Whether to opt for stock options in a Start-Up as a professional?

What is a Start-up?

Start-up is defined as a company that is in the first stage of its operations. These companies are often initially bank rolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. (As defined by Investopedia)

Of the various factors to be worked on, the major one is getting talent on-board in the budget allotted. In context to this, one of the trends followed by the start-up firms is to offer equity options to the employees being recruited.

Start up

Why do start-ups opt for equity options?

The main reason for taking this option is that the start-ups have limited cash. Unlike the biggies, who have good amount of cash per employee, the start-ups have limited cash component for the entire set up and can’t compete with the big firms. This is also a method by which free money is generated by undervaluing the common stock at low strike prices. The key for the usage of this method is to attract talent / top recruits at the higher positions of the company.

From the employee perspective, this is a gamble, to make it big or lose upfront. It could be millions or zero depending on the performance of the start-ups. Start- up equity options are offered to employees giving a blend of the salary component and the stock option.

Employee Stock Options (ESOPs) have become famous thanks to all the startups who are putting in every effort to make their ventures successful. Earlier, ESOPs or stocks were granted to seniors of the company to acknowledge their contribution in the growth of the company. However, nowadays ESOPs are provided to newly recruited employees, as the founders have limited funds in the beginning.

There are various factors that need to be considered before accepting stock options as a part of the compensation specially for a start-up.

Majorly when stock options are offered in a start-up, it would be a private company. Also, one has to see the reputation of the people starting the company. It could be a fresh entrant into the industry. Or on the other hand, it could be a set-up by an established entrepreneur in the market.

There are two scenarios that are to be considered:

  • The start -up is by a budding entrepreneur
  • The start -up is by an established entrepreneur

In the first case, it could be a venture by any common man like you or me, wanting to make it big in the industry. There are different factors that have to be considered before accepting or rejecting the offer.

Start up idea

In the second case, it could be a leading player of the industry wanting to start a venture of their own. This could be a retired person like Mr. Narayana Murthy (of Infosys) who would feel like making a mark in the industry on his own name. In this case, there is a brand that carries weightage for any prospective employee to take up an offer and negotiate terms. Accordingly, the terms would be concluded with a different focus and objective.

What is to be considered?

Salary negotiation : When an individual is offered stock options combined with the salary, it could be possible that they have to accept a below market salary. This could be, to compensate for the options been given instead, or it could be because it is a start-up that is non-profit making. You need to see the percentage of stock options and salary component. This would indicate how much is at stake in relation to the success of the start-up.

Stake offered: Many start-ups depending on the position offered, do give a stake, ranging from 1-2% of the start-up. Here, the conversion terms laid down by the company are to be analysed carefully.  Generally, percentage offerings take place in private firms, thereby the growth expected has to be chalked to analyse the viability of the offer.

Conversion criteria: Shares in a start-up are different from shares in a public company because they are not fully vested. For example, if one is granted 2,000 shares at four-year vesting, an individual would receive 500 shares at the end of each of the four years until it was fully vested.

One has to remember that it is an investment decision and a cash salary doesn’t always stand equally as against equity, so it is at the discretion of every individual to determine what risk one is willing to take.

Whether to accept or reject the offer?

Of the two scenarios mentioned, in the first one it is required to be noted that:

  • It is a complete risk for the acceptor with regards to the success or failure of the venture.
  • This would be done in compromise to higher salaries offered elsewhere.
  • The cash component in hand would be lower than a 100% salary job offered.
  • The amount of effort expected should be compensated by the offer made.
  • If a stake is given, what are the responsibilities to be borne for the offer?

Only after analysing all of these, if one still finds the offer to be lucrative then the individual can think of taking up the offer.

In the second scenario with an established entrepreneur, you should note the following:

  • Here the compromise on the salary would be compensated with the experience that one would gain under leading players of the market.
  • One will get to learn quite a bit with the ones who have already been in the market.
  • The expectations from the job would be higher than the others.
  • The future prospects with the experience from a positive entrepreneur would be bright and high yielding.

