Given the COVID-19 crisis, the Ministry of Corporate Affairs (“MCA”) has been taking many initiatives to support Corporate India including initiatives pertaining to Corporate Social Responsibility (“CSR”). Recently, the MCA expanded the scope of CSR activities by amending item (ix) of Schedule VII and introducing the Companies (CSR Policy) Amendment Rules, 2020.
Background: As per section 135 of the Act, any company with a profit of INR 50 million (USD 650,000) or turnover of INR 1 billion (USD 14 million) or net worth of INR 5 billion (USD 70 million) or more in the preceding financial year is required to expend at least 2% of three years’ average net annual profit on CSR activities specified under Schedule VII of the Act.
CSR activities: Schedule VII of Companies Act specifies permissible CSR activities. These include activities relating to eradicating hunger, poverty & malnutrition; providing and promoting healthcare; promoting education; environmental sustainability; promoting gender equality & women empowerment; setting up old age homes, day care centres and homes & hostels for women and orphans; protection of national heritage, art & culture; measures for benefit of armed forces veterans; training to promote sports; and contribution to the government relief and disaster management funds. By general circular 10/2020 dated March 23, 2020, the MCA made spending of CSR funds for COVID-19 an eligible CSR activity. Further, by G.S.R. notification 313(E) dated May 26, 2020, it also added contribution made to the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund i.e. “PM CARES Fund” as eligible CSR expenditure.
Recent amendments: By GSR 525(E) dated August 24, 2020, the MCA amended item (ix) of Schedule VII to add contribution to Research & Development projects in the field of science, technology, engineering and medicine as well as Ministry of Ayurveda, Yoga and naturopathy, Unani, Siddha and Homoeopathy (AYUSH). Item (ix) enumerates contribution to incubators funded by Central Government or State Government or Public Sector Undertaking or any agency thereof, public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defence Research and Development Organization (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology engaged in conducting research in science, technology, engineering and medicine aimed at promoting Sustainable Development Goals (SDGs).
Further, by GSR 526(E) of August 24, 2020, the MCA also introduced the Companies (CSR Policy) Amendment Rules, 2020. As per previous Rule 2, activities undertaken as normal course of business were excluded from the scope of CSR activities. Now, by amended Rule 2, the MCA allows R&D activity of new vaccine, drugs and medical devices related to COVID-19 for financial years 2020-21, 2021-22 and 2022-23 as CSR expenditure, even if these are in normal course of business. However, such R&D activity must be carried out in collaboration with institutes mentioned under item (ix) and such details must be disclosed in CSR annual report to be annexed to the board report. Furthermore, the MCA also amended Rule 4 & 6 and clarifies that any of the activities carried out in normal course of business will also be covered under CSR activities, but only if they are covered under Schedule VII.
PSA view: There has been extensive debate about whether activities covered under “normal course of business” should be permitted for CSR expenditure as long as they fall within the scope of Schedule VII. With its latest CSR Amendment Rules, the MCA has taken a long overdue step which will not only assist corporate India with its CSR compliance but also improve and enhance R&D activities to combat the present pandemic.