This article is written by Ms. Aporva Shekhar from KIIT School of Law. This article is a brief analysis of CSR trends in India and how they have changed as a result of the pandemic.
Corporate Social Responsibility or CSR is a subject concept and there is no universal agreement on what would constitute a CSR activity. But the general concept of CSR revolves around the central tenet that corporations that utilize the resources of society must give something back for the impact they create with their profit-making activities. In a country like India, CSR has played an important role with social inclusion and economic integration being the main focus. While CSR is a widely recognized concept, India was the first country to make it a statutory obligation in 2013. The pandemic shifted the paradigm of CSR requirements entirely, apart from general charitable work the corporate sector was now also contributing to the Covid management response to discharge their mandatory obligations.
CSR framework in India
The move to enforce CSR statutorily has been criticised by many based on arguments that it might be reduced to a mere compliance argument. Regardless, Section 135 was incorporated in 2014 in the Companies Act, 2013 to clearly lay down the law to govern CSR activities in India. The abovementioned provision states that all companies that have a turnover of more than INR 10 billion and a net worth of more than INR 5 billion must contribute two percent of their average net profits of three years to CSR activities. This is an important compliance requirement that must be followed and reported mandatorily. Subsequent amendments to the abovementioned Act have also made several clarifications regarding the types of activities that would come within the ambit of CSR. Schedule VII of the abovementioned Act clarifies the intent of the legislation to define broad areas for funding to be considered for CSR, such funding is not to be seen as mere donations but something that positively impacts society with visible strategic benefits. CSR legislation in India is mainly guided by the commitment to align interests with the UN-SDGs (United Nations Sustainable Development Goals). Even though CSR has now been incorporated there is a liberal interpretation of its provisions with the main focus and object being sustainable development.
Changes to the CSR regime in India
The Draft Companies (CSR Policy) Amendment Rules 2020 was formulated by the MCA (Ministry of Corporate Affairs) considering several points raised by the public as well. Some of the key changes proposed under the above-mentioned rules are:
- Definitions – several key definitions including the definition of CSR are proposed to be changed under this amendment, with the addition of certain exclusions from CSR which like the exclusion of all activities that benefit the 25% or more of employees of a company and their families Any activity undertaken outside India and any political contributions made during the normal course of business.
Clarifications were also made with regards to activities that would not be included in CSR as mentioned under the new definition. CSR would not include any events like marathons, charitable contributions, awards etc. The MCA also clarified that any expenditure made to discharge statutory obligations shall not qualify as CSR expenditure. Also, any statutory compensation made to employees for injuries suffered during the course of employment shall not qualify as CSR expenditure.
- Inclusion of agencies that can undertake CSR activities – the Amendment rules limit the corporations’ ability to engage in delegated CSR activity to Section 8 companies and any other institution established by Parliamentary Act or state legislature. Further, the Amendment rules add that a registered trust or society and collaboration of more than one company to form a Section 8 company will not qualify as agencies that can undertake delegated CSR activities.
- CSR committee – the CSR committee’s powers are proposed to be broadened under this amendment by mandating the formation of CSR policy that provides a clear approach with the recommendations of CSR committee being elevated to a higher status with relation to CSR activities and their selection, implementation and monitoring.
- Role of Chief Financial Officer – the CFO has been tasked with ensuring the utilization of funds to be contributed to CSR
- Collaborative CSR projects – Companies may now work on CSR projects together as long as they fulfil their compliance requirements separately.
- New Definitions – several new definitions are to be added under the draft rules such as ‘Public Authority’, ‘International Organization’ and ‘Ongoing Projects’.
- International Organization engagements – with prior permission from the Central Government, companies can now engage with international organizations to work on their CSR policies.
- Rule 10 – the draft proposes the addition of Rule 10 to empower the Central Government to establish a National Unspent Corporate Social Responsibility Fund to consolidate all unspent CSR funds that were to be used for activities mentioned under Schedule VII of the above-mentioned Act.
Key domains of CSR focus in India
Statistics till the financial year 2019 indicate that approximately INR 71 crores have been spent on 1.5 lakh projects across the country. Education, Health and Rural development are the top three domains that have received maximum funding related to CSR activities. Regardless of these broad distinctions, CSR funding also depends on the degree of industrialization in a particular domain and with more industrialized states like Gujarat, Maharashtra, Tamil Nadu and Karnataka receiving over 30% of the total CSR funding in the country. The pie chart below accurately depicts the ways in which most companies in India discharge their CSR obligations.
But aspiration districts with poor socio-economic indicators like Jharkhand, Bihar and others receive minimal CSR expenditure and this divide decreases the efficacy of CSR activities in India. The Corporate Social Responsibility Projects Repository on the IIG (Indian Investment Grid) is an undertaking of Invest India to remedy this situation. The main objective of this initiative was to correct the imbalance by facilitating companies to identify the most impactful CSR projects from a consolidated list at the central level, and so far the portal has succeeded with more than six hundred active projects across diverse domains in progress.
The government’s response related to CSR in light of the pandemic
The outbreak of the novel Coronavirus wreaked unprecedented loss of life forcing the government to declare it a ‘notified disaster’ and rely on the SDRF (State Disaster Response Funds) to mobilize resources. Considering the dire straits that the country was in, MCA clarified that CSR activities were to be interpreted liberally as mentioned under Schedule VII and could also include Covid relief activities. Another major development that took place was the establishment of the PM CARES (Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund) and the subsequent amendment of Schedule VII to include PM CARES within its ambit to promote corporates to contribute to the fund to discharge their statutory obligations.