One has to see the kind of personal development that can take place by working with experienced employers. The lower salary and risk taken could give higher returns going forward.

Based on the inference from the two scenarios, it is an individual’s call to take up or reject the offer, based on the comfort zone at personal levels.

Suppose the CTC offered is Rs15lacs with Rs10lacs in fixed compensation and Rs5lacs worth of stocks. Primarily, because the stocks are never vested immediately, as the leading hands want the employee to stay with the venture for a reasonable amount of time to be entitled to the benefits. Secondly, immediate value of the stocks is just an indicative number.

Remember that startups need to be successful before the numbers chalked become actuals and of any real value.

Factors to be taken care of:

  • Employees should ensure that all the documentation is in place.
  • They should also consider the present value and future value of shares.
  • Proper Exit Mechanism should be in place.
  • When the shares get allotted, check whether they are taxed as salary or perquisite.

Advantages of taking up the stock option

  • The employees do get a sense of ownership in the company. It helps in getting them in line with the other shareholders of the company.
  • Equity compensation is getting a piece of the company, one of the defining aspects of working at a startup.
  • It is a way to hire good talent.
  • It encourages the team to form a serious relationship with the startup.
  • It creates a monetary incentive

Disadvantages of taking up the stock option

  • When the ESOPs are exercised, the founder’s shareholding gets diluted.
  • Lower than expected performance could hamper the expected values from the stock options.
  • The risk to stock options is not being up-to mark in terms of the company growth. If the company does not perform the employee investment is at risk.
  • As the employee does not influence the stock options, the result of the plan has no value for the employee.

Conclusion

While established companies use stock options as a retention tool for the top brains; startups use it as a tool to hire talent, as they cannot afford to pay very high salaries. Thus, ESOPs a good tool for startups, is a bet for the employees. Employees should be convinced about the growth of company and then take the appropriate decision to be a part of the compensation.

What is credit appraisal?

A: Hey B! I need some money and I see you have plenty of it sitting idle in your purse. I will return you the whole money with additional interest. Could you lend me Rs 100?

B: Hmm. Let me see.

This happens mostly at one place called Bank. Afterwards what B has to do is to check out for the ‘Credit’ of B. This process of research, exploration in short is called Credit Appraisal.

Think this episode from B (read Bank) point of view. Ultimately Bank wants 2 things from any transaction: (A) Safety of capital and (B) Compensation for opportunity cost of money. B is pointless if A is incomplete.

How to ensure safety of Capital?

Couple of jargons need to be introduced beforehand. First one is KYC-Know Your Customer. How the customer does looks like. If it is a company when it was found? What is its business model? What are the revenue items? Is the revenue predictable with a bit of surety? What kind of plants it owns? What is his track record of earning and repayment history?

Second one is-End use. This is the first common sense question. “Bro, what you will do with Rs 100?”

Will you throw it in the roulette? Go Away. Isn’t it?

Knowing what is the end use of the proceeds from the bank, is the first right of the Bank. If it is related to what he has been doing then knowing that gives a Comfort to Banker? What is “Comfort” BTW? Comfort is the holy grail of lending business. Let us assume A and B were the best buddies, at the risk of sounding corny, I would say like Jai and Viru. Then B would have given A the money No question asked. Because he has good relationship with A and he has a “comfort” in lending to him.

Relationship is the name of the game (pun intended)

Have you ever wondered why the lending banks have concentrated portfolio (exposure) towards few big business houses which are the reason Banks are facing asset quality issues? Two reasons: First one is what I would call it: Heuristic. Heuristics is mental shortcut. When you brain have plethora of information to process then brain does not process the whole information. It rather looks out for shortcuts. So, if a Banker is flooded with couple of complex thermal power projects then he discovers a heuristic of going with big names, which sounds trustworthy.

