Apr 12, 2020

FAQs on CSR: Brings mixed feeling for Indian Inc.

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Ministry of Corporate Affairs (MCA) has vide General Circular No. 15/2020 dated April 10, 2020issued a series of FAQs on Corporate Social Responsibility (CSR) specifically in context of spending of CSR on COVID-19 related activities , wherein on one hand MCA has showed generosity by allowing  corporates to cover ex-gratia payments made to temporary / casual workers/ daily wage workers over and above the disbursement of wages, specifically for the purpose of fighting COVID 19 under the  CSR expenditure but on the other hand, has disallowed contributions made to the Chief Minister’s Relief Fund or the State Relief Fund for Covid-19 as CSR expenditure  since this fund does not form part of schedule VII of the Companies Act. In this regard, I wish to draw your attention towards the below facts, other circulars and provisions of the Laws:

Circulars of MCA

  • On March 28, 2020, MCA clarified that any contribution made to the PM CARES Fund shall qualify as CSR expenditure under the Act.
  • On March 23, 2020, MCA clarified that spending of CSR funds for COVID-19 is eligible for CSR since it falls under schedule VII of the Act.
  • There is a general circular issued by MCA on June 18, 2014 which says Schedule VII must be interpreted liberally so as to capture the essence of the subjects.

Provisions of the Companies Act

  • Activities eligible for CSR in the current context includes
    • disaster management, including relief, rehabilitation and reconstruction activities.
    • contribution to fund set-up by Central Government for Socio-economic development etc.
  • Preference be given to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.

Government actions Under Epidemic Act and Disaster Management Act

  • On 14 March, the Home Ministry declared the Coronavirus outbreak as a "notified disaster", thus bringing into play the provisions of the Disaster Management Act.
  • The Centre has invoked the Disaster Management Act to direct states to enforce a lockdown and restrict public movement.
  • Various Guidelines, Circulars, Advisories, etc have been issuing by the Authority anc committees formed under Disaster Management Act.
  • Few State Governments has established relief funds specifically for the purpose of Covid-19 like Haryana, Karnataka, MP, Odisha, Punjab, Rajasthan while other state governments have been accepting the donation for Covid-19 in their existing CM relief funds.

While the contribution, to PM-Care Fund, being a fund set -up by Central Government with one of its objects being socio-economic development, and to State Disaster Management Authority, is allowed as CSR expenditure but surprisingly contribution to Chief Ministers Relief fund set by various State Governments to arrange funds for disaster management has been disallowed without any specific reason.

Such a view, has caused double whammy for the corporates, who in tough times despite being one of worst affected sector on account of closure of factories, negligible revenue, etc, have been more than generous to contribute not only to the PM-Care Fund but also to various CM Relief funds of respective states where they operates like Reliance, Tata group, TVS, Asian Paints and so on.

It seems that MCA has erred in concluding that the contribution made towards CM Relief Funds will not qualify as CSR expenditure since entry no. xii in schedule VII of the Act includes ‘disaster management’ as eligible activity for CSR and Covid-19 has been declared as a disaster under Disaster Management Act and Epidemic Diseases Act. Thus, providing relief and rehabilitation should form part of CSR expenditure whether it is made towards CM Relief Fund or PM Care Fund. Further, in terms of the CSR provisions, the corporates are required to give preference to the area from where they operate so their primarily responsibility is towards their respective states’ CM Relief Fund. Moreover, in light of the circular issued by the MCA dated March 23, 2020, it has clarified that every spending towards Covid-19 is eligible for CSR and therefore creating such a distinction between PM Relief Fund and CM Relief Fund in unwarranted.

On the basis of foregoing facts and discussion read with the provisions of the law in force, the MCA should interpret the law liberally in the light of the current situation and allow contribution to CM Relief Fund as eligible for CSR Expenditure.

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