Declaration of the pandemic as a ‘notified disaster’
In an unprecedented move, the Government decided to declare the pandemic a ‘notified disaster’ on 14th March 2020. This was mainly done to enable the government to utilize funds from the SDRF and other state and central level disaster management funds to coordinate a strong response to contain the spread of the novel virus. This declaration enabled the authorities to divert resources from funds towards formulating a public health plan to provide assistance with treatment, accommodation and food supplies for people in quarantine facilities. The notification empowered the state authorities to utilize their funds for the procurement of essential supplies and the establishment of plans related to screening and testing.
Change in CSR norms to include Covid relief activities
All funds spent on Covid relief became eligible to be classified as CSR activities by virtue of the Notification approving the same taken out by MCA on 23rd March 2020. The MCA stated that companies could now contribute to preventive care infrastructure and disaster management as a part of their CSR obligations. The MCA circular added that CSR funds spent on Covid relief efforts would come within the ambit of items listed under Schedule VII as (i) and (xii) eliminating extreme hunger and poverty and relief, rehabilitation, reconstruction activities included under disaster management. Any other activity related to the promotion of preventive healthcare and sanitation activities was to be included within the ambit of recognized CSR activities considering that the items listed under Schedule VII are broad terms and therefore require liberal interpretation in the wake of the pandemic.
Research and Development work on new drugs, vaccines and medical devices related to the virus were also included within the ambit of CSR activities by an amendment made on 26th August 2020 to the CSR norms. The Gazette Notification stated that any R&D activity that is undertaken by companies with reference to areas focusing on the counter Covid response for the years 2020-2023 would come within the ambit of CSR activities subject to certain conditions. Those conditions being that the activities mentioned must be carried out in collaboration with organisations mentioned under item (ix) of Schedule VII of the abovementioned Act. And the details regarding these activities must be disclosed in the annual report of CSR in the Board’s report separately.
Ministry of Corporate Affairs’ role in relief response
The MCA provided several clarifications on the topic of CSR and related activities since the pandemic started, on 10th April 2020 released a set of FAQs regarding the deployment of relief funds. The FAQs clearly stated that all contributions made to PM CARES would be considered as CSR activity given the current crisis, but it also stated that any contributions made to the state or Chief Minister’s Relief fund would not be classified as CSR activity. Further, the notification adds that under item (ix) of Schedule VII contributions made to the State Disaster Management Authority to combat the pandemic would qualify as CSR activity. And another unique exception made in light of the ongoing crisis is that ex-gratia payments made to temporary, casual and daily wage workers would be considered as CSR expenditure. This exception can only be allowed when the board of the company makes a declaration to that effect duly certified by the statutory auditors.
Role of ‘Invest India’ in coordinating relief response
Invest India set up another initiative in the form of a CSR specific assistance cell to utilize its vast network of corporate connections to channel funds into various governmental and non-governmental relief efforts at central and state levels. This initiative helped corporates and other individuals to connect and identify organizations in need of funds for their relief efforts, and this initiative succeeded in creating a repository of relief funds with contributions exceeding INR 160 crores. Another contribution of Invest India to the relief efforts was facilitating the donation of essential supplies such as PPE kits, critical care equipment and other commodities. Over 10 lakh units of essential supplies and other equipment reached people in need during the time of crisis through the pipeline developed by Invest India. To develop technology space, Invest India reached out to more than two hundred Tech incubators to channel their CSR funds in this domain.
CSR trends during the pandemic
Indian origin companies, as well as foreign ones, have responded rapidly to the changing CSR landscape to mobilize their resources to utilize the changes in CSR norms and mitigate the ongoing crisis. Corporates have contributed to the PM CARES funds and other relief programs to discharge their CSR obligations. Corporates have also undertaken collaborative initiatives with respective state governments to supply essential commodities, food and medical supplies to cater to the requirements of the local communities. The Covid crisis has made 75% of companies focus on more pertinent immediate social issues that are a result of the pandemic. Companies are currently identifying potential CSR projects by focusing on direct beneficiaries to social initiatives undertaken in collaboration with NGOs proximate to their geographical base of operations. Lack of due diligence, ambiguity regarding the ambit of CSR contributions and logistical hurdles considering the pandemic are some of the challenges that the companies are facing currently with reference to CSR obligations. While some corporations have resorted to unconventional means like technology and mental healthcare to provide relief aligned with these agendas. But the key trend for corporate institutions during this crisis has been investment in initiatives and projects by identifying direct beneficiaries of social welfare. The following pie chart accurately represents the paradigm shift in the methods of CSR implementation during the pandemic
The aim of statutory incorporation of CSR has always been to promote corporate entities to invest more in the socio-economic development of the society as opposed to the single-minded goal of profit-making. The ongoing crisis has stimulated the corporate sector into action with several collaborative projects and initiatives that concentrate more on the social welfare aspect. The attitude of companies to treat CSR as a mere compliance requirement has been prevalent in India but the pandemic has motivated several corporate institutions to undertake genuine CSR activities, who were reluctant in the past to do so. And the government’s move to ease up CSR norms and regulations to motivate companies to undertake more welfare activities to lead the fight against the virus has proven to be very effective.
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