Context
Corporate Social Responsibility (“CSR”) has remained a buzzword for multinationals, policy makers, consumers and other stakeholders alike. While every country has a CSR regime, the Indian CSR regime is unique due to its distinctive departure from the voluntary nature, which is one of the core aspects of a CSR framework. India is the only country in the world which has made both, the spending and reporting of CSR obligations mandatory. The new CSR regime notified by the Ministry of Corporate Affairs (“MCA”) on January 22, 2021 brought about a fundamental shift from the erstwhile ‘comply or explain’ regime to a mandatory CSR regime. This includes specific obligations relating to CSR fund disbursement, ‘utilisation’ of disbursed funds, monitoring and evaluation.
There are arguments suggesting that the rationale for regulating companies’ CSR activities stems from the current developing stage of the Indian economy. Regulations at this stage promote responsible practices and enhance transparency, accountability as well as public trust in corporates. However, there are certain aspects of the CSR framework in the Indian context which merit reconsideration. Given the deviant nature and specificities of the CSR framework in India, this piece highlights the need for permitting CSR in kind as an eligible expenditure.
Permissibility of CSR in Kind – Existing Legal Position
The Companies Act, 2013 (“CA, 2013”), Companies (Corporate Social Responsibility Policy) Rules, 2014 (“CSR Rules”) and Frequently Answered Questions (“FAQs”) issued by MCA form the legal structure of CSR framework in India.
Section 135(5) of the CA, 2013 provides that, “The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years (or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years), in pursuance of its Corporate Social Responsibility Policy.” Schedule VII of the CA, 2013, which is to be read with Section 135, sets out the list of permissible CSR activities that include education, poverty, gender equality, environmental sustainability, protection of national heritage to name a few.
The MCA has clarified in its Frequently Answered Questions (“FAQs”) in relation to the provision that, (i) CSR contribution cannot be made in kind and monetised; and (ii) the company has to spend the amount.
‘Normal Course of Business’ – The Key Encumbrance
The phrase ‘normal course of business’ under Rule 2(1)(d)(i) of the CSR Rules has not been defined.
It may be read in parity with ‘ordinary course of business,’ which has been defined in Black’s Law Dictionary (8th edn.) as “the normal routine in managing a trade or business.” According to Ramanatha Aiyer’s Advanced Law Lexicon (3rd edn.), ‘ordinary course of trade’ in the context of anti-dumping law “indicates the current routine of business which was usually followed by the person”.
The decision of the Delhi High Court in Mohd. Ahmed v. Union of India [1] is relevant to understand what constitutes ‘normal course of business’ in the context of CSR. An affidavit filed by the MCA clarified that an activity carried out by a company covered under Schedule VII and is a part of its core business, qualifies as a CSR Activity if not done with a profit motive. The relevant portion of the Delhi HC judgment is reproduced below for reference:
“77. On 28th March, 2014, the Ministry of Corporate Affairs filed an affidavit clarifying the scope of the term “normal course of business” used in Rules 4 and 6 of the Companies (Corporate Social Responsibility Policy) Rules, 2014, by giving the following example : –
“….a pharmaceutical company donating medicines/drugs within section 135 read with Schedule VII to the Act is a CSR Activity, as the same is not an activity undertaken in pursuance of its normal course of business which is relatable to health care or any other entry in Schedule VII.”
78. This Affidavit clarifies that an activity carried out by a Company covered under Schedule VII which is a part of its core business, if not done with a profit motive, amounts to a CSR Activity. The aforesaid letter and affidavit of Ministry of Corporate Affairs are taken on record and accepted by this Court. Government of India is held bound by the same”. (emphasis supplied)
The FAQs on CSR by Corporate Laws & Corporate Governance Committee ICAI hs also provided clarity in this regard. According to the FAQs, activities that are carried out as a pre-condition for setting up a business or as part of a contractual obligation undertaken by the company or obligations under law do not constitute CSR. For example, installation of rainwater harvesting or a device to prevent pollution, which are mandatorily required to be carried out by law, do not qualify as CSR spend.
