In line with the national endeavor to include those sections of the society in the growth process, which had hitherto remained excluded from the mainstream of development, CSR was conceived as an instrument for integrating social, environmental and human development concerns in the entire value chain of corporate business in India. The principle of “inclusive and equitable growth”, focused on encouraging business action on national development priorities including community development initiatives and strategic CSR based on the shared value concept, was subsequently translated into a mandatory provision of CSR in Section 135 of the Companies Act, 2013. The CSR rules prescribe corporates to undertake CSR activities beyond their normal course of business or to say, adopt the philanthropic level of Carroll’s Pyramid of Corporate Social Responsibility. As updated earlier, owing to the genuine concerns about this new legislation , for which there is no parallel elsewhere in the world, a high level committee was appointed by the Government in February to suggest measures for the improved monitoring of the implementation of the CSR policies in India. After 6 months of discourse, the panel has finally come out with its recommendations (http://www.mca.gov.in/Ministry/pdf/HLC_report_05102015.pdf) along with some issues that require a change in the law of CSR to remove the difficulties, ambiguities, and complexities.
The key points from the report are summarized as follows:
- All information relating to the implementation of CSR by companies including amount spent, activities undertaken, geographical areas covered etc., as reported by the Companies in their annual disclosures should be compiled by the MCA & placed in the public domain to facilitate research and provide useful feedback for policy formulation. This would take care of stakeholders’ queries including those pertaining to RTI applications, Parliamentary Questions related to macro level analysis or unit level company wise information on CSR.
- Action should not be taken against companies on the ground of non-compliance with CSR provisions of the Act at least for the initial two to three years- which according to the panel is going to be ‘a learning period’ for all stakeholders. Companies need to be provided some grace period for capacity building in the field. Explanation, duly approved by the Board of the Company for shortfall, if any, in the CSR expenditure vis-à-vis the mandatory 2% of the average net profits, however, has to be placed in the public domain. The existing provisions of the law do not empower the Government to go beyond this.
- The existing provisions of the Act/Rules like mandatory disclosures, accountability of the CSR Committee and the Board, provision for audit of the accounts of the company, etc provide sufficient safeguard against non-compliance. The Board of a company is both responsible and accountable for its CSR policy. An external monitoring agency is neither required nor desirable, as the companies are internally capable to undertake the exercise.
- CSR Policies and CSR expenditure of CPSUs are subject to the audit of the Comptroller & Auditor General (C&AG) of India. The existing mechanism of CAG audit as well as study by COPU seems to be sufficient to monitor CSR implementation by CPSUs. Further, the practice of signing MoU between CPSUs and the administrative Ministry is expected to put in place some monitoring mechanism, if required.
- All public goods as far as possible should be incorporated in the list of permissible CSR activities under Schedule VII and an omnibus clause should be provided to cover those that are left out. The inclusion of such a clause would take care of development concerns, needs and priorities that cannot be anticipated. CSR activities must be for larger public good and for any activity that serves public purpose and/or promotes the well-being of the people, with special attention to the needs of underprivileged.
- The ceiling of administrative overhead expenditure of companies under CSR should be increased from the present provision of 5% to 10% of the total CSR expenditure. This would require appropriate amendments to the relevant provisions of the Act/Rules. These costs should, however, not include expenditure incurred on capacity building of the implementation agencies.
- Corporate entities can be categorized into two groups- i)those with less than Rs. 5 crore spend per annum on CSR; and ii) others with CSR budget of Rs. 5 crore or more. While companies with CSR budget of Rs. 5 crore or more could be mandated to follow all the procedures/conditions laid down in the Act and Rules, those with less than Rs. 5 crore of CSR budget, need not take CSR programs in project/programme mode. Smaller companies should be allowed to take up any programme/activity covered under the omnibus provision of “Public Provision”. They can also pool funds with similar companies with CSR spend of less than Rs. 5 crores. This suggested threshold of Rs. 5 crore (in CSR expenditure) should be adjusted for inflation, using the GDP deflator or Wholesale Price Index (WPI) every three years, and this figure should be rounded off to the nearest crore.
- There should be uniformity in tax treatment for CSR expenditures on all eligible activities, even the Prime Minister’s National Relief Fund (PMNRF). Otherwise, there can be a temptation on the part of companies to direct at least a part and possibly a substantial part of their CSR budget to activities like the PMNRF to avail benefits, leading to distorted allocation of CSR funds across development sectors. The intent of the Act is to inculcate a sense of involvement and responsibility in the corporate sector for social development by utilizing not just their funds, but also their managerial skills. A Board’s decision should be guided by compelling community social needs instead of tax saving implications.
- Outsourcing of CSR services to Implementing Agencies attracts payment of Service Tax, whereas if the company enters into a MoU with the Implementing Agency, the contribution made is treated as grant, and, therefore, not liable for payment of Service Tax. This is an anomaly that needs to be corrected.
- “Carry forward” provision for unspent balances of CSR funds as applicable to government companies should be extended to private companies. However, there should be a sunset clause of 5 years, after which the unspent balance should be transferred to one of the funds listed in Schedule VII.
- Section 8 companies should be outside the purview of the CSR provisions of Companies Act, 2013. Further, the applicability of Section 135 to foreign companies should be reassessed. However, CSR provisions should be made applicable to profit making listed entities that are not incorporated under the Company Law on mutatis mutandis basis- either through amendments in their respective Statutes or as a mandatory condition under the listing agreement of SEBI.
- The definition of “Net Profit” under Section 135(1) and Section 135(5) requires clarification as does the scope of the expression “any financial year” in Section 135(1) by the Ministry of Corporate Affairs.
- It is not feasible to monetize and count employees contribution to CSR activities towards CSR spend of the company. It could become subjective, if not arbitrary in allocating cost of the employees’ time spent on CSR activities of the company.
- Companies have the requisite capacity and expertise to carry out due diligence of potential implementation agencies. Therefore, Government cannot and should not maintain any data bank of implementing agencies for undertaking CSR activities of companies. Undertaking due diligence of these agencies should squarely remain the responsibility of the Boards and their CSR committees.
- The Government should have no role to play in engaging external experts for monitoring the quality and efficacy of CSR expenditure of companies. The Boards/CSR Committees are sufficiently empowered to engage any external firm, if they so require.
- The opportunity to use the substantial funds generated to benefit the deserving poor and under-privileged sections of the society should not be missed. CSR resources should be ring-fenced by the CSR committees/Boards. All programs/projects should be approved by the Boards on the recommendations of their CSR Committees. Any changes to the programs/project should also be undertaken only with the approval of the Committee/Board. The provisions of the law/rules should be strengthened to ensure this.
- Annual awards should be set up- one each for the two categories of companies, large and small, to incentivize the corporates to implement CSR in right earnest.
The overall intent of the recommendations proposed by the high level committee as evident is to encourage companies to undertake CSR activities in the right spirit. The measures suggested pave way to an efficient corporate system/mechanism for ensuring accountability & effectiveness, provided they get adapted into the law. An ideal assessment of the qualitative and quantitative aspects of the CSR implementation, however, will only be possible once sufficient data is gathered in the next two or three years.