandatory provisions.

Mandatory provisions comprises of the following:

a)       Composition of Board and its procedure - frequency of meeting, number of independent directors, code of conduct for Board of directors and senior management;

b)      Audit Committee, its composition, and role

c)       Provision relating to Subsidiary Companies.

d)      Disclosure to Audit committee, Board and the Shareholders.

e)      CEO / CFO certification.

f)        Quarterly report on corporate governance.

g)       Annual compliance certificate.

Non-mandatory provisions consist of the following:

a)       Constitution of Remuneration Committee.

b)      Dispatch of Half-yearly results.

c)       Training of Board members.

d)      Peer evaluation of Board members.

e)      Whistle Blower policy.

As per Clause 49 of the Listing Agreement, there should be a separate section on Corporate Governance in the Annual Reports of listed companies, with detailed compliance report on Corporate Governance. The companies should also submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the prescribed format. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.

Apart from Clause 49 of the Equity Listing Agreement, there are certain other clauses in the listing agreement, which are protecting the minority share holders and ensuring proper disclosures:

a)       Disclosure of Shareholding Pattern.

b)      Maintenance of minimum public shareholding (25%)

c)       Disclosure and publication of periodical results.

d)      Disclosure of Price Sensitive Information.

e)      Disclosure and open offer requirements under SAST.

Companies Act 2013 – Current status of corporate governance in India

Despite of all the mandatory and non-mandatory requirements as per Clause 49, India was still not in a position to project itself having highest standards of corporate governance. Taking forward, the Companies Law 2013 also came up with a dedicated chapter on Corporate Governance. Under this law, various provisions were made under at least 11 heads viz. Composition of the Board, Woman Director, Independent Directors, Directors Training and Evaluation, Audit Committee, Nomination and Remuneration Committee, Subsidiary Companies, Internal Audit, SFIO, Risk Management Committee and Compliance to provide a rock-solid framework around Corporate Governance. The key provisions in Clause 49 and 2013 act are summarized as follows:

a) Aligning Listing Agreement with the Companies Act 2013: Companies Act requirements on issuing a formal letter of appointment, performance evaluation and conducting at least one separate meeting of the independent directors each year and providing suitable training to them are now included in the revised norms of SEBI. Independent directors are not entitled to any stock option, and companies must establish a whistle-blower mechanism and disclose them on their websites.

b) Restricting Number of Independent Directorships: Per Clause 49, the maximum number of boards a person can serve as independent director is seven and three in case of individuals also serving as a full-time director in any listed company. The Companies Act sets the maximum number of directorships at 20, of which not more than 10 can be public companies. There are no specific limits prescribed for independent directors in the Companies Act.

c) Maximum Tenure of Independent Directors: Based on the Companies Act as well as the new Equity Listing Agreement, an independent director can serve a maximum of two consecutive terms of five years each (aggregate tenure of 10 years). These directors are eligible for reappointment after a cooling-off period of three years.

d) Board-Mix Criteria Redefined: Per Clause 49 of the Equity Listing Agreement, 50% of the board should be made up of independent directors if the board chair is an executive director. Otherwise, one-third of the board should consist of independent directors. Additionally, the board of directors of a listed company should have at least one female director.

e) Role of Audit Committee Enhanced: The SEBI reforms call for two-thirds of the members of audit committee to be independent directors, with an independent director serving as the committee’s chairman. While the Companies Act requires the audit committee to be formed with a majority of independent directors, SEBI has gone a step further to improve the independence of the audit committee.

f) More Stringent Rules for Related-Party Transactions: The scope of the definitions of RPTs has been broadened to include elements of the Companies Act and accounting standards:

1.       All RPTs require prior approval of the audit committee.

2.       All material RPTs must require shareholder approval through special resolution, with related parties abstaining from voting.

3.       The threshold for determining materiality has been defined as any transaction with a related party that exceeds 5% of the annual turnover or 20% of the net worth of the company based on the last audited financial statement of the company, whichever is higher.

g) Improved Disclosure Norms: In certain areas, SEBI resorts to disclosures as an enforcement tool. Listed companies are now required to disclose in their annual report granular details on director compensation (including stock options), directors’ performance evaluation metrics, and directors’ training. Independent directors’ formal letter of appointment / resignation, with their detailed profiles and the code of conduct of all board members, must now be disclosed in companies’ websites and to stock exchanges.

h) E-voting Mandatory for All Listed Companies: Until now, resolutions at shareholder meetings in listed Indian companies were usually passed by a show of hands (except for those that required postal ballot). This means votes were counted based on the physical presence of shareholders. SEBI also has changed Clause 35B of the Equity Listing Agreement to provide e-voting facility for all shareholder resolutions.

i) Enforcement: SEBI is setting up the infrastructure to assess compliance with Clause 49 to ensure effective enforcement. Companies need to buckle up and assess the impact of these reforms and step up compliance.

