Sunday, 22 April 2018

MCA strictly regulating CSR compliance

From the ‘Show or Shame’ policy of 2014, the Ministry of Corporate Affairs (MCA) seems to be moving towards ‘Spend or get Spanked’ policy in the year 2018, barely four years after CSR was made mandatory for companies having either Net-worth of INR 500/- crore or more or Turnover of INR 1,000/- crore or more or Net Profit of INR 5 crore or more.

MCA, through Deputy Director and Inspector e-CSPM - CSR has of late been issuing notices to various companies under section 206 of the Indian Companies Act 2013 regarding compliance of provisions of Corporate Social Responsibility (CSR) under section 135 read with Section 134(3)(o) of the Act and the Rules made there-under.  The information asked for by the MCA borders around forensic CSR audit of companies.

Section 135 lays down the following three compliance:
  • Constituting a CSR Committee of the Board
  • CSR Policy as approved by the Board
  • Report on CSR by the Board ensuring that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR Policy.

Section 134(3)(o) requires: “details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year”.

Implement CSR policy
MCA’s focus of inspection appears to be on “implementation” of CSR as per policy developed by the company and it has specifically questioned companies which have not spent the full two per cent of the company’s pre-tax profit for the relevant financial year. It has also asked such companies regarding “measures and efforts taken by the Board of the company to ensure that the prescribed CSR amount is FULLY SPENT for the financial year.”

While CSR activities should be undertaken within the framework of Schedule VII, some companies appear to have named their CSR projects under the head “others”. MCA has asked companies for details of all projects listed under the head “others”

Detailed CSR compliance inspection
In some cases, it would appear as if MCA is conducting a detailed forensic CSR audit asking for information such as:
  • Date when the CSR Committee was constituted;
  • CSR Policy of the company along with extracts of resolutions passed by the Board for adopting the same;
  • Details of the meetings held by the CSR committee during the relevant financial year and extracts of the minutes of such meetings;
  • If prescribed amount of two per cent as per section 135(5) of the Act is not spent, “furnish legally demonstrable specific reasons”;
  • Proportion of “administrative overheads” while implementing the total CSR expenditure during each financial year;
  • Details of the implementing agencies (trust, society or section 8 company with track record of at least three years of undertaking such activities) engaged by the company with the names and addresses of such implementing agencies.

Other information sought by the MCA:
  • Calculation of net profits computed u/s 198 of the Act;
  • Average net profits of the company for the three immediately preceding financial years as computed u/s 198 of the Indian Companies Act 2013;
  • Details of members of the CSR Committee;
  • Name and contact details (current address, email and Director Identification Number) of the Board of the company;
  • Details of the projects undertaken by the company as CSR activity as per disclosure under annual return of CSR as provided under Companies (CSR) Rules 2014.

Contribution to central government funds
MCA has also been asking companies to furnish certified true copy of bank statements showing transfer of money by way of “contribution to Prime Minister Relief Fund / Swatch Bharat Kosh / Clean Ganga Fund / any other central government fund”. 

The question is whether MCA is simply confirming whether such contribution was really made by the companies as stated in their report or subtly asking companies who have been under spending, as to why they have not contributed to these funds!

Companies which receive such notices and fail to furnish the required information shall stand liable for penal action.

Rise in CSR spend
The Annual CSR Tracker compiled by the Confederation of Indian Industries (CII) reveals that the number of Bombay Stock Exchange BSE-listed companies required to fulfil their CSR mandate has increased to 1,522 during Financial year 2016-17 from 1,270 in Financial Year 2015-16 and 1,181 during Financial Year 2014-15.

A total of 1,522 BSE-listed companies spent INR 8,897 crore, or ninety-two per cent of the budgeted INR 9,680 crore on CSR activities in the fiscal year 2016-17, an increase of about nine per cent from the previous year.

The survey suggests a substantial increase in CSR spends as against FY 2015-16 in the areas of environment and ecology (66 per cent), gender equality (115 per cent), national heritage (153 per cent) and sports development (192 per cent). However, there was no CSR spend in the areas of technology incubation or slum development by a single public-sector enterprise (PSE) in FY 2016-17. Moreover, slum development did not receive any funds from state-owned enterprises in the previous year either.

The overall increase in CSR spends in FY 2016-17 as compared to the previous year is 8.70 per cent. Development areas that show maximum increase in the CSR spends as against FY 2015-16 are sports development, national heritage, gender equality and environment.

There was a noteworthy increase in the CSR spend with respect to armed forces veterans in FY 2016-17 amounting to INR 33 crore in comparison to FY 2015-16, where less than INR 1 crore was spent, according to the report. 

FY 2016-17 also registered a huge drop in the contribution made to the Prime Minister's Relief Fund as compared to the previous fiscal year where 79 companies contributed INR 80.55 crore and 120 companies contributed INR 107.43 crore in 2014-15.

"Alignment of business strategy is slowly but surely happening. Companies have begun to disclose impact data, which goes beyond the requirements of the legislation. This is an indicator of improved transparency though quality of data leaves much to be desired," CII Director General Chandrajit Banerjee states in the report.

Across all three financial years 2014-15, 2015-16 and 2016-17, the industrialized states of Maharashtra, Gujarat and Tamil Nadu remained favoured destinations for CSR investment. It appears that over a span of three years, about 40 per cent of the companies preferred investing in one state / Union Territory and about 4 per cent in more than 10 states / Union Territories. Moreover, Northeast India received investment from 35 per cent of the Public Sector Enterprises and 65 per cent of the non-Public Sector Enterprises.

Out of the 32 industry categories, the major contributors to CSR spends in all three financial years are oil and gas; software and services; utilities; and metals and mining. Big increases in CSR spends in FY 2016-17 in comparison to FY 2014-15 are reported in automobiles and auto components, construction materials, consumer durables, coal and other financial services, according to the CII report!


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