The High level Committee constituted by Ministry of Corporate Affairs to suggest measures for improved monitoring of implementation of Corporate Social Responsibility Policies by the companies under Section 135 of the Companies Act, 2013 has submitted its Report to the Government. A copy of report is available here.
We will summarily discuss recommendations of the committee in this post.
According to the committee, the main thrust and spirit of law is not to monitor but to generate conductive environment for enabling the corporate to conduct themselves in the responsible manner. The CSR legislation is not to generate financial resources for social and human development since the resource gap, if any, could be met by levying additional taxes or cess on these corporate. The objective of this provision is to involve the corporate in discharging their social responsibility with their innovative ideas and management skills with greater efficiency and better outcomes.
This view of the committee is very important because many stakeholders were looking for enforcement of CSR Provisions.
Some committee members are of the view that the constitution of this committee is a little premature. According to the committee, it would be desirable to conduct a review of the programme after three years.
According to the committee, present provisions in the law appear to be sufficient.
On tax treatment of expenditures of various activities under Schedule VII, committee recommended that there should be uniformity in tax treatment for CSR expenditures across all eligible activities.
I personally think that uniform treatment of CSR expenditure may affect government own vision to prioritize particular area of urgent social need. Further, it became more like a taxation directly expended to society not through the government.
The committee recommends two models of implementation strategies – (i) for companies that have CSR expenditure of more than Rs. 5 Crore; and (ii) form smaller companies with CSR expenditure of less than Rs. 5 Crore. Companies in first category are required to undertake programme based sustainable CSR activities, with some measurable outcomes. Smaller companies could take project based activities depending upon their CSR spend from year to year. Committee recommend smaller companies to combine their CSR programme with other small companies. The committee also suggest for adjusting this threshold for inflation.
This recommendation may add one more class of companies in already end numbers of classes of companies under the Companies Act, 2013. I do not think this will serve any major purpose. However enabling small companies for pooling their CSR fund for long term project may be a good suggestion.
The committee suggest carry forward of unspent CSR funds in line with DPE guidelines applicable to public sector companies. The committee also recommend transfer of unspent CSR amount to one of the funds listed in Schedule VII. This carry forward provision and transfer of CSR fund to certain fund may certainly make CSR as compulsory expenditure and akin to taxation and with that logic make the Companies Act, 2013 certainly a money bill. This whole chain may start a constitutional debate on the provisions.
The committee recommended that the ceiling on administrative overhead cost should be increased from present 5% to not more than 10% of CSR expenditure of the company. I personally agree with dissent of DPE representative made on the ground that 5% cap is sufficient if project are well designed. But this should be looked comprehensively.
The committee also felt that administrative overhead expenditure of company on CSR should not include expenditute on capacity building of the implementation agencies.
The Committee feels that CSR provisions should not be applicable to Section 8 Companies. The committee require further clarity on applicability of Section 135 to the foreign companies. The Committee also require clarity in term ‘net profit’ in the Section as well as the rules. The committee also require re – examination of reference “any financial year”.
The committee strongly feels that Government cannot and should not maintain a databank of implementing agencies for undertaking CSR activities. This task of undertaking due diligence of implementing agencies should squarely remain the responsibility of the Board or CSR Committee. All information relating to implementation of CSR by companies including amount spent, activities undertaken, geographical areas covered etc as reported by the companie in their annual disclosure need to be complied by the ministry and placed in the public domain. I do not find any substance in compilation and placing all information in the public domain. We need to do cost benefit analysis of such compilation project.
The committee observe that government should have no role to play in engaging external experts for monitoring the quality and efficacy of CSR expenditure. No additional mechanism for monitoring implementation of CSR by CPSUs is required.
Committee recommends two awards – one each for the tow categories of companies large and small.
These recommendations do not seem to be in line with the apprehension of the industry and professionals. CSR provisions are, for the time being, saved form over legislation and may remain voluntary for some time. Public apprehension that in listing of implementing agencies politics may play its dirty game is also postponed to next attempt.
CSR being a pre mature baby of Indian law, saved from hurried surgery but still under observations and treatment