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Agama Law Associates argues new CSR rules are shoddy in policy, shoddier in politics

Agama Law Associates
Agama Law Associates
Archana Balasubramanian, Partner, Agama Law Associates argues that the new Companies Act corporate social responsibility (CSR) policy is deeply flawed at nearly every level.

With the arrival of next financial year, all companies would be required to be good samaritans and extend monetary support to prescribed forms of ‘social development’. The Minister of Corporate Affairs had been promising a robust corporate social responsibility (CSR) policy ever since the new Companies Act was laid before the Lok Sabha. Infact, CSR had been flagged as the high point of the new legislation by the government. However, the release of the final amended policy on 27th February 2014 has been a let down, to say the least.

From April 1, 2014, the companies (irrespective of whether they are public or private) that have a net worth INR 500 crores, turnover of INR 1000 crores or net profit of INR 5 crores or more during any financial year are required to incur 2% (of average net profit of preceding three years) on a pre-defined list of CSR activities.

The Companies Act, 2013 requires a CSR committee to be formulated by the Board comprising 3 or more directors with one director being an independent director to ensure implementation of CSR activities. Thankfully, the Rules exempt unlisted and private companies not otherwise required to have an independent director. Otherwise, family run closed businesses (whether public or private) might be required to appoint an independent director on the Board merely because their net profit is over INR 5 crores. This Committee has also been given the task of recommending to the Board, the CSR policy.

The law mandates that CSR policy comprise only of any one or more of the activities contained in Schedule VII of the Act (for a complete list of permissible activities see MCA Circular). It is interesting that a closed list has been adopted which leaves out many universally recognized principles, such as the ten principles of the UN Global Compact. Strange that in socialist India, areas such as collective bargaining, forced labour, and child labour have been completely ignored from the closed list. Most surprising is the absence of anti-corruption at a time when that issue politically charged the nation like it had never been since the Emergency in the 70s.

Details of CSR activities is mandatorily required to be disclosed in the company’s Board Report. CSR activities may be conducted in local areas and may also be conducted jointly with other companies. However, the activities should be conducted in such a manner that reporting separately by each collaborating company is possible.

For any expenditure to be counted as valid CSR spend, it shall not pertain to activities undertaken in the normal course of business and activities undertaken outside India. Further, the law-makers have selflessly declared that any contribution to any political party directly or indirectly is not CSR spend.

However, if an employer / corporate that is required to undertake CSR does anything for the welfare of his own employees, such gesture and expenditure towards the same shall not be counted as CSR spend. The logic seems to be – avoid abuse of the provision at the cost of employee welfare. As an employee of a corporate (who is of the level of an office boy or clerk) there is no justification why the corporate doles out crores of Rupees to the benefit of people like him but not him. Similarly the corporate may spend a substantial sum of money of ensuring the safety of all women in the local area where it operates. However, if a corporate were to spend on the safety of its own women employees, such corporate is precluded form claiming the amount spent as CSR expenditure. While allowing substantial portion of a company’s CSR funds on employee welfare may defeat the very idea, an absolute bar sounds equally retrograde. Doesn’t charity begin at home?

CSR should ideally impact every area of operations of an organization. For instance, governance and ethics; employee hiring, providing opportunity; stakeholders benefit sharing and energy usage and environment protection.

Compliance by Private Companies

Private companies, which have hitherto operated in a fairly independent manner, will now need to establish processes and monitor the same. In fact, substantial expenditure may be required to ensure that the CSR activities are conducted and appropriate information is provided in this regard to the Board. Additional resources will need to be pooled for this activity. The only seeming relief offered to private companies is the waiver of the condition of ensuring an independent director is on the CSR Committee.

Political Short-sightedness

CSR is a tool to mandate community spending directly by the business community. The question really is whether such a measure is required in a country so heavily taxed or is it just an easy out for inefficient governance.

One wonders whether such mandatory and strait jacketed form of spending is really corporate social responsibility or delegation of essential government business. Will the common man reap the benefits of such spend through reduction of taxes?

The use of a closed list, which seems to be a shoddy and hurried job, gives the CSR policy a feel of the absurd – for no rationale explains the intent behind the choices that have been made and those that have been ignored.

It is interesting to note that the notification comes at the dawn of the general elections. The dangers of changing political scenario on the basis of priorities of the party in power is bound to cause some volatility in undertaking CSR activities.

The author is the founder of Agama Law Associates, a boutique commercial law firm started in 2013. She can be contacted at or via Linked-in

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