Second is wrong incentive system. Every bank has one role called relationship manager. He handles relationship with corporates. He is incentivised to do more business with each of them. He is not incentivised (at least monetarily) to discourage less credible corporates to borrow from banks. He always plays Good Cop. So the Bank ends up lending to few corporates and the Relationship continues.

So what is correct way of credit appraisal?

If you are a project finance professional or Credit analyst then your job is to ensure that only those proposals get selected which does not have any untied risks in the base case Business plan. Sometimes some sleepwalking dreamy eyed Borrower comes and ask for money based on loosely tied business cases. There could be many risks. But it could be classified in to 2 types: First is factor which can delay the project completion schedule such as: wrong selection of technology, wrong people for assessing and implementation of project, incomplete funds (equity and debt not tied up), incomplete regulatory approvals, land acquisition delays etc. Second is factor which can erode the commercial viability of the Project i.e. the risk of producing something which does not have taker at right price, such as Offtake agreement not signing, Supplier risk, demand supply mismanagement, competition risk, operation and maintenance mismanagement, natural calamity etc.

Further, you prepare a financial model and run sensitivities for all the risk, such as what if project gets delay by 1 year, what if sales price of finished good becomes cheaper by 20%.The ultimate output of this part of exercise is to get a good debt service coverage ratio (DSCR).It will ensure safety of capital at least on paper.

A successful credit appraisal starts with a question and end with an answer. It is about identifying set of applicable risks and grilling the borrower about them, advises them to mitigate those risks with some structuring (that is another chapter in itself) and then presenting to credit committee wearing two hats. This time Good cop and Bad cop both.

10 Accounting Mistakes that every business should avoid

What is Accounting ?

Accounting is defined as the systematic and comprehensive recording of financial transactions pertaining to a business. It also refers to the process of summarizing, analysing and reporting these transactions.

Accounts give you all the information that is needed to take appropriate decisions about business. The entire financial health of the company depends on the accounting methods that are adopted. Some of the errors could be small and not affecting, but there are various mistakes if done can cost quite a bit in the long run.

Risk is an inherent part of any business. No matter how careful one is in reporting, it’s always open to mistakes. Sometimes certain accounting mistakes that seem to be small can have a big impact on the health, growth and longevity of a business. Thereby, accounting methods need to be correct in order to have a profitable business.

Some of the mistakes that one needs to avoid in the basic accounting done on daily basis are elaborated below. One needs to keep these on the do-not-do list, to generate the profits expected.

common accounting  mistakes

Mistake 1: Not hiring the right professional for taxes and other accounting
Many a times there is a wrong mind set of business owners that all accounting done on own is better. This is done as a cost saving measure. But this can sometimes cost an individual a big buck. There could be errors on the tax front where one may not claim for all the deductions that one is eligible for.

On the other hand, having a professional in place can help in being updated with the changing tax laws and having all the data in place for future planning. Being professionals they would take all the necessary steps needed for tackling different financial situations. Hence, having a professional is advantageous with regards to an added check on the finances, as success of small businesses depend on the accuracy and efficiency in maintaining the finances of the company.

Mistake 2: Not recording cash expenses and failing to keep expense receipts
Keeping a track of debit / credit cards as well as cheques is quite easy with the facilities through banks. Thereby, these are all recorded to calculate the profits at the end of the year.
However, the expenses that are done through cash are generally not recorded accurately. Due to this the income is generally overstated which is a loss to the entrepreneur. That is why, it is essential to keep a record of all the cash expenditures for calculations at the end of the year.

Many a times, you face the issue of having an expense in books but have no clue of what the expense was for. This happens when you do not keep a tab of all the business expense receipts, which leads to incorrectly reported tax expenses. If you do not actually keep the physical bill receipts, the advanced methods of technologies have various techniques of maintaining digital copies which can be tallied for all the expenses of the year.

Mistake 3: Data entry errors

Accounting is all about numbers. In the past, all the data entry was done manually which led to it being more prone to errors. However, nowadays although there are various software to do the manual part, the risk remains the same. The entire system does have entry of numbers to a particular level done through human intervention. Thereby, any errors in number punching or decimals could have an impact as the error is carried forward across the different financial statements.

