At a time when deep social issues have surfaced as a direct result of the COVID-19 pandemic, it is ironic and troubling that the very concept of corporate social responsibility (CSR) is sought to be altered to erode the founding spirit of the rules. The proposed amendment — open for public comments until April 20 — seek to change, among others, the definition and the manner by which CSR activities may be funded.
The present definition is inclusive, and open-ended, defining what consists CSR, whereas the proposal seeks to restrict the activities to only those specified in the Companies Act, 2013, and excludes specific areas. There are two exclusions in this ‘negative normative’ that need re-thinking.
The first of these exclusions relates to allocating CSR funds for employees of the company. Where presently the CSR rules state that ‘activities only for the employees’ shall not be considered as CSR activities, the proposed amendment has sought to exempt companies where beneficiaries account for less than 25 percent of the employees.
A word of caution: Even the present rule is unclear in its applicability given the dual interpretation (the operative word being ‘only’ and its placement in the rule). One interpretation is, can those activities which involve employees and other persons be categorised as CSR activities. The other is, do we interpret it to mean that the present rules exclude activities relating to employees from the ambit of CSR?
Assuming the latter, the proposed amendment seeks to allow a company to allow certain funds to be allocated towards employees so long as it does not cross the specified threshold. However, this implies that the very substratum of CSR is lost as there is no public benefit (or social good) being passed on from the corporate.
The second of these exclusions is where activities undertaken by a company outside India cannot be considered as a CSR activity. However, this exclusion is extremely wide and fails to take into account, say, social activities benefitting Indian citizens in other countries to participate in fields such as education, promoting gender equality, empowering women and rural sports, nationally recognised sports, Paralympic/ Olympic sports (all of which are part of Schedule VII).
It is recommended that the language in these amendments be changed to provide for spending of CSR in these areas as well.
The other aspect up for scrutiny is the manner in which the CSR activities may be undertaken.
The present rules permit Section 8 (not-for-profit) companies, registered trusts, or registered societies, which have an established track record of three years in similar activities, to undertake CSR. The proposed amendment has done away with these options, and instead, a CSR activity may be undertaken by the company itself or, through a Section 8 company or, through any entity established under an Act of Parliament or a State legislature so long as it is duly registered with the central government.
At first glance, the types of entities that can undertake the CSR activities has been broadened. However, from a practical perspective, would there be any agency monitoring the activities of these ‘entities’ to ensure that they stick to the CSR activities? Otherwise, such a broad-based reference could be prone to misuse. Hence this begs the question, should entities be restricted to not-for-profit or charitable trusts/societies?
There have also been murmurs that the proposed changes to the type of entities would disbar CSR activities through existing public trusts. This is not stated explicitly in the proposed amendments, and it also means that a company cannot engage with international organisations for implementation of a CSR project.
There are other minor changes in the proposed amendment that could have significant impacts. For example, the proposed rules allow for a company to collaborate only with other ‘companies’, but can be meaningfully allowed to include other entities. Further, the requirement of an impact assessment by companies for their CSR projects or programmes can get tedious, especially for one-time activities that may not always achieve the desired social results.
We are also at an interesting juncture where the Ministry of Corporate Affairs has issued a circular and clarification on COVID-19-related CSR spends. Interestingly, the Supreme Court has ruled many times over that circulars are not binding in nature and cannot contradict statutory provisions, which an FAQ appears to have.
Given the crippling effects that COVID-19 will have on the economy, this bridge can be crossed after seeing how many companies would even qualify per the CSR monetary thresholds for the next few financial years.
(Saamir Raketla contributed to the article.) Harini Subramani is an advocate. Twitter: @subramaniharini. Views are personal.