New CSR Amendment Brings New Challenges for Implementing Agencies

[Tanya Nair is a 4^th year B.A.LLB.(Hons.) student at NLIU, Bhopal]

On 13 March 2020 the Ministry of Corporate Affairs (MCA) invited comments from the public concerning the draft Companies (Corporate Social Responsibility Policy) Amendment Rules, 2020. The draft amendment, once notified, will make significant changes to the corporate social responsibility policies of various companies. The MCA has proposed numerous modifications to the current framework of corporate social responsibility (CSR) in India such as changing the entities can be implementing agencies, introduction of impact assessment, and the like. These amendments have been introduced to implement the suggestions of the High Level Committee (HLC) on Corporate Social Responsibility, which submitted its report in August 2019 with suggestions aimed at creating a more robust and coherent CSR ecosystem. The changes proposed in this draft amendment are also expected to help operationalize the changes introduced by the Companies (Amendment) Act, 2019.

Current Legal Framework

CSR is governed under section 135 of the Companies Act, 2013 read with the Companies (Corporate Social Responsibility) Rules, 2014 (CSR Rules). Section 135 of the Act requires that companies with annual net profit of ₹ 5 crore or more, or annual turnover of ₹ 1,000 crore or more, or a net worth of ₹ 500 crore or more must spend at least 2 percent of their average net profit of the preceding three years towards any of the CSR activities specified in schedule VII of the Companies Act. For this purpose, the company must also establish a CSR committee, which in turn will formulate a CSR policy and earmark funds to be spent for the specified projects.

Proposed Change for Implementing Agencies

A major cause for concern surrounding the draft amendment is that it bars registered trusts and societies from implementing CSR. Contradictorily, the prevalent CSR Rules under rule 4(2) allow registered trusts, registered societies and section 8 companies established by the company itself, or by independent third parties and entities established through an Act of the Parliament or a state legislature, to act as implementing agencies and carry out the company’s CSR activities. However, under the draft amendment, only section 8 companies and entities established by the Parliament or a state legislature may act as implementing agencies for CSR activities.

It is surprising to see this proposal put forth by the MCA, despite the opposing views presented by the High Level Committee’s Report, highlighting the work undertaken by implementing agencies in  executing CSR projects. In fact, the Report states that in the financial year 2017-18, 29 percent CSR activities were carried out by implementing agencies that are not set up by the company itself. The Report also states that “implementing agencies become suitable mode for the companies to execute CSR projects, given their presence in the target areas, local connect and knowledge, besides experience in executing social projects which a company typically lacks.”

While addressing the issue of regulating implementing agencies such as trusts and societies that fall out of the reach of the Companies Act, the High Level Committee had recommended that the board of directors of the company must conduct adequate due diligence of an implementing agency. Here, it is also important to highlight the fact that the registered trusts and registered societies in question are not completely unregulated, and operate within the limits of laws such as the Societies Registration Act, 1860 and the laws on public trusts as enacted by different states, such as the Maharashtra Public Trusts Act, 1950 and the Rajasthan public Trusts Act, 1959. The High Level Committee also suggested that implementing agencies must be registered with the MCA, and the same has been incorporated in rule 4 of the draft Amendment Rules.

The requirement of registration of implementing agencies can be a welcome move to ensure that the MCA has some control over all implementing agencies. Using such control, the MCA can cross-check their activities and also create an authentic and reliable list of implementation partners for companies to select from. However, removing registered societies and trusts instead will only cause greater disruption to companies.

The initial motive behind allowing implementing agencies to carry out CSR activities was to enable companies of all sizes to meet their CSR obligations. While giant conglomerates often have enough resources to set up large scale CSR programmes entirely on their own, not every company can do so. Hence, having relying on implementation agencies made it easier for them to use their funds for social benefit.

Additionally, the existing rules already contain an eligibility requirement stipulating that implementing agencies cannot be set up by the company itself for the purpose of carrying out CSR policies. The proviso to rule 4 states that section 8 companies, trusts and societies not set up by the company itself or by the Parliament or a State Legislature must have a track record of three years in undertaking similar programmes or projects.

These measures together can be sufficient for companies to find and engage bona fide organizations for their CSR activities, and can also help implementing agencies secure funds easily for their philanthropic activities. Hence, it is not necessary for the Government to completely remove registered trusts and societies from the range of implementing agencies, as the above-mentioned safeguards can help the government keep CSR fraud away and also allow trusts and societies with local outreach and resources to partner with companies for the CSR initiatives.

Conclusion

The MCA had issued a deadline of 20 April 2020 for the public to send their comments on the draft rules. While we can expect to have comments against the removal of registered trusts and societies from rule 4, it will be interesting to see what other suggestions are sent in by various stakeholders, and how the MCA will incorporate them in the final rules that may be promulgated.

– Tanya Nair