Mistake 4: Not keeping track of receivables and payables
Primary aspect of proper accounting is to record receivables to assure that the funds to the business are regularly tracked. It is essential to issue an invoice and record the receivable whenever received. Unreconciled receivables create confusion and one may end up overpaying on taxes. The same is applicable also for the payables in order to avoid hassles at the time of book closures.

Mistake 5: Inconsistency in Accounting
In order to ease the task of accounting, there are various sophisticated accounting software used on daily basis. However, one needs to keep in mind that the entire organization uses same accounting rules or else multiple accounting methods could lead to difference in reporting methods across different levels of the organization.

Mistake 6: Not backing up records regularly
Accounting efficiency is one of the key requisites for smooth running of a business. However, it is not always possible to anticipate technical flaws, crash down of systems, which could destroy all the data in spite of maintaining the best of accuracy. That is why, along with maintaining the records it is essential to also take backups regularly. These unexpected events can send all the records and efforts to maintain them, down the drain in a fraction of seconds.

Mistake 7: Different book keeping mistakes

There are various book keeping errors which cumulatively lead to blunders in accounts. It is essential to save all expense receipts and record them. Also it is required to keep track of reimbursable expenses. It is important to do books and bank reconciliation on the fixed dates. Petty cash is another segment that needs to be looked at regularly for final calculations. Employee classification should be well defined for the different calculations in terms of disbursement of funds and tax implications.

Finally, book keeping should be done regularly so that the base of accounts is correct and no errors are replicated in the future transactions. One must remember that the key to effective and efficient accounting is to record everything.

Mistake 8: Not doing appropriate budgeting
For any business it is mandatory to know what you starting with and what you aiming at. Budgeting is very important to know what we have in hand to invest and upto what levels are we on the breakeven point. The sales task can be taken according to what we hold in hand to disburse.
Failing to effectively budget for a business makes it difficult to gauge different costs to the company. This can cause one to spend more than required on projects which may or may not produce equivalent return on investment.

Mistake 9: Not understanding the difference between profit and cash flow

One should have clarity that cash flow defines the in and out of money in a company. On the other hand, profits are derived after the deduction of all expenses for generating sales of the company. Accounting errors can occur if the cash flows are considered for the profits of the company without it has actually made any. Also one should remember not to consider the sales till the product is delivered as recording earlier sales could mislead the sales forecast.

Mistake 10: Not having knowledge of the Accounting Software
It is very essential to select the correct accounting software and have 100% knowledge about the usage of the same. If one does not know the functionality of the software, then they are prone to making mistakes.

Conclusion

Any business whether on a small or large scale is the revenue generator for the entrepreneur. Of this, accounting is the backbone, on which the present and future of the business lies. It is therefore absolutely essential to have all accounting systems in place and appropriately managed in order to have smooth running of the business and generating the expected profits from the same.

How to play on your humanities degree to get into pure play finance career?

I am sure you have done your homework. Yeah. You must have looked at LinkedIn profiles of people whose job you want (to snatch) and found out the obvious truth: They are most of the times engineer in their undergraduate years. Most of the finance jobs in India are being completed by Engineers (like me); however the story does not end here.

Probably, you may have heard of Investment Management as one of the streams of finance careers. They manage investments of people. What do they do? Typically, their LinkedIn profile speaks about the following:

  1. Asset Management
  2. Family Office
  3. Portfolio Management
  4. Equity Capital Market

One of the main traits of succeeding in this kind of job is that you have to think like investor.

How to think like an Investor?

Investor has to appraise some risk and has to take some of them and then seek returns in lieu of that. All these function operate in Stock market. Different schools of thought have taken the field towards increasing levels of mathematical sophistication and model-based regression forecasting, but the building blocks remain human actors and their behaviours. In this context, the greatest investor of all time, Mr Warren Buffet has epitomized Stock Market as Mr. Market.

