Is the Indian CSR Legal Framework COVID Ready?

[Ayush Vijayvargiya is a corporate lawyer in Mumbai and a graduate of NALSAR University of Law]

Since the onset of COVID-19 and the subsequent lockdown in India, there has been constant public demand for increased spending by the Government to address shortage of medical supplies in hospitals, food and monetary allowance to urban and rural poor, shelter and food for homeless people, funding to small businesses, and other relief measures. Even though the Government has, at all levels, taken active efforts, it has failed to dispense relief measures like in other countries, primarily due to lack of funds and other fiscal constraints. In such circumstances, corporate social responsibility (CSR) contributions from companies assumes significant importance, as they could be utilized as a possible avenue for addressing the shortage of funds.

Companies in India appear to have acknowledged the need for such financial and social support in the fight against COVID-19. The past month has witnessed active support from companies in India not only in monetary terms, but also in non-monetary forms. The news media is filled with stories of companies making significant donations to government funds for COVID-19, providing access to preventive healthcare, providing meals to economically weaker sections, and the like. In view thereof, given CSR is a legal requirement in India, I examine whether the existing CSR legal framework (including the recently introduced government directions and FAQs) is adequate to facilitate the optimum utilization of CSR for COVID-19, especially in view of the need for immediate funds.

Existing CSR Framework

The existing CSR legal framework under the Companies Act, 2013 provides that companies with net worth of INR 500 crore or more, or turnover of INR 1000 crore or more, or net profit of 5 crore or more, during the immediately preceding financial year (FY), are inter alia required to formulate a CSR policy in consonance with schedule VII of the Companies Act. Schedule VII specifies the permitted CSR activities, divided under twelve broad categories, including hunger eradication, environmental protection and contribution to the Prime Minister’s national relief fund or any other fund set up by the Central Government for purposes specified therein. Every eligible company is mandated to spend on its CSR activities, in every FY, at least two per cent of the average net profits made by the company in the preceding three FYs. A failure to do the same is required to be disclosed in the board report of the company. However, this ‘comply or explain’ framework is expected to undergo a modification as and when amendments to section 135 of the Companies Act, introduced by way of the Companies (Amendment) Act, 2019, are notified by the Central Government.

In view of COVID-19, as there was some confusion surrounding the treatment of expenditure made in relation to CSR activities, the Ministry of Corporate Affairs (MCA) promptly clarified this through various circulars. By way of its circular dated 23 March 2020, the MCA clarified that items under schedule VII of the Act are to include any funds spent in relation to COVID-19. This was followed by another circular dated 28 March 2020, which specifically clarified that contribution to Prime Minister’s Citizen Assistance and Relief in Emergency Situation Fund (PM CARES Fund) falls within the ambit of item (viii) of schedule VII of the Act and accordingly qualifies as CSR expenditure. However, uncertainty continued to prevail regarding contribution made to state relief funds and employees/ labours /workers’ payment during lockdown. The MCA released a set of FAQs through a circular dated 10 April 2020, which clarified the following:

  • Contributions made to ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19’, not being a part of schedule VII of the Act, will not qualify as CSR expenditure. However, contributions made to State Disaster Management Authority will qualify as CSR expenditure. 

  • Payment of salary or wages to employees, workers, temporary or daily wage workers during the lockdown period (including imposition of other social distancing requirements) will not qualify as CSR expenditure.

  • Any ex-gratia payment made to temporary or casual workers or daily wage workers, over and above the disbursement of wages, specifically for the purpose of fighting COVID-19, will be admissible towards CSR expenditure as a onetime exception.
Inadequacy of the existing CSR framework and resultant recommendations

The aforesaid circulars issued by MCA, although prompt and timely, are only clarificatory in nature, since any change to the Companies Act requires an amendment approved by Parliament. Given the urgency of the situation, the circulars are a step in the right direction, as the time spent in waiting for parliamentary approval would have been counter-productive. However, in order to ensure a greater CSR contribution and address criticism towards on-ground implementation hurdles, certain other changes also become imperative. In view thereof, set out below are suggested amendments to the Companies Act, which may be considered by the MCA in view of the pandemic:
Mandatory utilization of previous financial years’ unspent CSR allocation for COVID-19

As stated above, CSR in India is currently governed by a ‘comply or explain’ framework. However, this enabled an exponential increase in unspent CSR amount over the years, possibly due to the lack of enforcement provision in the Companies Act. To address this shortfall, section 135 of the Act was amended by way of the Companies (Amendment) Act, 2019 to provide that any unspent CSR expenditure in a particular FY should be transferred to a fund under schedule VII of the Act. An exception is that the unspent amounts which pertain to an ongoing CSR project, shall be transferred to a special account and utilized within a specified timeline. However, owing to widespread criticism, such as for taking away the spirit of CSR and attributing a flavor of tax (wherein the companies are expected to comply with the minimum threshold in each FY, failing which penal liabilities are proposed to be imposed), amendments to section 135 have not been notified by the MCA.

The current framework provides companies with complete discretionary and temporal liberties in utilization of previous FYs’ unspent CSR expenditure, and grants no power to MCA to either direct utilization of the said unspent CSR contribution towards action against COVID-19, or mandate its transfer to a fund under schedule VII. Only an amendment to the Act could enable MCA to direct companies to choose from either depositing unspent contribution to the government funds or utilizing it for COVID-19. However, since introducing a new amendment to the Act requires approval of Parliament, it might not be practically feasible especially in view of the current state of affairs involving social distancing and lockdown.