Report on Corporate Governance

There shall be a separate section on Corporate Governance in the Annual Reports of company, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted.

The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given latter. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.


The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report field by the company.

The non-mandatory requirements may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.

Information to be placed before Board of Directors

1.       Annual operating plans and budgets and any updates.

2.       Capital budgets and any updates.

3.       Quarterly results for the company and its operating divisions or business segments.

4.       Minutes of meetings of audit committee and other committees of the board.

5.       The information on recruitment and remuneration of senior officers just below the board level, including appointment or removal of Chief Financial Officer and the Company Secretary.

6.       Show cause, demand, prosecution notices and penalty notices which are materially important.

7.       Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.

8.       Any material default in financial obligations to and by the company, or substantial nonpayment for goods sold by the company.

9.       Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company.

10.   Details of any joint venture or collaboration agreement.

11.   Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.

12.   Significant labour problems and their proposed solutions. Any significant development in Human Resources / Industrial Relations from like signing of wage agreement, implementation of Voluntary Retirement Scheme etc.

13.   Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business.

14.   Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material.

15.   Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc.

Meaning of Corporate Social Responsibility (CSR)

Corporate social responsibility (CSR) is a business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders. CSR is a concept with many definitions and practices. Corporate social responsibility (CSR) promotes a vision of business accountability to a wide range of stakeholders, besides shareholders and investors. Key areas of concern are environmental protection and the wellbeing of employees, the community and civil society in general, both now and in the future.

The concept of CSR is underpinned by the idea that corporations can no longer act as isolated economic entities operating in detachment from broader society. Traditional views about competitiveness, survival and profitability are being swept away.

Difference between CSR and Corporate Governance

In very simple terms, Corporate Social Responsibility is expression of the commitment a corporate has with the society/environment in which it exists, whereas Corporate Governance is the way a corporate governs itself in a responsible way.

As far as inter-relationship between the two is concerned - it can be said that Corporate Social Responsibility is a subset of Corporate Governance in the Indian Context. In the international arena Corporate Governance would become a sub-set of Corporate Social Responsibility.

This difference is due to a conceptual difference in understanding of CSR. In India CSR generally excludes anything and everything that is not voluntary and also that is concerned with employees. In global perspective, anything that is done to bring in a positive impact on society gets covered under the umbrella of CSR, irrespective of it being for the employees or for outsiders.

Need and Importance of CSR

Some of the drivers pushing business towards CSR include:

1. The shrinking role of government: In the past, governments have relied on legislation and regulation to deliver social and environmental objectives in the business sector. Shrinking government resources, coupled with a distrust of regulations, has led to the exploration of voluntary and non-regulatory initiatives instead.

2. Demands for greater disclosure: There is a growing demand for corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations.

3. Increased customer interest: There is evidence that the ethical conduct of companies exerts a growing influence on the purchasing decisions of customers. In a recent survey by Environics International, more than one in five consumers reported having either rewarded or punished companies based on their perceived social performance.

4. Growing investor pressure: Investors are changing the way they assess companies' performance, and are making decisions based on criteria that include ethical concerns. The Social Investment Forum reports that in INDIA in, 2016 there was more than $1 trillion worth of assets invested in portfolios that used screens linked to the environment and social responsibility.

5. Competitive labour markets: Employees are increasingly looking beyond paychecks and benefits, and seeking out whose philosophies and operating practices match their own principles. In order to hire and retain skilled employees, companies are being forced to improve working conditions.

6. Supplier relations: As stakeholders are becoming increasingly interested in business affairs, many companies are taking steps to ensure that their partners conduct themselves in a socially responsible manner. Some are introducing codes of conduct for their suppliers, to ensure that other companies' policies or practices do not tarnish their reputation.

