The Current Position on Corporate Social Responsibility

After our last blog on Corporate Social Responsibility (almost a year ago), the Government has notified Section 135 of the Companies Act, 2013 and amended certain portions of Section 135 and Schedule VII at the time of notification of these provisions. In this post, we seek to highlight certain key changes to the law pertaining to CSR.

Amendment to Schedule VII

The MCA, vide its notification dated February 27, 2014 notified the provisions of Schedule VII of the Act wherein, a few of the activities permitted as per the earlier Schedule VII have been elaborated and widened in scope and several others altered. Listed below are permitted CSR activities in accordance with Schedule VII:

1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation (including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation)* and making available safe drinking water. [*Inserted vide notification dated October 24, 2014 and will come to force after it has been published in the Official Gazette.]
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 centres 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 (including contribution to the Clean Ganga Fund set-up by the Central Government for rejuvenation of river Ganga)*. [*Inserted vide the abovementioned notification dated October 24, 2014 and will come to force after it has been published in the official gazette.]
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 handicraft
6. Measures for the benefit of armed forces veterans, war widows and their dependents
7. Training to promote rural sports, nationally recognised sports, paraolympic sports and olympic sports
8. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government
9. 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 castes, the scheduled tribes, other backward classes, minorities and women
10. Rural development projects.
11. Slum area development [inserted vide notification dated August 06, 2014 and will come into effect after its publication in the official gazette].

Clarifications

Owing to inconsistencies in language and difficulty in interpretation the industry sought answers, in response to which the MCA issued a detailed clarification on June 18, 2014. The clarification enhances the scope of Schedule VII by providing that a liberal interpretation ought to be taken of the entries contained in Schedule VII so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are in fact broad-based and are intended to cover a wide range of activities.

Further corporates would need to engage in a project as contained in Rule 4(1) of the CSR Rules 2014. As a corollary therefore, one off activities conducted by corporates albeit in connection with one of the entries of Schedule VII would not qualify as CSR activities and consequently the expenditure for such activity would not be CSR expenditure.

Foreign Companies

Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act.

Contributions to corpus

Contribution to corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act.

Companies (Corporate Social Responsibility Policy) Amendment Rules, 2014

 The big question before the executing personnel of the CSR policy was the extent of overhead expenditure permitted in relation to such activities. In order to ensure that CSR initiative is in fact effective, it is essential that the function is entrusted to professionals or that sufficient inhouse resources and cost expenditure be made in creating such competencies.

Rule 4(6) of the CSR Rules provide that companies may either build CSR capacities of its own personnel as well as those of implementing agencies through instituions and such expenditure shall not exceed 5% of the total CSR expenditure of the company in one financial year.

It was not clear as to what such expenditure entailed. Vide amendment made by MCA on September 12, 2014, the words “including expenditure on administrative overheads” have been inserted in the rule 4 (6) of the CSR Rules, clarifying the scope of the term expenditure. This has clarified that administrative overheads towards undertaking CSR activities are included in the term “expenditure”. However, on the other hand, the rules limit the extent to which such administrative overheads may be incurred. The companies affected by this would be smaller entities with not a very large corpus. In such cases, the best solution would be for many such corporates to come together to contribute their pooled resources towards such CSR activities.

In Conclusion

The amendments and clarifications are certainly a step forward in lending a more liberal interpretation to the permitted CSR activities, while also ensuring that CSR activities are undertaken as long term projects by companies.

[Recently also published a critical analysis of the CSR Regime in the Business Manager magazine, October 2014 issue, which can be accessed here.]