Companies Act 2013 only allows corporate contributions to relief funds set up by Central Government – like PM CARES – to be eligible as CSR.
Corporate donations to State Disaster Management Authorities can be counted as CSR, so State-level efforts can be incentivised, even if not the CM Relief Funds.
Still, there are some concerns over the logistics for this, and questions remain over documentation for PM CARES.
Why are corporate donations for coronavirus relief to Prime Minister Narendra Modi’s new PM CARES Fund eligible for benefits, but not donations to the long-established Chief Minister Relief Funds of different States?
And why can’t donations to these State-level relief funds be given this designation now, given the extraordinary circumstances?
These are questions that have been asked by Opposition parties and politicians of non-BJP State Governments ever since the Ministry of Corporate Affairs put out a circular saying donations by companies to PM CARES, but not CM Relief Funds, would be considered towards their CSR (Corporate Social Responsibility) obligations.
Given the crucial role States are playing in the fight against COVID-19, this may appear to be a strange move – it surely makes sense to incentivise donations to their local relief efforts as well.
However, there are two reasons why this is not a hill worth dying on:
- The distinction is a valid one when it comes to the law.
- There is an alternative way for States to get funds from corporations which would be counted towards their CSR obligations.
What is the Relevant Law on This Issue?
When the new Companies Act was enacted in 2013, it contained an obligation on large corporations to ensure they invested a share of their profits in activities for the good of their communities. Corporate Social Responsibility or CSR is a term commonly used around the world for such investments, though in most countries, it is entirely voluntary.
In India, however, thanks to Section 135 of the Companies Act 2013, it is compulsory for all companies with a net worth Rs 500 crore, or with a turnover of Rs 1000 crore or with net profits of Rs 500 crore, to invest 2 per cent of their average net profits towards CSR.
To satisfy this obligation, companies have to invest in any of the ‘activities’ specified in Schedule VII to the Companies Act. This lists 12 broad areas of action, from eradicating hunger, to promoting healthcare, sanitation and gender equality.
Para (viii) of Schedule VII specifically says that any contributions to the Prime Minister’s Relief Fund will be counted towards a company’s CSR obligations. It also allows this for contributions to “any other fund set up by the Central Government for socio-economic development and relief”.
This is why the donations to the PM CARES Fund are being counted as CSR – all that was needed for this was a clarification from the Ministry of Corporate Affairs, which was duly issued on 28 March. This was not an amendment or a tweak to the Companies Act as some have argued, but was always contemplated under the law.
While it may seem intuitive for donations to CM Relief Funds to also count as CSR, this can only be done if the donation can be classified under one of the headings in Schedule VII – legally, this cannot just be wished away just because there is an extraordinary situation.
While the Ministry has also clarified that money spent relating to COVID-19 can count as CSR expenditure, donations to a relief fund don’t automatically count as such. Note how even though donations to Central Funds like the PMNRF could be used for one of the general activities listed in Schedule VII, like promotion of healthcare, there is still a separate heading for donations to these Central Funds.
In light of this, it seems clear that since there is no such specific heading for State-level Funds, donations to them cannot be counted as CSR expenditure as the law stands.
Why Not Amend the Law Then?
Given the extraordinary nature of the coronavirus crisis, some have argued that an amendment to Schedule VII of the Companies Act could be made to allow donations to CM Relief Funds to get this benefit. As Parliament is not in session, this would require an ordinance to be passed to allow this.
While the Modi Government is hardly averse to passing ordinances even when they are not strictly necessary, from a necessity point of view, it is difficult to see how this could be justified.
This is because there is an existing alternative for donations to State-level efforts to be counted as CSR expenditure.
Para (xii) of Schedule VII makes “disaster management, including relief, rehabilitation and reconstruction activities” a valid avenue of CSR. In light of this, the Ministry of Corporate Affairs has clarified that a company’s donations to a State’s Disaster Management Authority will count towards its CSR obligations.
State-level DMAs and their funds can be used for measures to address the coronavirus crisis, since it has been notified as a ‘disaster’ under the Disaster Management Act 2005. This means that donations to local efforts to combat COVID-19 can also be incentivised in the same way donations to PMCARES are.
In the event companies have donated money to CM Relief Funds under the misapprehension that this would count as CSR, it is possible for States to transfer such amounts to their Disaster Management Authority, thereby giving the companies the benefit. Tamil Nadu, for instance, has already done this, as reported by The Hindu.
So Does This Mean There is No Controversy?
While this whole situation is not a scandal in the way some people and parties have tried to portray it, there are still some controversial issues that arise, which require some further clarification and some action.
First, while the MCA says that the PM CARES Fund donations are eligible as CSR, regulatory experts say we need more information to be sure about that. This is because Para (viii) of Schedule VII, which the MCA relies on, applies to Funds set up by the Central Government. However, the trust documents for the PMCARES Fund are not available in the public domain even though it is supposed to be a public trust.
The lack of transparency about the Fund has already raised eyebrows, and this is another question to be asked on that account.
Second, while contributions to the State Disaster Management Authorities will count as CSR expenditure, this is not exactly a route normally used by companies or individuals for donations to State-level efforts. The CM Relief Funds are far better known and the mechanisms for donating to them are much smoother and more accessible.
It could well be that companies which were thinking about making such donations to a State-level effort will balk at the difficulties, and instead just opt to donate to PM CARES, the process for which is much smoother, according to an official in Maharashtra.
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