Business Standard dated 19th February carries a report on the accomplishment of the top-50 Indian corporations on the key sustainability development goals (SDGs), measured on a scale of 100.
Hindustan Unilever (HUL) tops the list with 53.9 points, reflecting a strong performance across key areas, including climate, water, circularity, gender and biodiversity.
A near dead heat is with HCL Technologies, with 53.8 points. It scores high with 67,217 women on its rolls, the highest in India’s tech sector, and also cutting emissions and expanding energy-efficient digital solutions.
(Coincidentally, just a few days back the chairman of HUL, Nitin Paranjpe, spoke under the auspices of the Palkhivala Foundation, Chennai, on the impact of AI on the common man.
And a couple of years back, Roshni Nadar, the chairperson of HCL Technologies, again under the aegis of the Palkhivala Foundation, spoke on education as a tool to empower persons from the under privileged sections!)
A focus area for these companies in the sustainability journey is the investment in renewable (green) energy. It is in this context that the following offbeat and creative case originates, pertaining to a leading corporation!
The following paragraph is extracted from the annexure to the board of directors’ report (2019-20) outlining the initiatives of the company on the adoption of renewable energy to underscore the investments made by the company on this front-
Renewable energy : We have installed solar photo-voltaic (solar PV) plants in our campuses in addition to purchasing green power from third-party power producers, while at the same time, we are working with governments in different states to enable the right policies for large-scale adoption of green power. In fiscal 2019, we commissioned the 30 MW solar plant in Sira, Karnataka. We also added 2.8 MW of solar PV capacity in our campuses. With this, we now have 49 MW of total solar power plant capacity, including rooftop and ground-mounted systems.
In January 2021, the CSR rules were amended to specify that any asset acquired by utilising CSR funds in the earlier years should be transferred to an independent entity registered as a charitable organisation under the provisions of the Income-tax Act,1961.
Its annual report for 2020-21 carried the following note-
Consequent to the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, the Company intends to transfer its CSR capital assets created prior to January 2021 to a controlled subsidiary (“the Subsidiary”) to be established in accordance with Section 8 of the Companies Act, 2013 for charitable objects. The transfer will be undertaken upon obtaining the required approvals from regulatory authorities. The carrying amount of the capital asset amounting to ₹283 crore has been impaired and included as CSR expense in the standalone financial statements because the Company will not be able to recover the carrying amount of the asset from its Subsidiary on account of prohibition on payment of dividend by this Subsidiary.
The company cumulatively incurred ₹341.53 crore in the accounting years 2016-17 (₹74.25 crore), 2017-18 (₹170.65crore) and in 2018-19 (₹96.63crore) towards setting up solar power projects which folded up within the company’ CSR obligations. There were also other CSR projects outside of this.
In pursuance of the said rule change, the company setup a controlled subsidiary under section 8 of the Companies Act,2013 and initiated the steps to transfer the assets in the course of the financial year 2020-21.
It appears that the asset under consideration was primarily constituted by a 40MW solar PV plant built on 226.495 acres of land in the Tumkur district of Karnataka.
At the time of transfer the carrying value of the asset was ₹283crore. This must be the net figure after the depreciation claimed in the books in the earlier years. The actual cost of setting up the plant was ₹341crore, which is the cumulative amount shown in the CSR schedule for the years 2016-17 to 2018-19.
After the transfer of the solar power assets to the section 8 company, the two entities entered into a power purchase agreement( as required under the Electricity Act, 2003, for group captive model) to allow the power generated by the section 8 company to be consumed by the parent for its business.
The term of the PPA (power purchase) was 25years to supply power at ₹6.85 per unit, as against the commercial rate of ₹7.45 per KVA. The rate of ₹6.85 was benchmarked to other private arrangement in the neighborhood between unrelated parties. There was a provision for escalation of 5% in price, every five years.
The PPA also had a clause that the power purchaser (company) shall have the sole right and entitlements towards claiming any Green benefits available under applicable laws, and the power producer shall not take any action and / or commit any omission which may reasonably prejudice such rights / entitlements of the off taker.
Green benefit was defined to mean, all exemptions, waivers, subsidies, environmental credits, zero emission attributes, other incentives, or benefits and other rights related to then generation of sale or purchase of electricity (including tax benefits).
This confirms that even after the constitution of the Section 8 entity, the power generated was used only for the business of the parent and not used in any direct charitable activity.
In terms of the arrangement put in place, the parent entity paid to the subsidiary the cost of the power. Its administrative work was carried out by the staff of the parent for which it paid the parent.
This indicates that the power production was actually managed by the parent itself, even after the change of the ownership.
Some may consider this just an arrangement on paper to meet the requirement of the regulations, with no substantive change in the economic position.
Since the parent used the power purchased only in its business, the expenses towards the same would have been considered an operational expenditure and accordingly claimed for tax purposes.
The specific condition of the revised CSR regulation was that the asset should be transferred to an exempt charity, registered under the Income tax Act. Once, the Section 8 entity is granted the exemption its income will be free of tax.
However, the expenses of the parent will be tax deductible.!
The snapshot of certain key details of the section 8 entity is given below, as culled out from its abstract accounts-
Under the CSR rules, the entity to which the assets were transferred had to get itself registered with the IT department as a charity. In the absence of this registration the entity would not qualify to hold such assets.
The Section 8 company applied to the IT authorities to seek the necessary registration under Section 12AB of the Income tax Act.
The above case is no happenstance; but appears a well thought out structure to optimise the benefits to the company.
In order to avoid any bias of the author in evaluating this scheme which appears to have rough edges to a conservative mind, but must have been blessed by many top legal brains as clean and legal for an elite board to approve, the facts were shared with an AI (artificial intelligence) engine to get its observations.
Those are featured in the table on the right. If any reader has come this far, you may speculate for a while and forget it like the last T20 score, or probe through your favorite AI tool to find how much of this is fact and what portion is fiction. If you get more insights feel free to share it!
Since the nation’ capital is agog with various seminars on AI, it was only appropriate to seek more out of the A I tool for an apt concluding remark.
And that goes as-
This episode may well have remained unnoticed but for the regulatory insistence on transferring CSR-created assets out of the corporate fold. What the amendment did, perhaps unintentionally, was to lift the mist just enough for the contours beneath to be seen. The solar panels still gleam, the power still flows, and the sustainability narrative remains intact—but whether the sunlight truly illuminates public good or merely casts a long shadow over form-driven compliance is the question that lingers. In CSR, as in governance, sunshine is effective only when it reveals substance, not when it dazzles.
(Ranganathan V is a CA and CS. He has over 45 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
