Complying with Corporate Social Responsibility

CSR policy honours the triple bottom line: people, planet, profit. It’s like a corporate conscience, integrating the public interest in corporate decision making by encouraging community growth and development and voluntarily eliminating practices that harm the public, regardless of legality.

A bare reading of the new CSR rules may indicate simplicity and reader-friendliness. But close analysis of the fine print leaves ample room for ambiguity at various places.

Corporate Affairs Minister Sachin Pilot pointed out that the process of finalization of the rules included extensive consultations with all stakeholders. Putting to rest speculations and apprehensions that did the rounds in the aftermath of the draft rules, the final rules bring in greater clarity on aspects relating to the formulation of the CSR committee, the need to effectively monitor the implementation of the CSR policy and the manner of undertaking CSR activities. The Board will play a very crucial role in overseeing the implementation of the programmes. Here’s a closer look at some of the key developments that companies need to make note of-

While the Companies Act prescribes a specific method for computing net profits and the CSR contribution, the CSR rules take a step backwards in carving out exclusions from the net profit so calculated. Most shockingly, one of the exclusions provides that the profits of a branch of an Indian company located outside India cannot be merged into the profits of the parent company for the purpose of computing the two per cent contribution. This exclusion goes against the very mandate of Section 135 and is, to that extent, ultra virus.

The Companies Act, 2013, defines CSR activities to mean an identified set of activities set out in the separate schedule to the Act. However, a reading of the definition in the rules indicates that the list of CSR activities provided in the rules (which also includes the schedule activities) is only illustrative and not exhaustive. At the same time, an overall reading of the rules strongly suggests that the scheduled activities alone will be considered for the purpose of CSR. Whether or not social activities falling outside the purview of the schedule form a part of CSR activities still remains doubtful.

Another aspect of ambiguity in the new law that was expected to be corrected through the rules was the 'local area preference'. The Act provides that a company should give preference to the local area in which it operates for CSR spending. How would this work if a company has more than one operational office in the same city, or even otherwise? Is the location of a factory, as opposed to the corporate office, the target of preference?

The CSR rules have rightly excluded contributions directly or indirectly made to a political party from the scope of CSR activity. But, what about contributions made to institutions affiliated with one or more politicians or those located in a constituency represented by a politician who has some form of regulatory supervision or leverage over that company? What about activities/institutions being run under the trusteeship or office of a politician?

Another aspect of the rules that may be abused is the carve-out made in respect of CSR activities undertaken 'only' for the benefit of the employees and their families. Could the intent of the legislation have been to mean activities undertaken 'primarily' to benefit the employees? If a company undertakes a project primarily but not exclusively benefiting its employees, should that be considered CSR activity?

Amid various practical difficulties which may have to be encountered at least in the initial phases of implementation of the new CSR provisions, the initiative of the government is no doubt appreciable. The new provisions may be viewed as the result of the changing corporate philosophy in India and worldwide which entrusts the responsibilities on corporate giants towards social welfare of the population which comprise of their present or prospective employees, customers or other stakeholders in varied roles.