CSR during times of COVID 19

Corporate Social Responsibility or CSR is mandated by the Section 135 read with Schedule VII of the Companies Act, 2013. It states that all companies, having net worth of 500 crore, or turnover of 1000 crore or more or a net profit of 500 crore or more during a financial year to constitute a Corporate Social Responsibility (CSR) Committee Board. The responsibilities of the Board are enumerated thereunder, with the object of ensuring that every company spends, in each financial year, at least 2% of the average net profits of the company, in pursuance of its CSR policy.Section 135 has to be read with Schedule VII of the Act. It states that the activities, which would fall under CSR, have been enumerated. Clauses (i) – (xii) set out the various sectors which may be targeted through CSR contributions. It includes, inter alia, healthcare, socio-economic policies, environment and ecological sustenance, gender equality, education. CSR has a metric of how well a brand interacts with stakeholders and communities, both locally and globally. Supporting the common social good has become just as important a goal as delivering shareholder value and profitability for organizations for all sizes, even up to enterprise level, across every business vertical imaginable.

The global outbreak of the Covid-19 has brought the world to a standstill, having domino effect on the economies. With the impact of the COVID-19 pandemic and the lockdown on our public systems and the economy, their responsibility to all stakeholders appears starker than ever. The emergence of global crisis due to the novel coronavirus has led many corporate minds to ponder and step-in playing their part to be socially responsible to meet the need of the hour. In India, to encourage corporates towards fulfilling their social responsibility during the pandemic  and as an endeavor to minimize its impact on public health, certain amends were made to the existing Companies Act, 2013 by the Legislators.

The Government of India, vide General Circular dated 23.03.2020, bearing No. 10/2020, pursuant to the declaration by the WHO on the worldwide pandemic, notified all the stakeholders that that the present crisis would fall under the ambit of pandemic. Additionally, spending of CSR funds for Covid-19 is permissible form of CSR activity.The funds spent on activities would qualify as CSR as enumerated under clauses (i) and (xii) of Schedule VII of the Companies Act, 2013. Pertinently paragraph 2 of the said circular expressly states that items in Schedule VII are broad based and may be interpreted liberally for this purpose.

Vide an Office Memorandum dated 28.03.2020, issued by the Ministry of Corporate Affairs, it was notified that all donations made to the PM Cares fund are eligible to be qualified as CSR expenditure under clause (viii) of Schedule VII.

The Ministry of Corporate Affairs Vide, on 10.04.2020 vide General Circular bearing No.15/2020clarified its position vis-à-vis various FAQ’s, presumably, put forth by companies which made contributions to State Covid-19 Relief Funds and not to the PM National Relief Fund or PM Cares Fund. The Ministry of Corporate Affairs clarified that ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Companies Act, 2013 and therefore, any contribution to such funds shall not qualify as admissible CSR expenditure”.

Recently, on August 24, 2020, MCA issued Companies (CSR Policy) Amendment Rules, 2020 (CSR Rules) and amended Schedule VII of the Companies Act, 2013 (Act) vide a circular and a notification, respectively. Prior to the issue of CSR Rules, activities undertaken by a company (even if such activities are in areas and subjects listed in Schedule VII) in pursuance of its normal course of business were excluded from the ambit of definition of 'CSR Policy'. However, CSR Rules provide an exception to the aforesaid rule for companies engaged in R&D of new vaccine, drugs and medical devices in their normal course of business.

Pursuant to the CSR Rules, companies that are engaged in R&D of new vaccine, drugs, and medical devices are permitted to undertake research and development activity of new vaccine, drugs and medical devices related to Covid-19 for financial years 2020-21, 2021-22 and 2022-23 subject to fulfilment of the following conditions:-

• Such research and development activities shall be undertaken in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act
• Details of such activity shall be disclosed separately in annual report on CSR included in board's report

Accordingly, proviso appearing in Rule 6 of Companies (CSR Policy) Rules, 2014 which states that CSR activities do not include activities undertaken in pursuance of normal course of business of a company, has now been deleted.

It would be important to note that only companies that are engaged in R&D of new vaccine, drugs, and medical devices can reap benefits of CSR Rules whereas all other companies who are engaged in other businesses pursuant to their normal course of business will still remain outside the ambit of the CSR Rules.

This amendment is linked with amendment in definition of 'CSR Policy' under CSR Rules and appears to be a relaxation of a temporary nature which has been introduced as a means to encourage companies and businesses to contribute and engage in R&D of new vaccines drugs and medicines/medical devices for Covid-19, which is evident from the fact that such activities are permitted only until financial year 2022-23. While MCA invited public comments on draft Companies (CSR) Amendment Rules, 2020, the CSR Rules issued by MCA do not seem to notify any of the other proposals which formed part of the draft or any of the recommendations of the HLC.

The intent of CSR Rules and subsequent amendment to Schedule VII of the Act appear to only align with various other measures and steps that are being taken by Government in relation to Covid-19 and will definitely boost contribution of businesses in aiding country's fight against Covid-19.