As it is well-known, in countries like India where economic integration and social inclusion are imperative forces that drive the masses towards growth and development, Corporate Social Responsibility (“CSR”) has become an integral and impactful part of the corporate landscape.
The legal framework on CSR outside India began to develop during the 1900s. However, India is the first country in the world to impose a statutory obligation of CSR on corporates by way of the introduction of Section 135 of the Companies Act, 2013 (“CA, 2013”).
As per Section 135(1) of CA, 2013 read with the Companies (CSR Policy) Rules, 2014, a company satisfying any of the following criteria during the immediately preceding financial year is required to spend, in every financial year, at least two per cent of the average net profits made during the three immediately preceding financial years:
(i) The net worth of rupees five hundred crores or more, or
(ii) Turnover of rupees one thousand crores or more, or
(iii) The Net profit of rupees five crores or more.
Since these criteria are joined by the word ‘or’ instead of the word ‘and’, hence the companies fulfilling any of the above criteria would be required to fulfill the CSR obligations imposed by CA, 2013.
The Government of India (“GOI”) has made it clear that CSR spending is not charity or mere donations without any strategic benefits. In fact, there has been a concerted effort to define broad areas (Schedule VII of CA, 2013) under which the funding can be channeled, thereby visibly and positively impacting society.
Covid 19 and CSR activities:
With the outbreak of Covid 19 pandemic, GOI declared it as a ‘notified disaster’ on March 14, 2020. Following such notification, the Ministry of Corporate Affairs (“MCA”) on March 23, 2020 through a clarificatory circular, declared that spending of funds for Covid 19 relief would be treated as a permissible activity under CSR. Further, the GOI has also set up the “Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund” (“PM CARES”) to respond to the Covid 19 crisis and provide relief to those affected. Upon setting up of the PM CARES, Schedule VII of CA, 2013 was amended to include contributions to PM CARES, as a CSR activity.
Thus, standing today, a company which falls within the ambit of CSR regulations, can contribute to PM CARES and it shall constitute a valid contribution towards CSR activities. Also, Companies’ CSR funds can now be used towards promoting preventive healthcare infrastructure and disaster management.
In light of several circulars issued by MCA, from time to time, since the outbreak of Covid 19 pandemic, the scope of CSR has been widened to encourage companies to contribute towards Covid 19 relief as well as research and development towards generating Covid vaccines.
The table below outlines the kind of expenditure towards Covid 19 related reliefs which would constitute CSR activities and which would not:
Admissible CSR Expenditure | Non-Admissible CSR Expenditure |
---|---|
Contributions made to PM CARES Fund | Contributions made to Chief Minister’s Relief Fund |
Contributions made to State Disaster Management Authority | Contributions made to State Relief Funds for Covid-19 |
Spending of CSR funds for various activities related to Covid-19 relief under items nos. (i) and (xii) of the Schedule VII relating to promotion of health care including preventive health care and sanitation, and disaster management | Payment of salary to employees and workers, during lockdown period |
Ex-gratia payments to temporary/ casual/ daily wage workers for Covid 19 relief, over and above the disbursement of wages | Payment of wages made to casual/ daily wage/ contractual labour, during lockdown period |
Conclusion
Thus, to tackle the need for additional monetary requirements caused by Covid 19 pandemic, the MCA was quick to undertake necessary modifications in the CSR regulations to serve the dual purpose i.e., to generate funds for Covid 19 reliefs as well as ensure that the companies contribute towards Covid 19 reliefs, which is the need of the hour.
However, despite the above measures introduced by MCA, the future of the CSR initiative looks a little uncertain in the wake of the Covid 19 pandemic. As we are already aware, due to the outbreak of the Covid 19 pandemic, many companies (even the large ones) across sectors, have suffered a great loss. This is especially true in the case of the real estate sector, manufacturing sector, travel, and tourism industries, hospitality industry, airline industry, to name a few. The imposition of prolonged lockdown and mass exodus of manual labor led to the shutdown of many factories and industries across the country.
Therefore, the question remains as to, whether due to the decrease in turnover ratio and profitability of companies during the pandemic, more and more companies would fall below the thresholds prescribed under the CSR regulations.
In such a scenario, maybe the need of the hour is for MCA to relook at the threshold limits and undertake necessary modifications therein to lower the limits, accordingly. This may go a long way in ensuring that CSR regulations and corresponding CSR obligations on the companies, even though well-intentioned, do not remain a piece of toothless legislation.