The key test for determining a ‘CSR Spend’ is to assess whether the expense provides any benefit or profit to the company and whether it conforms to Schedule VII of the CA, 2013 as well as the CSR Rules. If a company engaged in imparting education undertakes activities in relation to the education sector – such expenses would not be included within CSR since it is in the normal course of business. However, if a company sets up an educational institution with concessional fees and creates opportunities for its students to be hired by said company, it would constitute CSR, even though access to a young talent pool indirectly benefits the company.
Divergent View of ICSI and ICAI
Section 135 comes under Chapter IX of the CA, 2013 (Accounts of the Companies), which indicates that concerns around CSR payment in kind are interlinked to accounting concerns that arise in monetising such expenditure incurred in kind. Therefore, advisories issued by institutes such as the Institute of Company Secretaries of India (“ICSI”) and the Institute of Chartered Accounts of India (“ICAI”) become relevant in our discussions.
An indicative reference can be found in the ICSI’s FAQs on CSR, where the question ‘can a company monetise CSR contribution in kind as eligible CSR expenditure’ has been answered in the negative, emphasizing that the company has to spend the amount.
On the other hand, the ICAI’s ‘Accounting Expenditure on CSR Activities’ (“Guide”) provides detailed guidance on the recognition, measurement, presentation and disclosure of expenditure on activities relating to CSR. The Guide includes some examples of expenditure made in kind, which can be considered as eligible CSR expenditure.
Some of these include donation of medicines by a pharmaceutical company, which would not have been undertaken during the normal course of business, related to health care or any other entry in Schedule VII of the CA, 2013. Another example includes a company manufacturing goods, distributing or selling goods other than those which it manufactures in the normal course of business.
Further, the Western India Regional Council (“WIRC”) of ICAI reference manual 2022-23 is of the opinion that a company supplying its goods and services manufactured or provided by it free of cost or at a concessional rate to people affected by natural calamities like flood, earthquake, will also be recognised as CSR spending apart from the CSR spends which are easily identifiable by the company.
Merits of Permitting CSR Payment in Kind
The advantages of allowing CSR payment in kind are manifold.
Firstly, allowing CSR payment in kind allows companies to utilise their already built capacities and helps them align the CSR policies and initiatives with their resources and brand image. In addition to this, it is neither practical nor logical for all companies to engage in the same types of CSR since CSR programs are driven by diverse factors. These include the industry and the societal environments in which businesses operate and the motivations of the people who run and govern the company. For example, a fast-food operator will be better served and equipped to collect excess food from supply chain partners and deliver it to local food pantries than by an employee blood-donation program. Therefore, the time spent by the employees of the fast-food operator in conducting such programs should be allowed to be recognised as CSR expenditure.
Secondly, allowing the expenditure incurred by utilising the companies’ employees for certain projects (as CSR activity) also helps boost employee morale and increase employee motivation. According to Harvard Business School, nearly 70% of employees say they prefer working for a company with a strong purpose. As much as 90% of employees who work at companies with a strong sense of purpose say they’re more inspired, motivated, and loyal, and 92% of employees who work at a socially responsible company say they would be more likely to recommend their employer to those in their network who are looking for a job. Further, research also shows that engaged employees have a 17% increase in productivity, are 21% more profitable, and can have 41% lower absenteeism. Large multinationals have the advantage of strong employee numbers, and collective employee engagement efforts increases workplace morale and boosts productivity, which directly leads to an increase in a company’s overall performance.
In the past, many instances of misappropriation of funds meant for CSR have been reported. Examples of this also include several registered NGOs and trusts. This is due to the monetary nature of CSR compliance coupled with the unwillingness of businesses to carry out effective due diligence in selecting their choice of establishment or cause. Permitting CSR in kind would not only eliminate the possibility of such misuse and laundering but also compel corporates to actively engage with the process.
Lastly, recognising CSR payment in kind as CSR spending by companies can be an important step in promoting the discourse in India that CSR should be popularised but not imposed. Allowing CSR payment in kind helps in emphasising that the focus of CSR spending is not on the means and modes used for its spending but the impact that the companies’ CSR policies seek to achieve.
Concerns in allowing CSR Payment in Kind
There is an inherent trust deficit in how the government perceives the private sector. This has permeated the discourse on CSR in kind. The CSR HLC Report 2015[1] had considered whether contributions made in kind should be included as a part of CSR expenditure. They argued against it because, (a) corporates may use it as a clandestine route to avoid/circumvent their CSR mandate; (b) corporates may distribute their rejected/ sub-standard or unsold products close to the date of expiry; (c) IT companies and others may distribute obsolete and used hardware or software; (d) there may be a demand-supply mismatch, particularly in the case of medicines; (e) it would circumvent the ‘normal course of business’ rule; and (f) valuation of such activities would pose as a problem.