Benefits of CSR

Corporate Social Responsibility has many benefits that can be applied to any business, in any region, and at a minimal cost:

a) Improved financial performance: A recent longitudinal Harvard University study has found that “stakeholder balanced” companies showed four times the growth rate and eight times employment growth when compared to companies that focused only on shareholders and profit maximization.

b) Enhanced brand image & reputation: A company considered socially responsible can benefit -both by its enhanced reputation with the public, as well as its reputation within the business community, increasing a company’s ability to attract capital and trading partners. For example, a 1997 study by two Boston College management professors found that excellent employee, customer and community relations are more important than strong shareholder returns in earning corporations a place an Fortune magazine’s annual “Most Admired Companies” list.

c) Increased sales and customer loyalty: A number of studies have suggested a large and growing market for the products and services of companies perceived to be socially responsible. While businesses must first satisfy customers’ key buying criteria – such as price, quality, appearance, taste, availability, safety and convenience. Studies also show a growing desire to buy based on other value-based criteria, such as ” sweatshop-free” and “child labor-free” clothing, products with smaller environmental impact, and absence of genetically modified materials or ingredients.

d) Increased ability to attract and retain employees: Companies perceived to have strong CSR commitments often find it easier to recruit employees, particularly in tight labor markets. Retention levels may be higher too, resulting in a reduction in turnover and associated recruitment and training costs. Tight labor markets as well the trend toward multiple jobs for shorter periods of time are challenging companies to develop ways to generate a return on the consideration resources invested in recruiting, hiring, and training.

e) Reduced regulatory oversight: Companies that demonstrate that they are engaging in practices that satisfy and go beyond regulatory compliance requirements are being given less scrutiny and free region by both national and local government entities. In many cases, such companies are subject to fewer inspections and paperwork, and may be given preference or “fast-track” treatment when applying for operating permits, zoning variances or other forms of governmental permission.

f) Easier access to capital: Companies addressing ethical, social, and environmental responsibilities have rapidly growing access to capital that might not otherwise have been available.


A corporation practicing CSR strives to comply with the laws and regulations, make a profit, be ethical and provide social accountability. It is responsible for the wider impact on society and not just the return of investments to stakeholders alone. Changing business practices and internal operations is considered vital for those organizations practicing CSR. In 1998 John Eklington coined the term “Triple Bottom Line” which is a coincident approach to that of CSR and an integrated concept under the umbrella of Social Responsibility. The “Triple Bottom Line (TBL)” approach is a means for corporations to achieve the adequate level of Corporate Social Responsibility which is necessary in the age of sustainable development for future generations.

There is no single, universally accepted definition of TBL reporting. In its broadest sense, TBL reporting is defined as corporate communication with stakeholders that describes the company’s approach to managing one or more of the economic, environmental and / or social dimensions of its activities and through providing information on these dimensions. Consideration of these three dimensions of company management and performance is sometimes referred to as sustainability or sustainable development. In its purest sense, the concept of TBL reporting refers to the publication of economic, environmental and social information in an integrated manner that reflects activities and outcomes across these three dimensions of a company’s performance.

Also termed as the 3P approach- People, Planet, Profit, the TBL considers CSR as an investment rather than a method of achieving sustainability. It focuses on the three aspects of-

People: A triple bottom line organization takes steps to ensure that its operations benefit the company's employees as well as the community in which it conducts business. Human resources managers of TBL entities are concerned, not just with providing adequate compensation to its workers, but also with creating a safe and pleasant working environment and helping employees find value in their work.

Planet: A TBL company avoids any activities that harm the environment and looks for ways to reduce any negative impact its operations may have on the ecosystem. It controls its energy consumption and takes steps to reduce its carbon emissions. Many TBL companies go beyond these basic measures by taking advantage of other means of sustainable development, such as using wind power. Many of these practices actually increase a company's profitability while contributing to the health of our planet.

Profit: The profit or economic bottom line deals with the economic value created by the organization after deducting the cost of all inputs, including the cost of the capital tied up. It therefore differs from traditional accounting definitions of profit. In the original concept, within a sustainability framework, the "profit" aspect needs to be seen as the real economic benefit enjoyed by the society. It is the real economic impact the organization has on its economic environment.


TBL reports usually contain both qualitative and quantitative information. In order for all reported information to be credible, it should possess the following characteristics: -

a)       Reliability: Information should be accurate, and provide a true reflection of the activities and performance of the company.

b)      Usefulness: The information must be relevant to both internal and external stakeholders, and be relevant to their decision-making processes.

c)       Consistency of presentation: Throughout the report there should be consistency of presentation of data and information. This includes consistency in aspects such as format, timeframes, graphics etc.

d)      Full disclosure: Reported information should provide an open explanation of specific actions undertaken and performance outcomes.

e)      Reproducible: Information is likely to be published on an ongoing basis, and companies must ensure that they have the capacity to reproduce data and information in future reporting periods.

f)        Audit ability: All statements and data within the report are able to be readily authenticated.