In view thereof, even though the current amendment to section 135 (awaiting notification) only provides for transfer of unspent contribution to PM CARES fund or the State Disaster Management Authority (SDMA), it might be the only feasible option and should accordingly be notified by the MCA at the earliest. Notification of the said amendment would although not allow self-deployment of unspent funds by the companies in fight against COVID-19, but will at least help the Government immediately raise funds and will also provide companies with the autonomy to choose the recipients of their unspent CSR contribution, i.e., State Government or the Central Government. As for the companies still seeking to deploy the funds by themselves towards fight against COVID-19, the CSR allocation for this FY may be utilized.

This is not to forget that the criticism leveled against the amendment to section 135 of the Act raises legitimate concerns, and the same must be assessed by the Government for the longer haul. This cannot however be the reason to not notify amendment to Section 135 to harness urgent and much needed funds for the pandemic. Once notified, the MCA may thereafter continue re-assessment of the modified section 135 of the Act on the policy front and make appropriate decisions for the long-term.

Carrying forward funds spent in CSR contribution towards COVID-19, in excess of the minimum threshold, for set off against the obligations under subsequent FYs

The existing CSR framework only stipulates the minimum threshold that a company is required to fulfill each FY, and does not provide any favorable treatment to a company that makes CSR contribution in excess of the minimum threshold. Thus, any spending in excess of the minimum threshold in any given FY is left unaccounted for in the CSR calculation of a company. This framework, therefore, is not conducive for many companies seeking to spend an amount higher than the minimum threshold in a particular FY, particularly in view of the fund requirement of a project or the overall beneficial impact of such increased spending on the concerned social enterprise. It prevents companies from undertaking many CSR projects which, although extremely valuable, require high investment in one particular phase or year, be it at the start (initial investment) or at the end (closing investment). As a consequence, companies abstain from spending over the minimum threshold and the CSR project suffers in the process.

It appears that this shortfall has already been recognized in the Companies (Amendment) Bill, 2020 which inter alia proposes that CSR expenditure made in excess of the minimum threshold in a given FY may be set-off by the company for such number of subsequent FYs as may be prescribed. This amendment assumes high importance in the context of COVID-19, since CSR contribution from companies is urgently needed. As apparent from the recent trend, companies are willing to actively partake in the fight against COVID-19; however, they are likely to exercise restraint in their CSR contributions, as is there no recognition for contributions beyond the minimum threshold.

Accordingly, in these testing times, where CSR spending from companies is stemming not only from the legal requirement of meeting the minimum threshold but also from a range of motivations including inter alia sustainability, corporate strategy, brand building and other projected long term interests, permitting the set-off of excess CSR spend against the minimum threshold for the subsequent FYs is expected to incentivize the companies and aid its outreach actually being employed. Further, as section 135 of the Act provides emphasis on giving preference to local areas where they operate, recognition of excess spending for the purpose of set off is most likely to give impetus to the local efforts. In view of the above, the Government should aim to get this proposed amendment passed at the earliest.

Eligibility of COVID-19 related state-level government funds for receiving CSR expenditure

As clarified by the MCA, only the contributions to SDMA have been classified as eligible CSR expenditure, and all other state-level funds have been excluded. State governments have opposed this and sought that funds set up by them to combat COVID-19 including the Chief Minister’s Relief Fund (CMRF) and State Relief Funds (SRF) also be recognized as eligible CSR expenditure. They have argued that they are at the forefront of fighting the pandemic at the local level, and require significant funds for the same.

However, unlike the inclusion of PM CARES Fund or the SDMA, basis for which can be found under items (viii) and (xii) respectively of Schedule VII of the Act, CMRF or SRF cannot be categorized as being eligible for receiving CSR expenditure. The reason for exclusion of CMRF or SRF is that it does not qualify under any other item schedule VII, particularly item (viii) which is limited to “any other fund set up by the central government”.  However, since CMRF and SRF serve the same specific purpose as PM CARES Fund, albeit at the local level, it may be useful to classify contributions received therein as eligible CSR expenditure. However, the legal framework consisting of section 135 and schedule VII of the Act does not legally permit such classification.

In view of the present legal framework, an innovative approach has been undertaken by certain State Governments such as Tamil Nadu and Telangana, which have allocated all the funds received in the CMRF and SRF, starting from 24 March 2020, to the SDMA. Such funds, despite being made to the CMRF or SRF will be classified as CSR expenditure. Other State Governments are likely to follow suit. Although in the shorter term, this arrangement could work in gathering the resources, but in the longer run the MCA needs to recognize that purpose of law is enablement of efficient working and not creation of obstacle which requires maneuvering around by the stakeholders. Therefore, schedule VII of the Act should be amended to include funds set up by the State Government within the ambit of item (viii).


COVID-19 presents an unprecedented and urgent task for the Indian economy, thereby demanding display of collective efforts, be it between companies inter-se or between companies and the government. In view of the crisis, failure by corporate sector to initiate efforts would supplement crippling of the economy. Similarly, the Government also needs to recognize the invaluable prowess of expertise, innovation and deep networks possessed by companies, and the role CSR efforts can play in easing the situation. Given CSR is a statutory requirement in India, any optimum utilization of CSR efforts for COVID-19 require requisite enablement from the legal framework. In view thereof, even though the existing CSR legal framework is fairly robust, certain legal reinforcements as set out above become imperative to ensure immediate infusion of additional CSR contribution, its more cohesive utilization and addressing criticism relating to on-ground implementation.

Ayush Vijayvargiya

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