The High Level Committee (‘Committee’) under the Chairmanship of Shri Anil Baijal, former Secretary, Government of India, constituted by the Ministry of Corporate Affairs to suggest measures for monitoring the progress of implementation of Corporate Social Responsibility policies by companies at their level and by the Government under the provisions of Section 135 of the Companies Act, 2013 has submitted its report. The key recommendations of Committee are outlined below:
- The rationale behind CSR legislation is not to generate financial resources for social and human development since the resource gap, if any, for such development or social infrastructure, could as well have been met by levying additional taxes/cess on these corporates. Therefore, CSR should not be interpreted as a source of financing the gaps in inclusive growth. The Committee is, 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.
- Schedule VII of the Companies Act 2013, has been amended may times with a view to expand the list of eligible CSR activities. The Committee recommends inclusion of an omnibus clause simply because certain development concerns, needs and priorities cannot be anticipated. In any case, CSR activities must be for larger public good and for any activity that serves public purpose and / or promotes the wellbeing of the people, with special attention to the needs of underprivileged.
- The mandatory provision of CSR is likely to generate substantial funds for the benefit of the deserving poor and under-privileged sections of 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, all CSR programmes / projects should be approved by the Boards on the recommendations of their CSR Committees. Changes, if any, in the programme / project should also be undertaken only with the approval of the committee / Board. The provisions of the law / rules should be strengthened, wherever necessary, to ensure this.
- As regards penalty for non-compliance with CSR provisions of the Companies Act, the present provisions in the law appear to be sufficient. However, 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 is being recommended because initial three years will be a "period of learning” for all the stakeholders. This liberal view can at least be taken for smaller companies, which become eligible at the margin to take up CSR programme under Section 135(1) of the Act.
- Differential tax treatment for expenditure on various activities covered under Schedule VII 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 than compelling community social needs. Therefore there should be uniformity in tax treatment for CSR expenditures across all eligible activities.
- There should be two models of implementation strategies for CSR: – (i) for companies that have CSR expenditure of more than Rs. 5 crore ; and (ii) for smaller companies with CSR spend of less than Rs. 5 crore. Companies in the first category are required to undertake programme based sustainable CSR activities, with some measureable outcomes.
Smaller companies could take up project based activities, depending upon their CSR spend from year to year. Such companies should be encouraged to combine their CSR programmes with other similar companies. This suggested threshold of Rs. 5 crore (in CSR expenditure) should be adjusted for inflation, using the GDP deflator or Wholesale Price Index (WPI) once every three years, and this figure should be rounded off to the nearest crore.
- In many cases, time taken in the implementation of CSR activities could be long, leaving unspent amounts at the end of a financial year. This may be allowed to be carried forward and clarification to this effect be issued. CPSUs are already required to carry forward their unspent CSR funds, under DPE guidelines. On the same analogy, private companies must also be permitted to cany forward unspent balance of CSR funds. However, there should be a sunset clause of five years, after which the unspent balance should be transferred to one of the funds listed in Schedule VII.
- The ceiling on administrative overhead costs should be increased from the present 5% to not more than 10% of the CSR expenditure of the Company, for which amendment to the Companies Act and / or CSR Policy Rules, 2014 would be required
- CSR provisions should not be applicable to Section 8 companies.
- Need for further clarity on applicability of Section 135 of the Act to foreign companies.
- Need to clarify the definition of the term 'Net Profit’ used under Section 135 (1) and Section 135 (5) of the Act and Rule 2(f) of Companies (CSR Policy) Rules, 2014, by making necessary amendments to Section 135 of the Act and the Rules thereunder.
- All information relating to implementation of CSR by companies including amount spent, activities undertaken, geographical areas covered etc., as reported by the Companies in their annual disclosure need to be compiled by the Ministry of Corporate Affairs and placed in the public domain.
- There should be a level playing field for all companies including CPSUs. Companies, irrespective of their ownership, should be treated at par while adhering to CSR provisions of the Companies Act and Rules made thereunder.
- With a view to incentivizing the corporates to undertake their CSR mandate in right earnest, annual awards can be set-up – one each for the two categories of companies, large and small