TBL reporting is emphasized on improved relationships with key stakeholders such as employees, customers, investors and shareholders. Specific organizational benefits include:

1.       Reputation and brand benefits: Corporate reputation is a function of the way in which a company is perceived by its stakeholders. Effective communication with stakeholders on one or more of the environmental, social and economic dimensions can play an important role in managing stakeholder perceptions and, in doing so, protect and enhance corporate reputation.

2.       Attraction and retention of high caliber employee: Existing and prospective employees have expectations about corporate environmental, social and economic behaviour, and include such factors in their decisions. The publication of TBL-related information can play a role in positioning an employer as an ‘employer of choice’ which can enhance employee loyalty, reduce staff turnover and increase a company’s ability to attract high quality employees.

3.       Improved access to the investor market: A growing number of investors are including environmental and social factors within their decision making processes. The growth in socially responsible investment and shareholder activism is evidence of this. Responding to investor requirements through the publication of TBL-related information is a way of ensuring that the company is aligning its communication with this stakeholder group, and therefore enhancing its attractiveness to this segment of the investment market.

4.       Reduced risk profile: TBL reporting enables a company to demonstrate its commitment to effectively managing such factors and to communicate its performance in these areas. A communication policy that addresses these issues can play an important role in the company’s overall risk management strategy.

5.       Cost savings: TBL reporting often involves the collection, spread and analysis of data on resource and materials usage, and the assessment of business processes. For example, this can enable a company to better identify opportunities for cost savings through more efficient use of resources and materials.

6.       Innovation: The development of innovative products and services can be facilitated through the alignment of R & D activity with the expectations of stakeholders. The process of publishing TBL reporting provides a medium by which companies can engage with stakeholders and understand their priorities and concerns.

7.       Creating a sound basis for stakeholder dialogue: Publication of TBL reporting provides a powerful platform for engaging in dialogue with stakeholders. Understanding stakeholder requirements and alignment of business performance with such requirements is fundamental to business success. TBL reporting demonstrates to stakeholders the company’s commitment to managing all of its impacts, and, in doing so, establishes a sound basis for stakeholder dialogue to take place.


A sustainability report is an organizational report that gives information about economic, environmental, social and governance performance. For companies and organizations, sustainability – the capacity to endure, or be maintained – is based on performance in these four key areas. An increasing number of companies and organizations want to make their operations sustainable. Establishing a sustainability reporting process helps them to set goals, measure performance, and manage change. A sustainability report is the key platform for communicating positive and negative sustainability impacts.

Sustainability reporting is therefore a vital step for managing change towards a sustainable global economy. Sustainability reporting can be considered as synonymous with other terms for non-financial reporting; Triple Bottom Line Reporting, Corporate Social Responsibility (CSR) Reporting, and more. It is also an intrinsic element of integrated reporting; a recent development that combines the analysis of financial and non-financial performance. A sustainability report enables companies and organizations to report sustainability information in a way that is similar to financial reporting. Systematic sustainability reporting gives comparable data, with agreed disclosures and metrics.

Major providers of sustainability reporting guidance include: The Global Reporting Initiative (The GRI Sustainability Reporting Framework and Guidelines), Organization for Economic Cooperation and Development (OECD Guidelines for Multinational Enterprises), The United Nations Global Compact (the Communication on Progress) International Organization for Standardization (ISO 26000, International Standard for social responsibility) etc.


Harmonization may be defined as the process aimed at enhancing the comparability of financial statements produced in different countries’ according regulations. Having understood the causes for differences and suitably classifying the accounting system across the world, it is necessary to achieve harmony or uniformity in the accounting system. Harmony will ensure easy comparability, which is essential in the context of global funding and multi-national company’s regulators who monitor capital markets, and the securities industries (including stock exchanges). The Global Reporting Initiatives’ (GRI) vision is that reporting on economic, environmental, and social performance by all organizations becomes as routine and comparable as financial reporting. GRI accomplishes this vision by developing, continually improving, and building capacity around the use of its Sustainability Reporting Framework.


Corporate Social Responsibility (CSR) is a continuous commitment by the business houses and the corporate to contribute towards inclusive growth in the society. CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies. Thus CSR is not charity or mere donations. CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth. CSR is often called the triple bottom-line approach – Sustainability in Environment, Social Community & Business.

