IN SOCIETY’S NAME

Context: CSR is the effort that corporates make to contribute to the interests of society as a stakeholder. How can CSR funds be applied to business expenditure?

  • As per a media report on June 19, 2019, Ministry of Corporate Affairs (MCA) had served a notice on May 31, 2019, under Section 206 of the Companies Act, 2013, on May 31, 2019 to a large listed Company for allegedly diverting funds, amounting to INR 1,740 crores, which were earmarked for mandatory CSR activities, to its own existing businesses. This had allegedly resulted in the Company violating CSR norms.
  • Section 206 of the Companies Act, 2013 relates to the Registrar’s power to call for Information, inspect books and conduct inquiries relating to a company.
  • According to the media report, a complaint was made by a whistle blower to the Department of Economic Affairs of the Ministry of Finance. As a result, there were 3 projects reported under the CSR activities of the company, 2 hospitals and 1 university, which came under the scanner.
  • MCA had asked the Company to furnish details about funding, operations and revenues for each of the three CSR projects for all financial years, starting 2014-15 till the date of the notice.
  • As per the media report, the Company had reported an expenditure of INR 2,816 crore (INR 2726 crores as per the annual reports of the company for the relevant time period), against the prescribed amount of INR 2,414 crores between 2014 to 2018. Of this, the company spent a total of INR 1,141 crores, INR 590 crores, and INR 8 crores (INR 9.69 crores as per annual reports of the company) on the 3 projects in the years which were being investigated.
  • MCA had asked Company’s top officials to appear before it in person.
  • MCA had stated that "Prima facie, you appear to be in violation of provisions of Companies Act, 2013 as use of CSR as a source of funding an existing business is not permissible. A final opportunity is being accorded to you to explain your compliance of CSR provisions... You are requested to appear for a hearing on the matter, in person, to demonstrate through legal documents how the prescribed CSR amount has been spent and CSR compliance has been made. In case compliance of CSR provisions can't be demonstrated, formal inspection under Companies Act shall follow". Also, MCA had found the company's reply to its earlier letter "not satisfactory".
  • It was also reported that the 3 projects/ companies too will be under scanner.
  • On June 19, 2019, Stock Exchanges sought clarification from the Company on the media report published.
  • On June 24, 2019, the Company clarified that MCA had been seeking information from the Company from time to time about its CSR activities. It had been providing information in response to the requirements of MCA. MCA had sought additional information on CSR projects and the Company was in the process of providing the same to MCA. Further, the company stated that it had carried out its CSR activities on PAN India basis through its implementation agency, which was its own Foundation, and also in co-operation with certain other reputed agencies. The Company was proud to be the largest corporate contributor to CSR in India.
  • The Company also mentioned that it was in compliance with CSR requirements under the Companies Act, 2013 and detailed disclosure was made in the Annual Report of the Company each year, which was duly certified by the Company’s Statutory Auditors.
  • The 3 projects were reported under the CSR Report (in the annual report) of the Company. But none of them explicitly stated that it was not-for-profit project. The two hospitals were founded in 1990s, and and the university was work-in-progress.
  • The Statutory Auditors’ report or Secretarial Auditors’ Report for FY 2019-20 mention nothing in relation to the MCA notice. The Annual Report of FY 2018-19 and 2019-20 does not mention anything in relation to the whistle blower complaint.

Points to ponder

  • Were the projects not-for-profit entities? If so, could compliance with CSR provisions not have been established?
  • What do you make of the non-mention by the Auditors, of the notice received from MCA?

EXCUSES OR EXPLANATIONS?

Context: A large listed entertainment company saw the exit of a couple of Directors inter alia because of non-performance of CSR obligations.

  • One Independent Director (ID) and one Non-ID resigned from the Board of a Company on November 22, 2019, citing several instances of poor corporate governance in FY 2018-19.
  • One of the concerns raised by them was that there was laxity in spending Corporate Social Responsibility (CSR) amounts given to the related party Foundation/ Trust.
  • Stock Exchanges sought clarification regarding the reasons cited by the Directors in their resignation letters.
  • On CSR spends, the Company stated that the funds were allocated in compliance with law. This was also certified by the Chair of CSR Committee. It also stated that the necessary certification was obtained.
  • The Company also stated that its Board of Directors had noted all the issues raised by the Directors who had resigned. The issues had been duly discussed, deliberated and acted upon from time to time in the previous Committee/ Board meetings in which those 2 Directors were also present.
  • As per the Annual Report for FY 2018-19, as on March 31, 2019, the Company had an unutilised CSR amount of INR 394.81 million, out of a budget of INR 621.78 million, including INR 224.65 million which was carried forward from the previous year.
  • Of the INR 226.97 million which was spent, INR 222 million was spent through the Foundation of the promoter, and the remaining (INR 4.97 million) were direct spends by the Company.
  • As per the Annual Report for FY 2019-20, as at March 31, 2020, the Company had an unutilised CSR amount of INR 880.18 million, out of a budget of INR 880.90 million, including INR 394.81 million which was carried forward from the previous year. INR 0.72 million, which was spent, was spent directly by the Company.
  • The reason for unspent CSR amounts in both the years was stated to be non-availability of suitable CSR Projects.

Points to ponder

  • Should CSR amounts be placed with the foundation or trust with suitable projects not being available?
  • Is a related party foundation or trust the best instrument to implement CSR?
  • If a thrust idea has been identified for the Company’s CSR initiatives, would there have been a shortage of CSR projects?
  • Should there be more than one implementation agency as a measure of risk diversification?