Injeti Srinivas Committee recommendations and how it is going to change India's CSR practices

It has been seven year since India made the Corporate Social Responsibility (CSR) obligation mandatory for corporate. The six years of experience has not only enriched the country in making CSR more effective but has also underlined few challenges. To understand the trend and make further recommendations for improvement of the Company Act-which governs the CSR- Government of India had constituted a High Level Committee in 2018 under the Chairmanship of Injeti Srinivas, Secretary, Ministry of Corporate Affairs (MCA). The Committee examined CSR data as filed by the companies on March 31, 2019 and submitted its report on August 7, 2019. These recommendations will shape India’s future CSR activities. See the recommendations made by the Injeti Srinivas Committee.

1-      Applicability of the CSR Provisions

The scope of CSR applicability be extended to Limited Liability Partnerships (LLPs) which are within the purview of the MCA. The applicability of CSR may also be extended to Banks registered under the Banking Regulation Act, 1949. The applicability of CSR provisions may also be extended to similarly placed entities not covered under Companies Act through necessary amendments in Companies Act and, if necessary, in their respective statutes.

2-      Applicability of CSR Provisions to Newly Incorporated Companies

A clarification may be issued that for newly incorporated companies the obligation under Section 135 shall lie only after they have been in existence for three years.

3-       Constitution of CSR Committee

Companies having prescribed CSR amount below Rs. 50 lakhs be exempt from forming a separate CSR Committee. The Board itself would carry out the functions of the CSR Committee.

4-      Obligation to carry out CSR and Carrying Forward of unspent CSR Amount

The Committee is of the view that the unspent CSR amount for a particular year be transferred to a separate designated account created for the purpose. Such unspent amount, and the interest earned thereon, be spent within a period of three to five years, failing which the same be transferred to a fund to be specified by the Central Government which may be used for innovative, high impact projects related to activities listed in Schedule VII. Adequate provisions be provided to ensure compliance. A penalty, 2-3 times the default amount, may be imposed subject to a maximum of Rs. 1 (one) Crore upon the default being made good, but there be no imprisonment.

5-      Creation of Capital Assets through CSR spending

Regulatory oversight be exercised through enhanced and granular reporting wherever CSR funds are used for creation of capital assets. Companies be encouraged to forge partnerships when creating assets for public purpose. The ownership shall rest with the public and the company may act as a custodian to operate it and make it self-sustaining.

6-      Undertaking CSR Activities in Local Areas

The emphasis on the local area in the Act is only directory and not mandatory in nature. A clarification be issued advising companies to engage in CSR activities by balancing local area preference with national priorities.

7-      Schedule VII of the Act

Schedule VII be mapped and aligned largely with SDGs and some important items such as promoting sports, senior citizens’ welfare, welfare of differently abled persons, disaster management, and heritage be additionally included to develop an SDG+ framework. The Central Government may, if required, identify a few areas from Schedule VII as priority areas and issue specific directions in this regard.

Contribution to Central Government Funds specified in Schedule VII

Contribution to Central Government funds as specified in Schedule VII be discontinued as CSR spend. However, a specific designated fund may be created for transfer of unspent CSR funds lying with the company beyond the proposed 3-5year time limit.

8-      Deepening CSR Impact

The Committee recommends that a company having an average prescribed CSR amount of Rs. 5 Crore or more in the three immediately preceding financial years, undertake need and impact assessment studies for their CSR programmes/ projects in that year and disclose the same in their Board Report. Such studies be undertaken once in three years

9-      Issues related to Reporting for CSR

The reporting for CSR needs to be strengthened, with enhanced disclosures for better information dissemination with respect to selection of projects, locations, implementing agencies to facilitate better monitoring.

10-   CSR Audit

The Committee is of the view that CSR may be brought within the purview of statutory financial audit, by making details of CSR spending as part of the financial statement of a company, and incorporated in Schedule III of the Act.

11-   Issues pertaining to Implementing Agencies

A clarification be issued that mere disbursal of funds to implementing agencies is not construed as CSR spending. The Board of a company to ensure that CSR funds are duly spent on CSR activities as specified under Schedule VII and report on the modalities of utilization of funds.

12-   Registration of Implementing Agencies

The Board of a Company to ascertain the credibility of an Implementing Agency (IA) and carry out necessary due diligence. IAs to be registered with MCA to carry out CSR activities.

13-   Tax Benefits for CSR Activities

All activities listed under Schedule VII to enjoy uniform tax benefit. CSR expenditure to be made deductible from the income earned for the purpose of taxation. The mode of implementation to be tax neutral. Implementing agencies be treated as partners and not service providers/vendors for CSR activities, so as to address the variable incidence of indirect taxes on them.

14-   CSR Exchange Portal

A CSR Exchange Portal is developed for creating an interactive platform for all stakeholders, including contributors, beneficiaries, IAs, etc. by leveraging the benefits of technology to maximize the potential and outcomes of CSR.

15-   Social Impact Companies

‘Social Impact Companies’ be created as vehicles within the CSR framework, with the express object of pursuing social outcomes, while being permitted to achieve conditional profit which can be distributed. CSR contribution to social impact bonds raised by such Social Impact Companies or not-for-profit companies bringing upfront risk capital may be considered on a pilot basis.

16-   Applicability of BRR to 1000 Companies

The Committee is of the view that the ambit of reporting on BRR be expanded gradually and at this juncture, it be extended to top 1000 companies.

17-   Advocacy of CSR and academic network for CSR

NFCSR to be strengthened to function as the think-tank for CSR. The Government may consider contributing Rupees Ten Crore as seed capital for strengthening NFCSR. It shall build a strong network among all stakeholders and build capacity for CSR. NFCSR may also undertake advocacy for Individual Social Responsibility.

18-   Guidelines for PSUs for effective CSR implementation

The Committee recommends that MCA shall partner with the DPE for comprehensive guidelines for Central Public Sector Undertakings (CPSUs).

19-   Annual Report on CSR

The Committee, therefore, recommends that an Annual CSR Survey may be prepared by the Ministry.

20-   Administrative Overheads

Status quo be maintained on administrative overheads. However, for companies undertaking need & impact assessments, the limit may be extended by an additional 5 per cent.

21-   Alignment of Rule 3(2) with Section 135(1)

The Committee recommends that the Rule 3(2) be deleted.

22-   International Organization to be eligible to undertake CSR as Implementing Agencies

The Committee recommends that international organizations may be engaged as partners for designing CSR projects, monitoring and evaluation as well as capacity building of CSR-eligible companies and implementing agencies. Further, the Ministry may consider specific socially useful CSR projects of international agencies for the purpose of a pilot study. These may be used for demonstration purposes and for scaling up upon successful implementation.

23-   Individual Social Responsibility

The Committee feels that Individual Social Responsibility is not Corporate Social Responsibility. The committee recommends that NFCSR undertake advocacy for Individual Social Responsibility.

24-   CSR expert in the CSR Committee

The Committee recommends that the Board of a company may engage a CSR professional, if it so desires, and the Government may prescribe eligibility criteria for such professionals.

25-   Third Party assessment of CSR Projects

The Committee suggests that 5% of CSR mandated companies be identified on a random basis for third-party assessments on a pilot basis.