New Delhi: In its latest clarification on the new companies law, the corporate affairs ministry said on Thursday that rules regarding corporate social responsibility should be “interpreted liberally so as to capture the essence of the subjects enumerated" in the norms.
The ministry has further clarified that one-off events such as marathons, awards, charitable contribution, advertisement, sponsorships of TV programmes, etc., will not qualify as part of CSR expenditure.
The expenses incurred to fulfil any regulation will also not be counted as CSR expenditure, nor would the salaries paid by the companies to regular CSR staff as well as to volunteers, the ministry said.
“The expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if, the CSR expenditures are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per section 135 of the Act," the ministry said in the order posted on its website.
The ministry has said that contribution to a corpus of a trust or society would qualify as CSR expenditure as long as such an entity is “created exclusively for undertaking CSR activities", or “where the corpus is created exclusively for a purpose directly relatable" to the subjects covered within Schedule VII of the companies law, which deals with corporate social responsibility.
A registered trust, in this case, says the ministry, “would include trusts registered under the Income Tax Act 1956, for those states where registration of trust is not mandatory."
Amarjit Chopra, a former president of Institute of Chartered Accountants of India (ICAI), said that the government has sought to liberalize the activities that companies can undertake to fulfil their CSR obligations.
“Put simply, they have told the companies that they can take some liberties and go outside the scope of the activities prescribed under the Act," he said.
Pavan Kumar Vijay, managing director at New Delhi-based financial and legal consultancy, Corporate Professionals India Pvt. Ltd, while agreeing with Chopra’s view, said one major change brought about by the order is the inclusion of the so-called “consumer-protection services" under the ambit of corporate social responsibility.
“Representations were made by several sections of the industry on this, and the government has accepted this view," he said.
The various “consumer-protection services" include provision of an effective consumer grievance redressal mechanism, protection of the consumer’s health and safety, sustainable consumption, consumer service, support and complaint resolution.
The new companies law mandates companies with a net worth of more than ₹ 500 crore or a revenue of more than ₹ 1,000 crore or a net profit of more than ₹ 5 crore to spend 2% of their average net profit over the three preceding years on CSR activities.
While non-compliance will not be penalized, companies will be required to disclose the reasons for this, effectively making such spending mandatory.
The clause relating to CSR was a key provision in the long-pending legislation to overhaul the outdated companies law of 1956.