New Delhi: India’s corporate affairs ministry has clarified that companies cannot make financial contributions to any ‘Chief Minister’s Relief Fund’ or ‘State Relief Fund for COVID-19′ and claim that as ‘corporate social responsibility’ (CSR) spending as per existing law.
This clarification comes less than two weeks after the ministry of corporate affairs (MCA) said all corporate donations to Modi’s ‘PM CARES Fund’, which was set up to fight the COVID-19 pandemic, could be counted as CSR expenditure that most companies are mandated to make by law.
Instead, corporates will have to donate to a state government’s disaster management authority in order to claim it as CSR spending.
It appears that in the last few weeks, the MCA and finance ministry both received a number of requests over whether donations to ‘Chief Minister’s Relief Fund’ also would count as CSR spending. However, as per existing law, this is not allowed.
“Chief Minister’s Relief Fund or ‘State Relief Fund for COVID-19’ is not included in Schedule VII of the Companies Act, 2013 and therefore any contribution to such funds shall not qualify as admissible CSR expenditure,” an FAQ issued by the ministry noted.
The circular added, however, that corporate contributions made to each individual ‘State Disaster Management Authority ‘to combat COVID-19 “shall qualify as CSR expenditure under item no (xii) of Schedule VII of the 2013 and clarified vide general circular No. 10/2020 dated 23rd March, 2020”.
The Ministry of Corporate Affairs has allowed contributions from companies to state disaster management authorities for fighting COVID-19 to be treated as CSR expenditure. pic.twitter.com/LRPr9dMGmH
— NSitharamanOffice (@nsitharamanoffc) April 11, 2020
These restrictive regulations have attracted criticism from Opposition party leaders, who ask why the rules cannot be amended by the Narendra Modi government, and have also forced states like Tamil Nadu to resort to workarounds.
For example, The Hindu reported late Saturday night that the Edappadi K. Palaniswami government has ordered that all contributions made to the Chief Minister’s Public Relief Fund (CMPRF) towards fighting COVID-19 will now be allocated to the Tamil Nadu State Disaster Management Authority (SDMA).
“We have directed the transfer of the funds to the State Disaster Management Authority, with the intention of making them eligible as CSR expenditure,” a senior TN government official told the newspaper.
Communist Party of India (Marxist) leader Sitaram Yechury has said that the Companies Act should be amended to allow donations to the CM Relief Fund to qualify as CSR.
Corner all CSR monies for his personally named fund & deny States – who are in the frontline of combatting #COVID19 – these funds.
👆🏾This is “Cooperative Federalism”?
Amend Schedule 7 of Companies Act to permit State govts to access these funds which could save millions of lives https://t.co/s2LkEtkB1e
— Sitaram Yechury (@SitaramYechury) April 11, 2020
In addition to this, the ministry’s FAQ also notes that India Inc can also count any “ex-gratia payment made to temporary or casual workers” that they employ as CSR expenditure provided it is made for the purpose of fighting COVID-19.
The ministry, however, has clarified that this is only a “one-time exception” provided to companies only after the board of the company makes an explicit declaration to this effect and it is duly certified by the statutory auditor.
What are India Inc’s CSR obligations?
Most companies are mandated by law to spend 2% of their average net profits (as calculated by the average of the preceding three financial years) on CSR duties.
These CSR funds can be used for a wide range of activities, including helping alleviate poverty and hunger, promoting skill development and education and disaster relief.
At present, companies with a net profit of Rs 5 crore or a net worth of Rs 500 crore or a turnover of Rs 1,000 crore have to spend 2% of their average net profits of the last three years as CSR.
Update: This story was updated at 12:04 AM to add reference to how the TN government is now moving contributions made to the CM Relief Fund for COVID-19 into the SDMA in order to ensure they qualify for CSR spending.