Corporate Social Responsibility Provisions Under The Companies Act 2013: Salient Issues And Challenges

By Pankaj Jain

Under the Corporate Social Responsibility Policy Rules, 2014, the board of directors ofa company has no flexibility to choose CSR activities outside of Schedule VII. The wording in clause 2 (c) of the Rules suggests thatthe board has the flexibility to include activities beyond those mentioned in Schedule VII. However, a subsequent part of clause 2 (c) as well as other clauses of the rules reiterate that activities should be restricted to headings covered under Schedule VII, which has the effect of removing board autonomy.

The Rules mention that CSR activities cannot include activities undertaken in the normal course of the company’s business. Greater clarity on what “CSR activities”constitute normal business would be useful, since under the present Rules while some training, skill-development, and literacy-related initiatives that are closely linked to a company’s business could be construed to fall in this categoryyet others might not. The Rules reiterate that activities exclusively for the benefit of company employees cannot be claimed to be CSR activities.

The Rules require that the company’s declared CSR Policy must include modalities of utilisation of funds as well as monitoring and reporting mechanisms. Since the Rules allow private/unlisted companies to form CSR Committees with just two non-independent directors and no independent directors, the monitoring and reporting requirements for such companies are somewhat less stringent.,

Despite expectations to the contrary, the Rules do not permit the time-value of the contribution of personnel towards CSR activitiesto be included in the calculation of whether a company has fulfilled its CSR responsibilities. Compliance will be measured by the company’s actual spending and not by the value of services provided by its employees..

The Rules provide no guidance or clarity regarding the interplay between the CSR provisions of the Companies Act, 2013 and the provisions of Indian Foreign Contribution Regulation Act, 2013 (FCRA). The definition and application of “foreign source” in the latter may have some interesting implications on the “ability to give” and “ability to receive” of the donors and recipients of CSR grants.

The biggest concern is the FCRA and its wide definition of the term “foreign source,” which has not been addressed under the new law. A local arm of a multinational company or a company with an overseas shareholding of more than 50 per cent will find itself coming up against the FCRA every time it wants to contribute CSR funds to any NGO in India. The FCRA implications of each donation to an NGO from a “foreign source” company will have to be thoroughly evaluated to prevent an inadvertent breach of the law.

Pankaj Jain is the founder-principal of Impact Law Ventures, a boutique, mission-focused law firm based in New Delhi and Mumbai, India. He can be reached at pankaj.jain@impactlawventures.com.

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