The ‘sachet revolution’ of the 1980s is a good example to understand these concerns. The concept of offering expensive products small packages at affordable prices was targeted at the rural market, which was undeniably larger than its urban counterparts. It not only made daily essentials such as soap and shampoo more accessible and affordable, but also created a demand for the brands selling those products. In some cases, FMCG[2] companies have implemented schemes to sensitise rural population to the importance of hygiene by supplying their own hygiene-related products. This clever marketing strategy leverages CSR to create tangible business benefits by breaking into an untapped market. Permitting CSR compliance in kind may entangle it with companies’ profit-making motives that may defeat the purpose of such a policy.
Concluding Thoughts
The CSR obligation prescribed under Section 135 of the Companies Act, 2013 and the CSR Rules aims to create a regulatory framework for enabling corporates to contribute towards social and human development objectives. Since it aims to achieve a social objective, they can be categorised as a ‘beneficial legislation’.
In Delhi Development Authority v. Virendra Lal Bahri[3], the Supreme Court of India (‘SC’) held that a beneficial legislation should be interpreted in a manner that furthers its purpose and objective. It stated that if there two possible interpretations of a provision of a beneficial legislation, the Court must adopt the interpretation that is in accordance with the beneficial object sought by the statute. In Union of India v. Prabhakaran Vijaya Kumar[4], the SC has also held that the provisions of a beneficial legislation should receive a liberal and broad interpretation. The interpretation which advances the objective of the statute and serves its purpose should be adopted.
In accordance with the principles laid down by the Supreme Court, a view that may defeat the objective of the statute should not be adopted.
In the same vein, the potential for difficulties should not stand in the way of enacting or furthering the objective of beneficial legislation such as CSR. It is the responsibility of the government to put in place relevant checks and balances to ensure corporates do not exploit the law. A possible solution to address the apprehensions expressed in permitting CSR in kind may be mandating companies to institute schemes under which they are permitted to donate their own products instead of allowing such donation to occur in isolation. For example, if an IT company seeks to donate computers, it should formulate a scheme to train individuals on their use and integrate it with their intended purpose. More specifically, if the company is donating computers for learning in classrooms, it may devise a program to guide the recipients on enhancing teaching techniques with the help of such computers.
Further, in dealing with the concern on valuation, one may refer to the Guide on CSR expenditure published by the ICAI.[5] It has stated that the value of goods supplied by a company that manufactures it would be the quantum of CSR expenditure, calculated in accordance with Ind AS 2.[6] In the case of services being offered, the cost of services would be regarded as the CSR expenditure. For both, indirect taxes such as GST and service tax would also be included in the calculation.
While the current CSR regime does not allow in-kind contributions, the benefits of accreditation, if permitted, would outweigh such disqualifications.. This is not only in terms of CSR objectives but also about mutual gains that CSR brings to both companies and its recipients.. Despite accounting bodies issuing opinions that provide for expenditure made in kind to be claimed as CSR expenditure, there have been instances demonstrating the contrary. For example, during the Covid-19 pandemic, pharmaceutical companies distributed medicines as a part of relief activities but were not allowed to treat the same as CSR expenditure. Therefore, there is a definite need to revisit the current CSR regime in India to identify and widen its application for meaningful accomplishments.
[1] Report of the High Level Committee headed by Anil Baijal in September, 2015.
[2] Fast-Moving Consumer Goods
[3] Delhi Development Authority v. Virendra Lal Bahri, 2019 (10) SCJ 546, See also Eera v. State of NCT of Delhi, (2017) 15 SCC 133.
[4] Union of India v. Prabhakaran Vijaya Kumar, (2008) 9 SCC 527. See also Kunal Singh v. Union of India, AIR 2003 SC 1623 & Jeevanlal v. Appellate Authority, AIR 1984 SC 1842.
[5] Technical Guide on Accounting for Expenditure on Corporate Social Responsibility Activities by the Institute of Chartered Accountants of India, June 2020.
