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Panel suggests steps to monitor implementation of CSR rules

Panel takes into account a number of other concerns raised over the past year by companies as part of its report

New Delhi: Taking note of the concerns of companies, a high-level panel constituted to suggest measures for monitoring the implementation of Corporate Social Responsibility (CSR) Rules, 2014, has come up with 24 recommendations which have been uploaded on the ministry of corporate affairs (MCA) website.

The panel, which was constituted mainly to look into the monitoring of CSR rules, has taken into account a number of other concerns raised over the past year by companies as part of its report.

Pointing out that it is “premature" to judge the implementation of the rules, the six-member committee’s report said, “Many of the concerns raised during discussions with stakeholders seemed beyond the terms of reference of the committee but were significant enough to be addressed at this stage…"

Sudhir Singh, partner-risk advisory at PwC India Pvt. Ltd, a financial advisory and consultancy firm, explained that when the rules were announced, companies had a number of apprehensions like the fact that the government could suggest penal action against companies that do not comply. But the committee’s report states that penalty should not be levied and since it is a unique law, a “learning period" of two to three years should be granted to all stakeholders.

The CSR rules, under section 135 of the Companies Act, 2013, mandate companies with a net worth of 500 crore or a revenue of 1,000 crore or a net profit of 5 crore should spend 2% of average profit in the last three years on social development-related activities.

But the committee has reiterated that CSR is not about the spend alone. Headed by Anil Baijal, former secretary in the ministry of urban development, it has concurred with the majority of the issues raised by the companies such as the cap of 5% of the total CSR spend on overheads not being sufficient.

It has recommended that the figure can go up to 10% of the total spend. Currently, CSR activities such as contributions to the Prime Minister’s National Relief Fund (PMNRF) get tax benefits while others don’t. The committee suggests that differential tax treatment of some CSR initiatives leads to distortion in allocation of funds and, hence, all activities under Schedule VII of the CSR rules should have uniform tax treatment. The CSR corpus should not be viewed as “financial resources" for social and human development because the “resource gap—if any—could be met by levying extra taxes", says the report.

“The fact that they have proposed uniform tax is important. Right now some areas like PM relief fund and agriculture attract more tax benefit than others, and this could create bias towards certain areas," said Abhishek Humbad, co-founder and director, NextGen, a Bengaluru-based CSR consultancy firm.

The report also points out that the existing provisions on reporting, auditing, selection of CSR activities or partners are the prerogative of the company’s board or committee and the government should not intervene.

The CSR rules provide for firms tying up with agencies like not-for-profits to carry out activities on the ground. Concerns were raised about how companies will know which agency to use.

In response to this, the government, the Indian Institute of Corporate Affairs (under the ministry of corporate affairs) as well as industry associations like the Confederation of Indian Industry said they will bring out a list of accredited non-governmental organizations.

The committee says the government “cannot and should not maintain a data bank of implementing agencies".

It says the selection of implementing agencies should be left to the board of directors or CSR committees of the companies. This, according to Neeraj Seth, director-development advisory services at EY, is good “because it emphasizes the importance of the board of directors of a company".

The overall intent of the recommendations sit well with the law because they are encouraging rather than prescriptive, she added.

Recognizing the subjective nature of CSR, the committee has made recommendations which are more flexible. For instance, the need for an amendment to the CSR rules to include an “omnibus clause" in Schedule VII of the CSR rules, which detail the activities that companies may implement as part of CSR. This clause will give a little flexibility for activities that do not fall directly under the ambit of the 11 already listed in the schedule such as women’s empowerment, eradication of poverty, hunger, etc.

Some like Singh of PwC believe a little more push or encouragement is needed from the government to get companies to undertake CSR. “There is a strong need for the government to encourage the participation of those companies that are left out of the CSR ambit," he said, adding that since the purpose of CSR is to encourage companies to do business in a responsible manner, there are many companies which need to be engaged further to ensure they participate as well.

“Right now, many of the companies reporting on CSR are those which have had CSR activities in place for a long time. We need the first-timers to embrace CSR as well to have overall inclusive growth," he said.

Plus, as Humbad said, “The recommendations are in the right direction. But they (the panel) didn’t have enough data to address all concerns that could arise. It would require data from two to three years to make detailed recommendations."

Seth believes “these are just recommendations. How they will be adapted into the law remains to be seen".

Arundhati Ramanathan contributed to this story.

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