A Critique Of MCA Circular Excluding Donations To State COVID-19 Funds From CSR Expenditure

Eklavya Dwivedi

13 April 2020 6:40 AM GMT

  • A Critique Of MCA Circular Excluding Donations To State COVID-19 Funds From CSR Expenditure

    Introduction Section 135 of the Companies Act, 2013, mandates all companies, having net worth of 500 crore, or turnover of 1000 crore or more or a net profit of 500 crore or more during a financial year to constitute a Corporate Social Responsibility ("CSR") Committee Board. The responsibilities of the Board are enumerated thereunder, with the object of ensuring that every company...


    Section 135 of the Companies Act, 2013, mandates all companies, having net worth of 500 crore, or turnover of 1000 crore or more or a net profit of 500 crore or more during a financial year to constitute a Corporate Social Responsibility ("CSR") Committee Board. The responsibilities of the Board are enumerated thereunder, with the object of ensuring that every company spends, in each financial year, at least 2% of the average net profits of the company, in pursuance of its CSR policy.[1]

    Simply put, it is the responsibility of all companies, which have a net worth of 500 crore or more, turnover of 100 crore or more, or net profit of 500 crore, to :

    • a)Constitute a CSR Company Board ;

    • b)Ensure that 2% of annual net profit is invested in activities enumerated under clauses (i) to (xii) of Schedule VII of the Companies Act, 2013.

    The Central Government, vide General Circular dated 23.03.2020, bearing No. 10/2020, informed all stakeholders that GOI in consultation with WHO, has notified COVID-19 as a pandemic (notified disaster). Further, spending of CSR funds for Covid-19 is permissible form of CSR activity.[2] It was informed that funds may be spent on activities enumerated under clauses (i) and (xii) of Schedule VII of the Companies Act, 2013. Pertinently paragraph 2 of the said circular expressly states that items in Schedule VII are broad based and may be interpreted liberally for this purpose.[3]

    On 28.03.2020, an Office Memorandum was issued by the MCA notifying that all donations made to the PM Cares fund are eligible to be qualified as CSR expenditure under clause (viii) of Schedule VII.[4]

    On 10.04.2020, the MCA issued yet another General Circular bearing No.15/2020, vide which the MCA clarified itsposition vis-à-vis various FAQ's, presumably, put forth by companies which made contributions to State Covid-19 Relief Funds and not to the PM National Relief Fund or PM Cares Fund.[5]

    The MCA in FAQ 2 has clarified that '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". FAQ 3, on the other hand, states that contributions made to State Disaster Management Authority will form part of CSR expenditure. Strangely, FAQ 4 clarifies that funds spent on Covid-19 related activities will fall within the ambit of Schedule VII. Herein lies the contradiction and incongruity in law.

    The Circular is devoid of any rationale basis which such distinctions have been drawn between funds, which otherwise seek to serve the same purpose – containment of the Corona virus and flattening the curve of positive cases.

    Before we examine the legalities of this aforementioned exclusion, it is pertinent to understand the object behind CSR.

    Brief background

    Corporate Social Responsibility (CSR) can be defined as the 'ethical behaviour of a company (or say business) towards society'. It means engaging directly with local communities, identifying their basic needs, and integrating their needs with business goals and strategic intent. The government perceives CSR as the business contribution to the nation's sustainable development goals. Simply stated, CSR is a concept which suggests that commercial corporations must fulfil their duty of providing care of the society.[6] It is the continuing commitment by corporations to behave ethically and contribute to economic development, improving the quality of life of the community and society at large.[7]

    Inherent in CSR is the socio-economic policy of the government to ensure Corporations, which often play a huge role in environmental degradation and excessive wastage of resources, constitute a Board in order to form a policy which would cater to the overall upliftment of the area where the Corporation operates, and of the country at large. It may be looked at as a quid pro quo arrangement between the society and the corporations, which cater to each other's interests though this mechanism. While industry provides employment opportunities and thus facilitates socio-economic progress, it also displaces people, and the onus is, therefore, on the industry to ensure proper infrastructure facilities are in place.

    The need for CSR has increased due to recent rapid increase in the operation of MNC's on the soil of India. Such corporations have often perturbed the lives of the locals. Bhopal Gas Disaster[8], POSCO plant in Odisha, Unilever case of Kodaikanal and many other such instances depicting the negative intrusion of the corporations into the lives of the people. This is a strong factor that has made Government turn its head towards CSR. The tribal, villagers and other socially disadvantaged groups of the population often find themselves at the mercy of government.[9]

    CSR is extremely important for sustainable development of all stakeholders (all the people, on whom the business has an impact, including the society at large). Proponents of CSR argue that companies make more long term profits by operating with a perspective, while critics argue that CSR distracts from the economic role of businesses. Nevertheless, the importance of CSR cannot be undermined.[10] An epidemic [later qualified as a pandemic] which has led to a complete lockdown of the nation, the burden on those who are in position to contribute and ease off the stress on certain sectors like health care and food industry, has never been greater.

    Validity of the Circular

    Now, we proceed to examine the position in law of the statutory guidelines as contained in the Companies Act, 2013. The scope and width of Section 135 has been discussed above. Section 135 has to be read with Schedule VII of the Act. It is here that the activities, which would fall under CSR, have been enumerated. Clauses (i) – (xii) set out the various sectors which may be targeted through CSR contributions. It includes, inter alia, healthcare, socio-economic policies, environment and ecological sustenance, gender equality, education.