Changing nearly six decades (57 Years) old regulations for corporate reporting, the new Companies Act 2013 makes it mandatory for certain class of profitable enterprises to spend profits on social welfare activities. Under Section 135 (5) of the new Companies Act, 2013, passed by Parliament in August 2013, profitable companies must spend every year at least 2 per cent of their average net profit over the preceding three years on CSR works and shall not include profits arising from branches outside India. This mandatory CSR-spend rule will apply from fiscal 2014-15 onwards. The Ministry of Corporate Affairs, vide its Notification dated 11 October 2018, has reconstituted the High Level Committee on Corporate Social Responsibility. The Scope of the said committee is to review existing framework under the Companies Act, 2013, regarding CSR, recommend guidelines for enforcement of CSR provisions, suggest measures for adequate monitoring and evaluation of CSR by companies and examine and recommend audit (financial, performance, social) for CSR, as well as analyse outcomes of CSR activities/programmes/projects.

Present Corporate Social Responsibility Norms in India

Applicability: As per Section 135 of the Act and rules issued there under, CSR norms are applicable on companies which have (a) net worth of Rs 500 Crore or more; (b) turnover of Rs 1000 Crore or more; or (c) net profit of Rs 5 Crore or more.

Compliance: The companies, crossing the prescribed threshold, are required to spend at least 2% of their average net profit for the immediately preceding 3 financial years on CSR activities. Such expenditure incurred on the CSR activities cannot be taken as an expenditure incurred by the company being an assessee for the purposes of the business or profession. Further, no specific tax exemptions have been extended to CSR expenditure per se.

Other key requirements includes constitution of a committee of the Board of Directors consisting of 3 or more directors, formulation of the Corporate Social Responsibility Policy by the Board of Directors on the recommendation of the CSR Committee, undertaking the CSR activities and spending the prescribed amount of expenditure on CSR activities as per CSR Policy and recommendations of CSR Committee and monitoring effective implementation of CSR Policy.

Board's Responsibility: The Board of Directors are required to disclose in their report the composition of the CSR Committee and other compliance undertaken by the company and place it on company's website. If the company fails to spend the prescribed amount on CSR activities, the Board is also required to specify the reasons for not spending the amount in their report.

Penal provisions: At present, there is no penal provision for non-compliance under CSR norms. However, penalties can be levied of the Act for not making the required disclosures in Board's report on an annual basis besides prosecution of the officers of the company in default.

Activities which may be included by companies in their Corporate Social Responsibility Policies relating to:

a)       Eradicating extreme hunger and poverty;

b)      Promotion of education;

c)       Promoting gender equality and empowering women;

d)      Reducing child morality and improving maternal health;

e)      Combating human immunodeficiency virus (HIV), acquired immune deficiency syndrome, (AIDS), malaria and other diseases;

f)        Ensuring environmental sustainability;

g)       Employment enhancing vocational skills;

h)      Social business projects;

i)        Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and

j)        Such other matters as may be prescribed.

Current Status of CSR in India

Today, the basic objective of CSR is to maximize the company’s overall impact on the society as well as on the stakeholders. An increasing number of companies are comprehensively integrating CSR policies, practices and programs throughout their business operations and processes. CSR is perceived not just another form of indirect expense but an important tool for protecting and enhancing the goodwill, defending attacks and increasing competitiveness.

Companies have stated having specialized CSR teams that formulate strategies, policies and goals for their CSR programs and include in their budgets to fund them. These programs are determined by social philosophy and have clear objectives. Also, they are aligned with the mainstream business. These CSR programs are implemented by the employees crucial to the process. CSR programs range from community development to development in environment, education and healthcare etc.

For instance, corporations such as Bharat Petroleum Corporation Limited, Hindustan Unilever Limited and Maruti Suzuki India Limited have adopted a more comprehensive method of development. Building schools and houses and empowering the villagers, provision of improved medical and sanitation facilities, making them self-reliant by providing vocational training and knowledge of business operations are the facilities focused on by these corporations.

On the other hand, corporations like GlaxoSmithKline Pharmaceuticals’ focus on health related aspects of the community through their CSR programs. They set up health camps in remote tribal villages offering medical check-ups and treatment and also undertake health awareness programs.

Nowadays, corporates are joining hands with various NGOs and use their expertise in devising effective CSR programs to address wider societal problems. In India, the CSR multi-stakeholder approach is fragmented. Interaction between business and civil societies, especially trade unions, is still rare, usually taking place on an ad-hoc basis. The understanding of CSR in India is still not directly linked to the multi-stakeholder approach. A few companies in India that have successfully integrated sustainability into their business processes are discussed below.