Mr. Market is often identified as having human behavioural manic-depressive characteristics, it:

  1. Is emotional, euphoric, moody
  2. Is often irrational
  3. Offers that transactions are strictly at your option
  4. Is there to serve you, not to guide you.
  5. Will offer you a chance to buy low, and sell high.
  6. Is frequently efficient…but not always.

(Source: Wikipedia)

So in short, to be a successful investor you need to understand the behaviour of Mr. Market who is often, unlike what you read in CFA courses, IRRATIONAL.

Rational world teaches you 2+2 =4 but you can’t convince the same to Mr. Market. So the typical mathematical based or rather hard science based thought process has a big disadvantage in this context.

Humanities: Which streams has advantage?

Economics: It’s the actions of individual actors that determine economic reality, not the other way around. The field of economics attempts to understand the patterns of individual decisions within the context of a world that has scarce resources.
If you are a student of economics then you understand the Demand Supply concept quite clearly and can easily understand the basic tenets of how prices are determined in stock market also, because the root is always individual human action. You understand the incentive system better. So what is the Promoters incentive or what is investors incentive system, you can understand and mend your way quickly, which is required to be successful in dealing with stock investments.

Psychology: The market is made up of millions of person who are ultimately humans. Human are filled with their biases. The study of Psychology enables you to understand why market is the way it is. It helps you understand the emotion part of it.so if you read news about a company, then you can anticipate which way the share prices of the company will move.

Sociology: It is the study of social trends, how mob works, how crowd thinks etc. So it gives you an understanding of the world of company selling toys, furniture, cell phones or the company providing services to masses like IT, Banking etc. In other words, if the company you are looking at to invest is dependent on consumerisms of society, then who have studied the sociology have an edge.

The next big thing- Behaviour Economics:
Behavioural is a relatively new field that seeks to combine behavioural and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. 

Conclusion

Ultimately the stock market investment is more of an art than science and if you can showcase in interviews or resume that you have the knack for this kind of art then getting an Investment Management Job is not difficult. In life and career, what really matters are how you build upon the skills you have. Scared money doesn’t make any money and also scared mind do not get great jobs. So the summom bonum of the article is about being aware, it is about knowing one’s circle of competence and finally about developing confidence and proving mettle in interviews and likewise in finance career.

Things not to do while projecting financial statements

Financial statements include the Balance Sheet, Profit and Loss Statement and Cash Flow Statement. The financial model projections depend on the individual forecasting of these financial statements. The collective projections give the forecasted value of the company used for taking appropriate investment decisions.

We have already in our earlier topics discussed how to invest in a right company which indicated all the factors that are to be considered while selecting a company. Generally we will get enough guidance and literature on how to make that perfect financial model but rarely do we actually consider what we need to keep in mind that will help us avoid errors in our model. In this topic, we shall discuss the things that one should be conscious about while projecting financial statements, which is the rationale for any investment idea.

Things to avoid while preparing a financial model:

After one has already put in the past numbers in the model, the projections of the future numbers needs to be done. It is very essential that one should check the actual data, as it would form the base for future projections. Once the model with the past data is duly checked, we move on towards the future workings.

As per the requirement for the future years to be projected, (generally 3 years future numbers are projected) one needs to put the formulae for the same.

The prime requisite of any projection is the right input of formulae. The model prepared should be done in such a way that every number is formula based.

  • Never have manual punching for any future projections

As manual punching leads to mistakes in projections and also leaves huge scope for manipulation.

  • Never drag the formulae, always check for the cells under reference

Sometimes wrong cells are linked and the error is dragged all over the model.

  • Never put all the data in one sheet

Separate sheets should be maintained which should all be linked to the master sheet which reflects any change made in any of the sheet in the model. It is best to form a template before beginning the projections.

  • Never make projections as a thought for the moment

Always have the habit of putting comments. As after all, its human assumption, so some data should be there to fall back on if one needs to know the base of assumption.

