The Ministry of Corporate Affairs (MCA) by an Office Order dated 4th April 2018 has constituted a twelve member ‘Steering Committee on Corporate Social Responsibility’ (CSR) under the Chairmanship of Mr. Manmohan Juneja, Regional Director, MCA, (Western Region), “to review the functioning of CSR enforcement and to recommend a uniform approach for its enforcement.”
The Steering Committee has also been tasked with formulating the structure for a “Centralized Scrutiny and Prosecution Mechanism” (CSPM). There will also be two sub-committees, legal and technical, that would go into various aspects of compliance under the CSR provisions.
The Office Order can be read at:
The law on CSR in India
The Indian Companies Act 2013 under section 135 makes Corporate Social Responsibility (CSR) compliance mandatory for any company, be it private, public, foreign or for that matter even a nonprofit company registered under section 8, if the company meets certain criteria of profit, turnover or net-worth. Reportedly, India is the only country in the world that mandates CSR under law.
Section 135 (The 'CSR' clause)
Unfortunately, Section 135 of the Indian Companies Act 2013 reduces CSR to mere arithmetic. During a block of three fiscal years, if the company has Net-worth of Rs. 500/- crore or more or Turnover of Rs. 1,000/- crore or more or Net Profit of Rs. 5 crore, it must:
a) Constitute a CSR Committee of the Board
b) Have a CSR Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any.
c) Ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy.
The “escape clause”
If the company fails to spend on CSR, "the Board shall, in its report made u/s 134(3)(o) shall specify the reasons for not spending the amount". Many in the corporate sector earlier viewed this as an “escape clause”. However, in recent history Ministry of Corporate Affairs has moved beyond its earlier policy of ‘show or shame’ (show that you complied or shame on you for not being compliant) to cracking the whip with show cause Notices on defaulting companies asking reasons for failure to spend or not spending enough.
Move towards “Enforcement”
Clearly after persuasive talk about CSR being voluntary and the philosophy of “Show or Shame” the government has now decided to put some teeth into Section 135 of the Indian Companies Act 2013 which as of the moment allows companies not to spend on CSR or under-spend and get away simply by providing lame reasons for not spending or not spending enough.
MCA which is the watch-dog on CSR compliance has finally decided to bare its fangs, four years after Section 135 (popularly known as the CSR clause) came into force on April 1, 2014. In our view, this move is not entirely unexpected or misplaced. Over the past four years MCA has been observing a rise in CSR non-compliance and therefore the time has come to put away the kid gloves and ensure compliance through “enforcement” under law!
Since the last two years MCA has been sending Notices to several companies which have failed to comply with the requirements under section 135. While many companies have a CSR Committee of the Board and a CSR Policy in place, the reporting on CSR activities is far from satisfactory.
As per official data, 6,286 companies spent Rs 4,719 crore towards various CSR activities in 2016-17. The total number of such projects taken up stood at 11,597.
Data of the CSR expenditure of 5,097 companies during the fiscal year 2015-16 as also the CSR expenditure of 7,334 companies for the Fiscal year 2014-15 (the first year) can be found at: http://www.mca.gov.in/MinistryV2/csrdatasummary.html
Terms of Reference for the Committee
Terms of reference (TOR) for the Steering Committee for CSR includes revisiting Schedule VII of the Indian Companies Act 2013 which provides an indicative list of CSR activities which companies may undertake in a project or program mode.
By itself, Schedule VII is quite wide and varied in terms of scope of activities. We would not mind if it is further broadened. However, it should not be widened to accommodate more government schemes and government welfare and development programs. Already there is option under Schedule VII to contribute to Swach Bharat Kosh set up by the Central government for the promotion of sanitation, the Clean Ganga Fund set-up by the Central Government for rejuvenation of the river Ganga and of course the ever “popular” Prime Minister’s National Relief Fund.
The Committee will also revisit guidelines for enforcement of CSR provisions including the structure for a Centralized Scrutiny and Prosecution Mechanism (CSPM). This is where the committee needs to ensure that the CSPM focuses on regulating and not slip into control mode.
The Committee has also been tasked with examining the role and function of the National Foundation on Corporate Social Responsibility (NFCSR) which operates under the Indian Institute of Corporate Affairs (IICA).
Unfortunately neither Section 135 nor the Company CSR Rules recognize ‘employee engagement’ as CSR. All over the world, companies proudly report the number of hours contributed by their employees in community services. However, this is not included even by way of a footnote when it comes to CSR reporting under law. The Committee should consider recognizing ‘employee engagement’ under CSR.
Also, companies are not allowed to spend more than five per cent of their CSR expenditure on administrative costs or over heads. How is a company with even a CSR budget of one crore rupees expected to hire capable staff to implement or oversee CSR with just five lakhs rupees? The committee should increase this threshold or do away with it.
Finally, we would urge the Committee to focus on regulating CSR and not get into control mode. The ‘R in’ CSR stands for “Responsibility” … let it not slip into “Revenue” for the government!