Monday, June 23, 2014

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.

No comments: