Analysis of the report of the High Level Committee on CSR

Critical Analysis of the report of High Level Committee on CSR

Important recommendations:

1. The constitution of the committee is premature as it is the very first year and the Annual Reports of the Companies are not available so far.

2. Provisions of monitoring are sufficient. Therefore, no additional mechanism for monitoring implementation of CSR is required;

3. It is necessary to clarify some definitions viz. Net Profit, Any financial year;

4. CSR provisions should not be applicable on Section 8 Companies;

5. Companies should be allowed to carry forward their unspent amount of CSR with a sunset clause of 5 years;

6. There should be uniform tax treatment for all CSR heads.

Preface

India is the first and the only country in the world to have statutorily mandated Corporate Social Responsibility (CSR) for certain corporate entities as defined under section 135 of the Companies Act, 2013. As it is the unique provision of the law which does not have any parallel law elsewhere in the World, undoubtedly it has given rise to many concerns among stakeholders. Many questions have been raised by various stakeholders including professionals, industry representatives, media, policy makers, civil societies and various associations etc. These concerns range from formulation of CSR policies, issues of compliances and disclosure, mechanism for monitoring and implementing by the Companies, amount spend, activities undertaken, tax benefit. To examine all such concerns Ministry of Corporate Affairs has constituted a High Level Committee under the Chairmanship of Shri Anil Baijal, former Secretary of Government of India. To examine and suggest measures for monitoring the progress of implementation of CSR policies. The Constitution of the Committee is as under:

*Economic Adviser, MCA will discharge the responsibility in the absence of Additional Secretary, MCA.

The term of reference of the High Level Committee were:

1. To recommend suitable methologies for monitoring compliance of the provisions of section 135 of the Companies Act, 2013 by the companies covered thereunder;

2. To suggest measures to be recommended by the Government for adoption by the Companies for systematic monitoring and evaluation of their own CSR initiatives;

3. To identify strategies for monitoring and evaluation of CSR initiatives through expert agencies and institutions to facilitate adequate feedback to the Government with regard to CSR expenditure and quality of compliance by the Companies;

4. To examine if a different monitoring mechanism is warranted for Government Companies undertaking CSR, and if so to make suitable recommendation in this behalf;

5. Any other matter incidental to the above or connected thereto.

The Committee held widespread consultations with a cross section of stakeholders’ viz. corporate, industry associations, public sector undertakings, civil societies and other professional bodies like  Institute of Company Secretaries of India and Institute of Chartered Accountants of India.

Since, the year 2014-15 was the first year of actual implementation of the CSR, most of the annual reports of the companies are still under process or are being filed by the companies and all information in this regard will be available by the end of this year. The committee, therefore, did not have the benefit of learning lessons even from this one year’s experiences of CSR Implementation.

The Committee was expected to submit its report within 6 months from the date of holding its first meeting. Another one month time was allowed by the Ministry by way of circular no. 13/2015 dated 16/09/2015. The first meeting of the High Level Committee was held on 23rd February, 2015 thereafter, met several times before finalizing its report.

Discussion on Terms of Reference

The committee deliberated on the necessity for collation and compilation of the information available on annual filing by the Companies to the MCA. The e form AOC -4 has been designed to collect all such information on CSR for compilation purpose.

It was also stated that it is pre-mature to assess the issues of non-compliances at this stage, being the first year and the committee was suggested that initial 2-3 years of roll out of CSR are going to be the learning period  for all the stakeholders. Therefore, actions should not be taken against companies on the ground of non compliance of CSR provisions, at-least for 2 to 3 years.

Further, the companies are required to undertake CSR activities in project/programme mode, either director or through implementing agencies. It was also mentioned that while project mode of implementation is not an issue for large companies which sufficient CSR Funds, smaller companies with small amounts to be spent on CSR might find it difficult to implement CSR policy in a programme mode and therefore, monitoring of the same by adopting pre-defined methodologies could be difficult.

Recommendations of the High Level committee:

1. The rationale behind CSR legislation is not to generate financial resources for social  and human development but to involve the corporates in discharging their social responsibility with their innovative ideas and management skills. Use of corporate innovative ideas and management skills in the delivery of ‘public goods’ is at the core of CSR implementation by the Companies.

2. As this was the first year of the implementation of the CSR, Annual Reports are being prepared by the companies and will be filed during November and December. Thus the constitution of this committee is premature, therefore, it is desirable to conduct a review of the programme, after three years.

3. The committee prima facie of the view that the existing provisions of the Act and Rules based on general principles of “comply or explain” are for the time being sufficient for ensuring compliance of the Law.

4. The Committee recommends inclusion of an omnibus clause simply because certain development concerns, needs and priorities cannot be anticipated.

5. The mandatory provisions of CSR is likely to generate substantial funds for the benefit of the deserving poor or under privileged sections of the society. To ensure that this opportunity is not frittered away by thinly spreading the resources so generated; and  that only sustainable programmes/ projects are taken up for optimal benefits of the poor and under privileged sections of the society, the Committee strongly felt that there is a need to ring-fence the companies’ CSR resources so that this objective is not defeated.  All CSR programme / project should be approved by the Board on the recommendation of their CSR Committee. Any change in the  programme / project should also be approved by the Committee \ Board. The provisions should be strengthened, wherever necessary to ensure this.

6. As regards penalty for non-compliance of the CSR provisions of the Companies Act, 2013, the present provisions in the law appear to be sufficient. However, the committee is of the view that leniency may be shown against the companies for non compliance in initial two / three years to enable them to graduate to a culture of compliance. This liberal view can atleast be taken for smaller companies.

7. Finance Act, 2014 has specifically denied for any tax exemption on CSR Expenditure, there are several head under schedule VII which may provide tax benefits to the Companies. This provides different tax treatments for different activities covered under Schedule VII which may create unforeseen distortions in the allocation of CSR funds across development sectors. Board’s decision could be guided more by tax savings implications rather that compelling community social needs. The Committee felt that there should be uniformity in tax treatment for CSR expenditure across all eligible activities.

8. The committee also recommended that there should be two models of implementation strategies for CSR: for companies having more than 5 cr. CSR outlay; for companies having less than 5 cr.  CSR outlay.

9. Companies should be allowed to carry forward their unspent amount of CSR with a sunset clause of 5 years, after which the unspent balance amount should be transferred to one of the funds listed in schedule VII.

10. The committee further recommended that the companies which are neither incorporated under companies act nor subjected to the mandatory guidelines of DPE, but otherwise falls under CSR,  should be brought under similar provisions on a mutatis mutandis basis, through listing conditions of SEBI or suitable amendments to their respective Statutes.

11. The committee also felt that ceiling on administrative overheads costs should be increased from the present 5% to not more than 10% of the CSR expenditure. The administrative overhead expenditure of the company on CSR should not include expenditure incurred on capacity building of the implementing agencies.

12. The Committee also felt that the CSR provisions should not be applicable on Section 8 Companies.

13. There is a need for further clarity on applicability of Section 135 of the Act to foreign companies.

14. It is necessary to clarify the definition of the term Net Profit used under section 135(1) an section 135(5) of the Act, and Rule 2(f) of the Companies (Corporate Social Responsibility) Rules, 2014, by making necessary amendments to section 135 of the Act and rules thereunder.

15. Reference to ‘any financial year’ in section 135(1) needs to be re-examined by the Ministry.

16. The Board and CSR Committee, being accountable for their own shareholders and public at large, thus existing provisions of monitoring is sufficient. Therefore, no additional mechanism for monitoring implementation of CSR is required.

17. With a view to incentivizing the corporates to undertake their CSR mandate in right earnest, the Committee recommended setting up of annual awards – one each for the two categories of companies, large and small.