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Exceptions do not make a rule, goes the old saying. It is equally relevant to law making. Rules — either prohibiting or allowing something — should not be based on exceptions.
The Ministry of Corporate Affairs (MCA) has put out for stakeholders’ comments, a draft of the ‘Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020’. Once notified, these new rules will govern corporate social responsibility (CSR) programmes of India Inc. The one proposal that stands out is that entities which are organised as ‘trusts’ and ‘societies’ would no longer be eligible to implement CSR programmes on behalf of companies.
The efficacy of CSR programmes lies in their implementation. While the mandate for CSR is on companies, in most cases, they may not have the capacity to undertake and execute CSR activities on their own. Barring a few large corporations, most companies would not have the bandwidth to divert focus from their principal business and concentrate on CSR activities. Recognising this practical reality, the existing MCA rules on CSR allow companies to undertake their CSR programmes through ‘implementing agencies’ (IAs).
Under the existing rules, an IA could be a non-profit company or a registered trust or a society. These could be established by the companies themselves or could also be independent, third-party entities with established track record. These IAs are a key constituent of the CSR ecosystem.
Proposal lacking clarity
The proposal in the new rules drafted by the MCA seeks to exclude trusts and societies from the current list of eligible entities which could be used as IAs for CSR. What has led to this proposal is not very clear. Going by some media reports, the concern appears to be that promoters of some of the companies may have used trusts and societies as a vehicle for round-tripping of CSR funds. Even if the concern is real, it is largely anecdotal and at best, pointing toward exceptions rather than the norm. There are bad apples, but that’s true of all forms of organisations. Should such exceptions be the basis to prohibit all trusts and societies from playing a role in CSR? That would be akin to throwing the baby out with the bathwater.
What is most surprising is that the proposal to exclude trusts and societies is contrary to a recent report of a High Level Committee (HLC) on CSR chaired by the Secretary, MCA. The committee had given its report in August last year.
Several proposals in the new rules are based on the HLC’s recommendations. Nowhere in its report did the HLC, which analysed and deliberated in detail the working of the CSR regime over the past four years, observe or suggest that trusts or societies were not suitable to be IAs. On the contrary, the HLC found that use of IAs is the “most used” method of implementation in terms of percentage of all CSR projects. During 2014-2018, 43 per cent of the total CSR expenditure was made on projects and programmes implemented by third-party IAs, including trusts and societies. The HLC’s report acknowledged that “implementing agencies become suitable mode for the companies to execute CSR projects, given their presence in the target areas, local connect and knowledge, besides experience in executing social projects which a company typically lacks.”
A concern raised before the HLC was that unlike non-profit companies, trusts and societies are not registered under the Companies Act and hence, fall outside the regulatory purview of the MCA. However, the HLC did not consider it necessary to recommend a change in the existing rules. It was of the view that conducting proper due diligence on IAs was the responsibility of the board of directors. The report only recommended (and that has been included in the new rules) that all IAs should register with the MCA. This, the HLC felt, would be a “suitable check”.
At any rate, that argument would prove tenuous — with no rational basis or benefit — to justify ousting trusts and societies from the process. While the Companies Act is the legislative basis for mandatory CSR, a ‘company’ form of structure alone cannot be the sole option for implementation of CSR programmes. Non-profit trusts and societies also operate within legislative framework (e.g. Societies Registration Act, Maharashtra Public Trusts Act, etc.). These laws have adequate checks and safeguards.
Regressive approach
Some of the oldest and largest philanthropic institutions in India that have done exemplary work in the social sector (like Tata Trusts, Sri Aurobindo Society, to name a few) are organised as trust or society. They have the required capacity, capability and credibility to help companies implement CSR programmes. It would be regressive to prevent companies from utilising this huge repository of expertise and experience for planning, effective execution and last-mile delivery of CSR programmes.
The approach of the MCA in matters of CSR has so far been, and rightly so, not overly prescriptive. There is no reason why this approach should change. The MCA’s rules should be designed to act as a facilitator while regulating and maintaining the integrity and accountability of the process. This purpose has been adequately achieved through strict disclosure norms for companies and making them responsible for policy-level decision-making and monitoring of CSR programmes.
Beyond this, companies need to be given ample play in the joints, including the freedom to partner with deserving IAs, be it a trust, a society or a non-profit company.
Hopefully, MCA would reconsider its proposal.
The writer is a Supreme Court advocate. Views are personal
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