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Streamline Multiple Mandatory CSR & Make it Sustainable

Published: Aug 03, 2016

“I come to another point. And that is regarding payment by companies to charity. I think it is a very good idea that the companies should contribute something out of their profits to charity, but in the clause it is stated, ‘charities and other funds'. The moment we introduce the words ‘other funds' there is a great deal of loophole that instead of money being given to charities it will be given to ‘other funds'....I am afraid that under the garb of charities and other funds, the companies will be forced and persuaded to contribute to party funds,” stated late Kishen Chand, while participating in Parliament debate on Companies Bill, 1955 during September 1955.

Charity has morphed into corporate social responsibility (CSR) in the Companies Act 2013 & several other laws. Consequently, the challenge to fix firms' social obligations has become complex and chaotic since then. And so has the risk of CSR-linked corruption and other irregularities. The recent query from regional registrar of companies (ROCs) in States to deviants has to been seen in this context. According to a story published in Economic Times dated 16 th July 2016, ROCs have served warning to about 100 companies over nondisclosure or improper disclosure of their corporate social responsibility (CSR) spending, sending a strong signal that the government is very serious about compliance. The story adds: ROCs “have shot off notices to companies asking them to furnish further details of spending in some cases or face action that could include prosecution as well , a government official said.”

Simultaneously, the Ministry of Corporate Affairs (MCA) is trying to fix CSR issues through consultation and reforms. Two MCA-constituted committees have thus made recommendations on improving CSR provisions and their implementation within a span of less than one year. And MCA has incorporated a few recommendations in The Companies (Amendment) Bill, 2016 introduced in Parliament during March 2016. These initiatives would, however, not lend full clarity to mandatory CSR because this also separately comes under other laws. Mandatory CSR has thus assumed elephantine dimensions due to interventions from different ministries and political clamour for opening new CSR windows.

A non-cash avenue pitched for by politicians and recommended by certain statutory authorities is the reservation of jobs for scheduled castes & tribes (SCs/STs) and other backward classes (OBCs) in the private sector.

Mandatory CSR for specified category of large companies under the Companies Act became effective only in 2014-15. According to MCA's reply given to Parliament question dated 19th July 2016, an assessment of CSR expenditure of 4257 companies indicates that companies have spent about 72% of the prescribed amount on CSR. Of these companies, 2351 did not spend mandated CSR funds, 621 spent more than the prescribed limit, 400 spent exactly as specified, that is, 2% of the average net profit for preceding 3 years. Another 261 firms spent 66-99% of prescribed limit whereas the remaining 624 spent less than 66%. In all, 776 companies hired NGOs to implement their CSR policy and projects. In an answer to another question put on the same day, MCA disclosed that evaluation of CSR expenses of a sample of 460 stock market-listed companies indicates that their CSR expenditure aggregated to about Rs. 6337 crores during 2014-15.

If we take CSR in larger context, Companies Act also provides for donations to National Defence Fund and other such funds as may be notified by the Government. Such donations were originally envisaged under The Companies (Donations to National Funds) Act, 1951, which is to be repealed now. The Companies Act also facilitates direct or indirect donations to political parties. The Act permits private companies to chip in annually up to 7.5% of its average net profit during the three immediately preceding financial years to political parties. The Act thus implicitly exempts Government companies from this social obligation.

Net profit is thus now faced with three competing demands from the larger societal domain. The Companies Act should thus specify a total cap on non-business usage of net profit.

Prior to incorporation of these provisions in the company law, the corporate sector has been making payments to different funds created by the Government. These include Prime Minister's National Relief Fund, Jansankhya Sthirata Kosh (JSK)/ National Population Stabilization Fund and erstwhile National Fund for Rural Development (NFRD).

Apart from Companies Act-driven CSR, there are several other CSR elements on the Statute book. The latest case in point is the Prandhan Mantri Khanij Kshetra Kalyan Yojna (PMKKKY). This scheme would be financed by mandatory payments for local development & social welfare to be deposited by mining companies to District Mineral Foundations (DMFs). These entities are being set up under The Mines and Minerals (Development & Regulation) Amendment Act, 2015.

In September 2015, the Mines Ministry notified the DMF rates to be paid by miners. In case of all mining leases executed before 12th January, 2015 (the date of coming into force of the Amendment Act) miners will have to contribute an amount equal to 30% of the royalty payable by them to the DMFs. Where mining leases are granted after 12.01.2015, the rate of contribution would be 10% of the royalty payable.

All companies - profit-earning or loss-incurring, big or small, are also mandated to undertake upfront CSR expenditure on new and expansion projects cleared by Central and State environmental approval authorities. MOEF has defined this expenditure as Enterprise Social Commitment (ESC). This is in addition to expenses committed for environment management of the project. ESC would be elaborated later in this column

CSR and its variants constitute an apt case that resembles the fable of blind men and elephant. It is high time the Executive and Parliament realizes the need for rationalizing CSR. They must ensure that CSR neither makes ease of doing business (EoDB) daunting nor makes Indian companies uncompetitive in globalized economy.

