Defining CSR in India

I discussed Corporate Social Responsibility here, when there was a pending Bill. Now, we have a full fledged corporate social responsibility law in place. Section 135 of the companies Act, 2013, redrafted Schedule VII and the Companies (Corporate Social Responsibility Policy) Rules 2014 will be effective from 1^st April 2014. I agree with V. Umakanth  in India CorpLaw say, April 1 this year would mark a new era in corporate law and governance in India with companies being required to comply with the quasi-mandatory obligations regarding CSR, an approach that is fairly unique in the global context.

First time, the Companies (corporate Social Responsibility Policy) Rules, 2014 give a legal definition to Corporate Social Responsibility. Rule 2(c) gives an inclusive definition to Corporate Social Responsibility.

 Corporate Social Responsibility means and includes but not limited to:–

(i)                  Project or programs relating to activities specified in Schedule VII to the Act; or

(ii)                Project or programs relating to activities undertaken by the Board of Directors of a company in pursuance of recommendations of the CSR Committee of the Board as per declared CSR policy of the Company subject to the condition that such policy cover subject enumerated in Schedule VII of the Act.

 In simple manner, this definition says,

(i)                  Project of programs on activates specified in Schedule VII of the Act; or

(ii)                Any activity related to above clause when put under CSR policy, or

(iii)               Any other activity because terms used are “includes but not limited to”

We cannot say a definition inclusive only because it uses word inclusive in it with an inherent strong protection for exclusiveness.

When we read this definition with the Clause (a) of Sub – section (3) of Section 135, a Corporate Social Responsibility Policy shall indicate the activities to be undertaken by the company as specified in Schedule VII. Clause (a) of Rule 6(1) of CSRP Rules also confirm that the policy shall include a list of CSR projects and programs which a company plans to undertake falling within the purview of the Schedule VII of the Act.

We may safely conclude that there is no freedom for a corporate to be responsible socially at its own unless their activities fall under activities Schedule VII of the Companies Act, 2013.

CSR Activities:

The Schedule which shall come into force from 1^st April 2014 list out following activities (list rearranged by us) –

• Eradicating hunger, poverty and malnutrition;
• Promoting preventive health care (* Read “Promoting health care including preventive health care, Corrigenda dated 31 March 2014 published on 2 April 2014);
• Sanitation and making available safe drinking water;
• Promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly and the differently – able and livelihood enhancement projects;
• Promoting gender equality, empowering women, setting up homes and hostels for women and orphans;
• Setting up old age homes; day care centers and such other facilities for senior citizens;
• Measures for reducing inequalities faced by socially and economically backward groups;
• Ensuring environment sustainability, ecological balance, protection of flora and fauna, animal welfare, agro – forestry, conservation of natural resources and maintaining quality of soil, air and water;
• Protection of natural heritage, art and culture including restoration of buildings and sites of historical importance and works of art;
• Setting up of public libraries;
• Promotion and development of traditional arts and handicrafts;
• Measures for the benefit of armed forces veterans, war widows and their developments;
• Training to promote rural sports, nationally recognized sports, Paralympics sports and Olympic sports;
• Contribution to the Prime Minister’s National Relief fund or any other fund set up by the Central Government for socio- economic development and relief and welfare of the Schedule castes, the Scheduled Tribes, other backwards classes, minorities and women;
• Contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
• Rural development projects.

This may consider it an exclusive list of activities with a very limited inclusiveness. In case of an established public library, we may perhaps include reading room attached with library.  Main limitation of this government guided policy is complete blockage of social innovation.

Government should have place a really inclusive definition of corporate social responsibility and ask the companies to explain any such activity to its stakeholders in CSR Reporting.

Rule 7 of these rules disapprove any expenditure as CSR expenditure; where such expenditure is on an item not in conformity or not in line with activities which fall within the purview of Schedule VII of the companies Act, 2013.

Limiting horizon further:

Proviso to sub – section (5) of Section 135 of the Companies Act, 2013 direct that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities. In my earlier post here, I have criticized this limitation because this is against the harmonious development of India and beneficial to industrialised states. Article 38 of our Constitution, direct the State; The State shall, in particular, strive to minimise the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations.

Rule 4 of the Companies (Corporate Social Responsibility Policy) Rules 2014 put in place any qualitative restrictions on CSR activities.

The CSR activity shall exclude activities undertaken in pursuance of its normal course of business. This means a company in Education must defer itself from promoting adult education program. A company in health sector may not undertake hygiene or preventive health care. Free distribution of chlorine pills in flood affected area may not be a CSR activity for a pharmacy company but distribution of food packets may be. I welcome this in limited manner. There must be a self explanation clause regarding connected activities to disconnect it from profit making.

The CSR projects or programs or activities undertaken in India only shall amount to CSR expenditure. Here, India is deliberately losing a soft diplomacy opportunity but limiting or controlling large expenditure of money by some Indian corporate in well known western universities. I suggest, conditional permission for particular expenditure outside India must be permitted. Limited expenditure in reconstruction activities in Afghanistan, Education in Iraq may be some welcome and help brand India globally.

The CSR projects or programs or activities that benefit only the employees of the company and their families shall not be considered as CSR activities. I welcome this.

Misleading Path:

Contribution of any amount directly or indirectly to any political party under section 182 of the Act, shall not be considered as CSR activity. I further read this sub – rule with an eye on Section 181 and 183 of the Act, which make it clear any donation under these Sections shall not be considered as CSR expenditure. Intent seems to be that any Donation under Section 181 and 183 may be in addition to CSR expenditure under Section 135.

I find bug here. Any amount spent as per section 182 of the Act as political contribution shall not be considered as CSR expenditure but any amount other than that amount to a political party under a well craft policy shall be CSR Expenditure. A company may donate up to seven and a half percent of its average net profit to “Environment Party” as political donation and add up two percentage of its net profit to “Environment Party” for spreading awareness towards environment.  I suggest, simple disqualification for any contribution to political parties and organisation of political nature as CSR expenditure. 

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.