    We are concerned primarily with clause (i) and clause (xii) of the said Schedule. The clauses have been extracted below :-

    • -(i) Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the Swach Bharat Kosh set-up by the Central Government for the promotion of sanitation and making available safe drinking water.

    • -(xii) disaster management, including relief, rehabilitation and reconstruction activities

    On a perusal on clause (i) Schedule VII, it is evident that activities which promote health care, including preventive health care, would constitute CSR related activities. Further, the parameters included therein are inclusive and not exhaustive. This can be positively gauged from the 23.03.2020 notification (supra) of the Central Government as well, which recommends liberal and broad based interpretation of the activities enumerated under Schedule VII. So construed, any contribution towards any activity promoting health care and preventive healthcare would form a part of CSR related activities. The contributions made to State relief Funds, in order to mitigate the spread of Covid-19 would fall under this clause. This clause is an inclusive clause and must be read in light of the purpose CSR seeks to achieve.

    Clause (xii) of Schedule VII provides for activities related to disaster management, relief, rehabilitation, et al. Again, construing the said clause liberally, it would entail that contributions made to any fund, Central or State, in pursuance of any rehabilitation policy or for the purposes of providing aid to persons aggrieved by any health exigency, would fall under this clause. Yet again, there exists no distinction in the statute between contributions going to Central and Provincial welfare funds. Central and State funds constituted for the purposes of mitigating the effects of Covid-19 would, by necessary implication, fall under clause (xii). This fact is made even more clear by the Circular dated 10.04.2019, which specifically includes contributions to State Disaster Management Authorities. The relevant part is reproduced below for ready reference :

    "Ministry vide general circular No. 10/2020 dated 23rd March, 2020 has clarified that spending CSR funds for COVID-19 related activities shall qualify as CSR expenditure. It is further clarified that funds may be spent for various activities related to COVID-19 under items nos. (i) and (xii) of Schedule VII relating to promotion of health care including preventive health care and sanitation, and disaster management. Further, as per general circular No. 21/2014 dated 18.06.2014, items in Schedule VII are broad based and may be interpreted liberally for this purpose."

    It is also pertinent to keep in mind the mandate of the proviso to sub-section 5 of Section 135. The immediate concern of every corporation qua CSR related expenditure is to give preference to the local area around which it operates. This criteria is better taken care of by contributing to a State fund, thereby making sure that the contribution is utilized without any lag or laxity in approach. Further, it also slices off the time taken for funds to percolate down the system and reach the concerned States where the requirement is most exigent.

    Without prejudice to the above submissions, let us assume that the impugned circular lays down the correct position in law. This would lead to an anomalous scenario where the Act discriminates between Central and State Funds, which otherwise seek to serve the same purpose - mitigating the spread of the virus. Many states have constituted funds dedicated to Covid-19, which is exactly what the PM Cares Fund has been constituted for.[11] Including the PM Cares Fund within the ken Schedule VII, and excluding all other State funds which are designed for the same purpose, would be manifestly arbitrary and would expose the Act (Schedule VII, in particular) to an attack on the basis of violation of Article 14 of the Constitution.

    Therefore, following the principles of purposive and harmonious construction of statutes, if any expenditure is relatable to any of the activities falling under Schedule VII of the Companies Act, such contribution should be taken as CSR expenditure. Contributions made to State Relief Funds also enable the State to fulfil its duties as regards protection and promotion of health and marginalizing the damage which an infection like Covid-19 proposes to inflict. This interpretation would also be in line with the principles of federalism, oft quoted but never fully adhered to, which is that an interpretation that whittles down the powers of the State should be avoided. The Centre and the State must work together, hand in hand, towards defeating this common enemy.


    Thus, General Circular dated 10.04.2020, bearing No.15/2020, does not lay down the correct position in law. It is submitted that by virtue of Entry 85/96 of List I of the Constitution of India, the power to legislate on any issue relatable to corporate tax falls within the legislative domain of the Union[12], but this power does not authorize the Central Government to override the statutory mandate of the Companies Act, 2013, on the basis of an executive order issued by MCA. The same would be a colourable exercise of power. Only Parliament, by law, can give effect to such exclusion.

    It is up to the various State Governments, or maybe even the big Corporations to challenge General Circular No.15/2020 issued by the MCA on 10.04.2020, and get appropriate relief in the form of a clarification or a direction from the High Courts or the Supreme Court.

    (The author is a Supreme Court Advocate)

    [1] Sub-section 5 of Section 135, Companies Act, 2013.

    [3] see also FAQ 4 in Circular dated 10.04.20, where this position is reiterated

    [6] C. Gopala Krishna, Corporate Social Responsibility in India: A Study of Management Attitudes (Mittal Publications, 1992)

    [7] Sushma Bareja "Corporate Social Responsibility — A Key for better Corporate Governance" (2005) 4 Chartered Secretary 374.

    [8] Union Carbide Corporation v. UOI, (!991)4 SCC 584

    [9] Dr. Sunitha Kanipakam, Reflections of Indian judiciary on Corporate Social Responsibility, International Journal of Applied Research and Studies, Review paper, ISSN: 2278-9480 Volume 2, Issue 4 (April 2013).

    [10] Pushpa Sundar, Business and Community: The Story of Corporate Social Responsibility in India (SAGE Publications India, 2013)

    [11] Chattisgarh, Delhi, Goa, Haryana, Himachal Pradesh, Andhra Pradesh, etc., have all constituted funds specifically for the purposes of tackling Covid-19

    [12] CSR, being in the nature of a compulsory exaction by Govt., would fall under the definition of 'Tax'.

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