To do so, the Government should set up a committee to define comprehensively CSR. It should factor in all mandatory elements enforced under different laws such as Environment (Protection) Act , Forest (Conservation) Act, Wild Life (Protection) Act, The Building and Other Construction Workers'Welfare Cess Act, 1996 and several other sector-specific welfare cess laws. The proposed Committee should quantify the impact of CSR maze on existing business, greenfield project and expansion projects. Such an approach is required to minimize the scope for arbitrariness in deciding CSR cases and resulting corruption. It can also recommend standardization of CSR stipulations for projects to wipe out prospects for regulatory arbitrage by project developers. The committee should also suggest mechanism that minimizes the scope for accounts fudging.

It is here pertinent to recall observations made by the Supreme Court while hearing public interest litigation on The Building and Other Construction Workers' Welfare Cess Act during August 2015. A bench of the apex Court reportedly stated: “We are extremely disturbed. The (state) governments are sitting over Rs 27,000 crore but labourers are not getting any benefits. The governments must file affidavits stating the names of labourers who benefitted from the fund with their Aadhaar number and we will get it verified.”

The Bench added: “It is a shameful and amazing situation as the amount is not spent on labourers and the governments used the fund for other purposes.”

The Building and Other Construction Workers'Welfare Cess Act, 1996 provides for levy of cess at the rate of 1% of the total cost of construction incurred by the employer. The money collected by Centre and States through multitude of social-purpose cess and duties would aggregate into lakhs of crores of rupee in any year. While politicians hardly ask questions about the utilization or fate of this money, they never get tired of putting questions in Parliament on CSR and alleged misuse of CSR funds.

What is the combined impact of all social welfare and infrastructure development cess on cost of goods and services? How much are they responsible for making India a high-cost economy? How much of CSR burden companies ultimately pass on the consumer in form of enhanced price for goods and services?

Should the country not have a national, annual audit of all welfare cess collected by Centre, States and municipal corporations?

The list of welfare cess and duties is long. The big-ticket ones levied by the Centre include: Primary Education Cess and Secondary & Higher Education Cess that are collected as certain percentage of different indirect and direct taxes, clean energy cess on coal, Krishi Kalyan Cess & Swachh Bharat Cess, both levied at the rate of 0.5% on all taxable services, road cess levied on petrol and diesel and National Calamity Contingent Duty imposed on specified imported and indigenous products.

Consider now the impact of regulatory deficit in managing CSR across different laws. Start with the Companies Act. It does not debar companies giving CSR funds to NGOs linked directly or indirectly with politically exposed persons (PEPs), their family members & associates. This loophole helps camouflage bribes as CSR funding as exemplified by big-ticket donations to trusts floated by politicians in mining and 2G scams. Companies Act thus must provide for empanelment of credible and reputed NGOs to which the companies can give fund. The accounts and other details of such NGOs must be available online on 24X7 basis to minimize the scope for funds siphoning. Moreover, the disclosure norms for both CSR and political donations under the Companies Act should be identical. The Law currently provides for a bare minimum disclosure of political donations.

Turn now to CSR under different environment laws. The Ministry of Environment, Forest and Climate Change (MOEF&CC) has given too much discretion to its experts committees for environmental clearance of projects in this area. Experience shows that discretion leads to arbitrage and corruption.

In an office memorandum dated 11 th August 2014, MOEF&CC stated: “It has been decided that in respect of valid concerns expressed during the public consultations, mitigation issues emerging from social impact assessment and R&R Plan, the project proponents, in EIA / EMP report will clearly state the activity-wise costs involved (both capital as well as recurring costs), the phasing of these activities along with costs and also as to how such expenditure would be met. The costs and the timelines for various activities as prepared by the project proponent may be looked into by the concerned Expert Appraisal Committee (EAC) for their reasonableness and appropriate recommendations in the matter reflected in the minutes of EAC meeting, In case these activities (or some of these activities) are proposed to be covered by the project proponent under CSR activities, the project proponent should commit providing for the same. In either case, the position regarding the agreed activities, their funding mechanism and the phasing should be clearly reflected in the EC letter.”

The memo has not specified any norms for stipulating ESC on project developers. EAC have thus misused MOEF&CC's flexibility to arbitrarily stipulate different ESC cost on different projects. EAC for industrial projects, for instance, stipulates ESC expenditure of 2.5% of the project for one project, say sugar mill, and 5% of the project cost for another project in the same sector. In certain cases EAC for infrastructure projects and EAC for coal mining projects have accepted absolute figure of proposed ESC expenditure. Such discretion on case-to-case basis is bound to create suspicion.

MOEF&CC thus must issue a gazette notification under EPA, specifying rules for ESC to be mandated for project developers. Apart from this, there is a need to harmonize different CSR guidelines issued by MCA, MOEF&CC, Department of Public Enterprises, Ministry of Mines, Reserve Bank of India and other authorities to minimize the scope for conflict between different guidelines.

The last but not the least the Government should study whether multiple, mandatory CSR expenditure can be sustained by the companies. Moreover, the Government should realize that all mandatory CSR expenditure other than post-tax CSR under the Companies Act impacts profitability of business and thus their corporation tax paying capacity.

Is there any country which is transforming corporate sector into instrument of social welfare through multiple central and State CSR stipulations?