  • Never make a blunder in the currency to be followed

Always keep a tab of the currency in which the numbers are reported and the one being used in the model. As mistakes in crores or millions or billions can send the model for a toss.

These are some of the key points one needs to keep in mind while building a financial model using the different financial statements. Now we shall look into projecting the financial statements individually.

Things to avoid while preparing Profit and Loss statement:

Profit and Loss statement presents the results of a company’s operations for a given reporting period. Generally, the projections begin with projecting the income statement of any company.

  • Never get confused with Total income and Net income (Net Sales) reported differently by different companies. One has to know the components of the total income and their placement in the projections
  • The expenses are never to be taken as a single entry. Always prepare a breakup of the expenses as each would impact the bottom-line. A combined number could lead to wrong projections
  • The model with operating profit as the key trigger should never have depreciation as part of the expenses. Depreciation should always be below the EBIDTA line as it is just a book entry.
  • Never combine all the taxes (current, deferred, MAT) together. The actual tax impact can be gauged when the taxes are separated and worked as different heads
  • The exceptional / extraordinary gains and losses are not to be part of the profits / losses. These parameters are to be dealt separately on occurrence basis.
  • The appropriations are not to be taken as a part of the P&L.
  • Appropriations are to be taken as a  separate schedule and projected accordingly

One needs to keep these minor points in mind, which if not considered correctly can lead to the P&L projections go haywire.

Once the P&L is projected, it is linked to the balance sheet with the assets and liabilities projected in correlation to the total income and expenses of the P&L.

Things to avoid while preparing Balance sheet:

A balance sheet (also called the statement of financial position) is defined as a statement of a firm’s assets, liabilities and net worth.

There could be difference in the format in which the balance sheet is reported by the company and that taken up for projection.

  • One should not change the format for the projections, in comparison to the actuals which could be the company format as the linking is based on it. Keep uniformity in the template of the actual and projected balance sheet.
  • Never forget the concept of liabilities and shareholder’s equity and not to be taken in assets side. They are to be separately projected under the liabilities head.
  • Never separately calculate and punch in numbers of the balance sheet (this is often done to adjust the cash).Every head of the balance sheet is to be linked to the P&L and projected as a ratio to the number of days or averages calculated

The projections of the balance sheet done after considering the above points should be without much of an error.

After the P&L and balance sheet, numbers have to only flow into the Cash Flow Statement

Things to avoid while preparing Cash Flow Statement:

The cash flow statement can be projected once it is linked to the P&L and Balance sheet. No head of the cash flow has any separate calculation. All numbers just flow-in from the above.

  • One should never have any manual scope in the cash flow. All has to be linked to P&L and BS
  • Avoid the blunders that generally happen with representing the increase or decrease of a line-item.

One needs to be careful with the signs (positive / negative) used in the different line items as that would lead to the net cash value at the end of the cash flow.

Conclusion:

The above mentioned points may look to be not that important, but once we sit to project a model and any mismatch or error in any of the above mentioned happens, it can make a person struggle for days to tally the balance sheet or rectify the cash blunder. That is why, for a smooth transit from actual reported to the projected, it is better to proof read, be cautious with the minutest data avoiding any error and then have a model that is almost close to 100% accuracy.

Corporate Social Responsibility (CSR) under Companies Act, 2013

India’s new Companies Act 2013 (Companies Act) has introduced several new provisions which change the face of Indian corporate business. One of such new provisions is Corporate Social Responsibility (CSR). The concept of CSR rests on the ideology of give and take. Companies take resources in the form of raw materials, human resources etc. from the society. By performing the task of CSR activities, the companies are giving something back to the society. Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014. In the following paragraphs, I will discuss various aspects of CSR activities.

Applicability

The following companies are required to constitute CSR committee –

  1. Companies with net worth of Rs. 500 crores or more, or
  2. Companies with turnover of Rs. 1000 crores or more, or
  3. Companies with net profit of Rs. 5 crores or more.

If any of the above financial strength criteria is met, the CSR provisions and related rules will be applicable to the company. These companies are required to form CSR committee consisting of its directors. This committee oversees the entire CSR activities.

Role of Board of Directors

The board plays an important role in CSR activities. The role of Board are as follows –

  1. Approve CSR policy.
  2. Ensure its implementation.
  3. Disclose the contents of CSR policies in its report.
  4. Place the same on Company’s website.
  5. Ensure that statutory specified amount is spend by the company on CSR activities.

It’s important to note that there is no penalty if the specified amount is not spend on CSR activities. In such case, the board’s report should specify the reason for such short spending.

CSR – Spending, Policies & Activities

Few important points of CSR spending are as follows –

  1. The companies covered by section 135 are required to spend at least 2% of their average net profits during the three immediately preceding financial years.
  2. The section postulates that “net profit” shall be calculated in accordance with the provisions of section 198.
  3. Company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.
  4. Where the company fails to spend such amount, the Board shall, in its report, specify the reasons for not spending the amount.
  5. The CSR committee shall formulate and recommend CSR policy to the Board.
  6. The policy shall indicate the activities to be undertaken by the company as specified in Schedule VII.
  7. The CSR Committee shall recommend the amount of expenditure to be incurred on the activities referred in CSR Policy
  8. The CSR Policy of the company shall be monitored by CSR committee from time to time.

As per schedule VII, the following activities may be included by companies in their CSR policies:

  1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water.
  2. Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects.
  3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups.
  4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water.
  5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts.
  6. Measures for the benefit of armed forces veterans, war widows and their dependents.
  7. Training to promote rural sports, nationally recognized sports, para Olympic sports and Olympic sports.
  8. 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 Caste, the Scheduled Tribes, other backward classes, minorities and women.
  9. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government.
  10. Rural development projects.

Net Profit Considered for CSR Spending

Net Profit means the net profit of a company as per its financial statement prepared in accordance with
Section 198 of the Act, but shall not include the following, namely: ‐

  1. Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise.
  2. Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.
  3. Profit from premium of shares/Debentures.
  4. Profit from sales of Forfeited share.
  5. Profit in terms of capital natures (in terms of undertaking of company or any part of thereof).
  6. Profit from the sale of immovable property/fixed assets/any capital nature.
  7. Any surplus change in carrying amount of an assets or liability recognized in equity reserves.

Following shall not be considered as expenditure:

  1. Income tax and any other tax on income
  2. Compensation, damages or other payments made voluntarily
  3. Loss of capital natures including loss on sale of undertaking of company or any part of thereof
  4. Any transfer to assets/liabilities revaluation/equity reserves.

Impact of CSR Provision

The new Companies Act 2013 was much awaited. With the new Act coming into force, lots of new provisions came in picture. One such new provision was relating to CSR activities. This provision was much debated. Many companies said that this new provision will create financial burden on them as they need to spend specified percentage of their profits. Now, since the new Act is in force, every company is following the new regulation. Considering the intent of law that companies take so many resources from society they should give back something to it, the provision of CSR is justified. Also there are few good points for Companies like:

  1. The companies can spend less than specified percentage. In such case the board need to disclose the reason for lower spending in its report.
  2. The Institute of Chartered Accountants of India (ICAI) also issued a guidance note that clarifies that no provision is required in books of companies for CSR spending. The need to book only actual expenditure.

Also the above spending will help in benefitting the underprivileged who are deprived of basic necessities. Since the new provision is only one and half year old, it is difficult to analyze its benefit. But in long run the society as a whole would surely stand benefitted from it. In cost benefit analysis of this provision, its sure that its benefit will exceed its cost.

Conclusion

With new CSR regulation, the task of Companies has increased. They are not only required to spend money but are also required to follow the disclosure and other statutory requirement. It would take some time for companies to get used to these new regulations. But this new regulations is good from social equality and development of underprivileged. As far as these new regulation benefits society in large, it’s always welcome.