MCA Clarification on CSR

The provisions of the Companies Act, 2013 and the
relevant Rules thereunder relating to corporate social responsibility (CSR)
have come into effect from April 1, 2014. Since this concept is novel in India
from a regulatory standpoint, several difficulties are bound to rise in its
implementation. Matters are compounded further because the nature of the Act
and Rules are extremely prescriptive in nature, including as to what matters
fall within the purview of CSR and what do not. Not only have the Rules made
the scope of the CSR provisions quite restrictive in nature (as discussed here),
but the type of matters covered within CSR under Schedule VII of the Companies
Act have undergone
amendments
even before coming into effect.
Given all these complexities, the Ministry of
Corporate Affairs (MCA) last week issued a
clarification
regarding the CSR provisions under the Act and the Rules. It
is evident that industry was concerned regarding the scope of CSR activities in
Schedule VII, which are quite restrictive in nature. Now, the MCA has clarified
that “the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects
enumerated in the said Schedule” and that the “items listed in the amended
Schedule VII of the Act, are broad-based and are intended to cover a wide range
of activities”. Illustrations of various types of activities are provided in the
clarification. This suggests that the MCA is willing to provide some level of
flexibility to the corporate sector in implementing the CSR policy.
While this clarification enlarges the scope of
CSR activities, the prescriptive nature of the regulation continues to be demonstrated
further. For example, several limitations have been placed. One-off events are
excluded from being part of CSR. Expenses incurred in compliance with statutes
and legislation are excluded. These indicate that the approach of heavily
regulating CSR will be accompanied by its own set of problems. While lack of
clarity in the regulation will give rise to uncertainties as witnessed in the
need for MCA to issue clarifications, but it is also likely that industry
players may come out various structures that may have to tested against the
touchstone of the regulation. In the ensuing contest between regulators and the
industry, the focus is likely to be on the micro-level aspects of regulation
rather than the overall philosophy of social responsibility of corporations,
which one would lose sight of in the process.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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