Column: Shades of grey in CSR

Updated: Mar 13 2014, 08:39am hrs
The most talked about provision of the Companies Act, 2013, relating to corporate social responsibility (CSR), has finally got notified. That the CSR provision has been notified before other provisions of the Act shows the governments urgency in bringing it to effect before April 1, 2014.

The Act mandates a disclosure regarding CSR, than the CSR spend per se. The 2013 Act follows a comply or explain approach. As per the provisions of section 135, a company with a turnover of R1,000 crore or more or of a net-worth of R500 crore or more or reaping a net profit of R5 crore or more in any financial year shall constitute a CSR committee and is required to spend at least 2% of its average net profits of the past three years on CSR activities. Further, the 2013 Act provides that if, for any reason, a company is unable to spend 2% of their average net profit on CSR, they are required to explain the reason for not doing the same.

Under section 467 of the Act, the government has invoked the power to amend schedule VII significantly. A clause X in the earlier schedule VII, which empowered the government to prescribe any other matters, has been removed.

Schedule VII states that certain new activities could be classified as CSR activitiesprotection of national heritage, art and culture, including restoration of buildings and sites for historical importance and works of art, setting up of public libraries, promotion and development of traditional arts and handicrafts, measures for the benefit of the armed forces veterans, war widows and their dependants, rural development projects, training to promote sports, funds to technology incubators, etc. The scope of certain existing activities has been enhancedthe scope of promoting education also includes special education. Further, the schedule elaborates on certain activities. For example, environment sustainability, which includes ecological balance, maintaining quality of air, water and soil, conservation of national resources, etc.

Activities aimed to help only the companys employees or families of the companys employees wont be considered as CSR activities and political contribution/funding wont be considered as CSR expenditure.

The definition of CSR, as prescribed in rule 2(c), seems to be an inclusive definition, although at several other places it clearly states that those CSR activities falling under schedule VII will only qualify as CSR expenditure by a company. This will create ambiguity. If someone takes up a project, other than that permitted in schedule VII but in line with the policy approved by the CSR committee of board of directors, its spend wont be considered as part of the 2% CSR expenditure, even if it is well within the inclusive definition of CSR per se. This restricts the choice of the company with existing CSR schemes/programmes because itll have to reconsider and realign their activities with the newly amended schedule VII.

There has been concern around the appointment of an independent director by private companies to comply with the provisions of section 135 with respect to constitution of CSR committee. The notification clarified that an unlisted public company or a private company covered under sub-section (1) of section 135, which is not required to appoint an independent director pursuant to sub-section (4) of section 149, shall have its CSR committee without such director. Private companies have also been permitted to have only a two-member CSR committee if their board of directors comprises only two directors. This is a welcome change as private companies arent required to have an independent director. Though this is great relief to private companies, the legal question is, can rule making power under section 469 relax the provision of section 135 of the Companies Act, 2013 It would have been better, if the Ministry of Corporate Affairs would have invoked its power under section 462 to exempt certain class of companies from compliance of certain provisions of the 2013 Act.

A company may also collaborate with other companies for undertaking CSR activities; however, reporting of such activities in the board report has to be done by the individual company.

A company may decide to undertake CSR activities through a registered trust or a registered society or a company established under section 8 of the 2013 Act or section 25 of the Companies Act, 1956. However, such trust, society or company should have an established track record of three years, if they are third-party NGOs not established by company or its groups who are spending on CSR activities.

All foreign companies having a branch or a project office in India will also be covered under the CSR provision if they fall under any of the criteria under section 135. CSR activities have to be carried out in India itself to be qualified as CSR spend. Foreign companies having a branch or project office in India including Indian subsidiaries of foreign companies where FDI has come are required to undertake CSR activities. They also need to take approvals under the Foreign Contribution Regulation Act 2010 (FCRA). This will trigger an amendment in the Foreign Exchange Management (FEMA) regulations as a foreign branch can undertake only eight activities and CSR isnt part of those activities. Also worth noting is that FDI isnt permitted in case of a trust or societies.

The notified CSR rules are silent over the tax treatment, while the draft rules stated that it will be as per CBDT norms. It means that it is still unclear whether the CSR spend will be considered as an allowable business expenditure for tax treatment or not.

The concept of CSR is recognised the world over. Integrating social, environmental and ethical responsibility into business governance ensures a companys long-term success, competitiveness and sustainability. This approach also reaffirms the view that businesses are an integral part of the society and have a critical and active role to play in the sustenance and improvement of healthy ecosystems, in fostering social inclusiveness and equity, and in upholding the essentials of ethical practices and good governance. This also makes good business sense as companies with effective CSR have the image of socially-responsible companies. They achieve sustainable growth in their operations in the long run and their products and services are preferred by the customers.

CSR has taken on many guises and names over the years with some companies pursuing CSR more vigorously and more broadly than others. With the initiative taken over by the ministry to mandate disclosure on CSR activities, Indian companies would need to evaluate the way forward.

Harinderjit Singh

With inputs from Gajendra P Singh, associate director, Price Waterhouse

The author is partner, Price Waterhouse