The CSR-FCRA contradiction
Of the many grievances that companies have regarding the challenges posed by the Corporate Social Responsibility (CSR) Rules, 2014, one that has remained largely understated is to do with the treatment of funds from certain companies such as Infosys Ltd and Hindustan Unilever Ltd (HUL) as a foreign source.
These companies, registered and operating in India, either have substantial foreign shareholding or are 100% subsidiaries of foreign entities. The CSR 2014 rules for such companies differ from those for firms with little or no foreign shareholding.
With effect from 1 April 2014, every company with a net worth of Rs.500 crore, a turnover of Rs.1,000 crore or a net profit of Rs.5 crore is required to spend a minimum of 2% of its average profit for the three preceding fiscal years on charitable activities.
The rules specify that funds from companies that have over 51% foreign shareholding or are subsidiaries of foreign-owned companies are to be treated as coming from a foreign source. Therefore, these companies can only work with not-for-profits that are registered with the home ministry under the Foreign Contribution (Regulation) Act, 2010, or FCRA, norms. Even foundations run by such companies must obtain an FCRA licence to operate.
Mint approached HDFC Ltd, ICICI Bank Ltd, HUL, Britannia Industries Ltd and Infosys, among the better-known firms with substantial foreign shareholding. The firms declined to comment.
A study on corporate foundations conducted by Charities Aid Foundation in association with other not-for-profits shows many companies are facing operational difficulties because of the requirement of an FCRA licence to conduct CSR activities.
The report, Study on corporate foundations: An emerging paradigm, released in May, studied the top 300 companies by market capitalization. It found that of the lot,142 companies had 153 foundations between them. “More than half the foundations were registered under FCRA, entitling them to receive funds from outside India.”
The common refrain among the foundations was that FCRA registration procedures are extremely cumbersome and that the government should try and minimize the formalities needed to obtain and renew the registration. One step taken by the government earlier this month has been to put all FCRA-related paperwork online.
Adarsh Kataruka, director at Soul Ace, a CSR consultancy, believes the treatment of funds from some companies looking to fulfil their CSR obligations as a foreign source limits the options for both companies and not-for-profits. “There are roughly 30 lakh not-for-profits registered in India, of which only 45,000 have FCRA licences. And, of the 45,000 organizations certified to receive foreign funds, barely 20,000 are actually operational... This limits the number of organizations that corporates can work with,” Kataruka explained.
He added that the provision had restricted access to CSR funds to large not-for-profits that had the foresight to register under FCRA norms.
Another challenge, according to CSR consultants, is that in the first year of implementation not many non-profits were aware of the rules governing “foreign source” funds. There are a number of companies registered in India with over 51% foreign shareholding, but this is not a well-known fact.
Sanjay Agarwal, director at Account Aid, an audit firm focused on the development sector, said most non-profits do not have information about a company’s shareholding pattern.
“The two laws (FCRA and CSR) are acting in contradiction,” said Lalit Kumar, partner at law firm J. Sagar Associates. He explained that while on the one hand, the government wants companies to take up development work, on the other, looping in FCRA hinders that work. This contradiction stops a company from funding a not-for-profit of its choice, forcing it instead to opt for one eligible as per the law to receive funds, Kumar said.
However, some companies such as Toyota Kirloskar Motor Pvt. Ltd believe the overlap of CSR and FCRA laws is not a bad thing.
Naveen Soni, vice-president-external affairs, said, “FCRA licence may have acted as a deterrent for some companies to doing CSR but it also acts as a safety net. The FCRA application and other bureaucratic processes act as the first-stage filter to weed out organizations that are not doing genuine work.”
Toyota spent around Rs.6.5 crore on CSR initiatives such as building toilets, water and sanitation projects, even though the Indian arm of the Japanese auto firm did not qualify for CSR as per the rules.
With the corporate affairs ministry expected to act on the recommendations of the high-level committee chaired by former urban development secretary Anil Baijal, made in October, companies can hope for some clarity on the applicability of FCRA to CSR rules before the start of the next fiscal year.
Kumar suggested that either FCRA be amended to state that not-for-profits receiving money from companies complying with Section 135 of the Companies Act (to do with CSR) do not need FCRA clearance or that the Companies Act be changed to accommodate this aspect.