Proposed CSR norms still unspecific

The nonchalant way in which the Companies Bill, 2011 was approved by the Cabinet recently only proves the point that the Government has been trying very hard to make simple things difficult.

If the majority of Parliamentarians show up for work in the winter session and maintain normal office timings, passing of the Bill should not prove to be too difficult a task.

That the Bill was necessary is not in dispute — the mammoth Companies Act had too many Sections which were either unnecessary or outdated and corporate India had outgrown it, thanks to complicated transactions and a mega-scam that put the auditing profession under the scanner. The Bill has been tweaked a bit from the one tabled before the Cabinet by amending the Clauses relating to Corporate Social Responsibility (CSR) and auditors.

CSR initiatives

Clause 135 of the Bill on CSR is one of the significant additions to the Bill. Every company having net worth of Rs 500 crore or more, or turnover of rupees Rs 1,000 crore, or more or a net profit of Rs 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

The Board of every company shall ‘make every endeavour’ to ensure that the company spends, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its CSR policy.

The words ‘make every endeavour’ to have been removed in the Amendment to dissuade entities from taking advantage of the loose wordings to state that though they made endeavours they could not follow the CSR mandates. Another amendment seeks to force entities to focus on local areas to utilise their CSR budgets.

The amendments, however, have not fixed other issues in the Clause — the benchmark of Rs 5 crore of net profits appears too low in comparison with the net worth and turnover benchmarks. An amount of Rs 50 crore appears to be the ideal benchmark.

The Clause is also silent on what happens if an entity has topsy-turvy financials — losses in a few years and profits in one. The use of the words ‘three immediately preceding financial years’ seems to indicate that only consistent profit-making entities would be bound by the CSR mandates.

Eligible activities

Schedule VII, which accompanies the Bill, lists out 9 activities that qualify as CSR initiatives.

A residual clause has also been included — ‘such other activities as may be prescribed’. Eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment-enhancing vocational skills, social business projects and contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Schedule Castes, the Scheduled Tribes, other backward classes, minorities and women — all qualify as CSR initiatives.

While reading the list, the initial frowns of the management would turn to a smile on reading the last clause — a cheque to the PM’s National Relief Fund would fulfil their CSR mandate.

Though many entities have their own CSR initiatives now, the ones that do not would prefer issuing a cheque to the Relief Fund than finding ways and means to promote, say, gender equality.

A contribution to the Fund also gets companies a tax break, which makes it necessary for the Income-Tax Act to be amended to provide similar tax breaks to other CSR initiatives as well. Else, the PM’s National Relief fund would be the most popular CSR initiative — forcing a rather harsh comment in some quarters that this is indirectly a public deposit campaign for the PM’s National Relief Fund.

The clause is silent on a situation in which an entity spends a significant amount on CSR initiatives which are in excess of the prescribed percentages — whether the excess would be allowed to be carried forward for a few years needs to be clarified. As always, the intention behind CSR is blameless — it is the implementation that should turn out to be so.

(The author is a Bangalore-based chartered accountant)

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