The quick evolution of corporate social responsibility regulations played a crucial role in helping companies fight the pandemic. Nitin Mittal explains how legal teams rose to the challenge

NITIN-MITTAL
NITIN MITTAL

CCorporate Social Responsibility (CSR) was once relegated to a quiet backwater of the company annual report. Either particular projects were dear to the heart of someone high in the company, or the company found that it was good publicity to adopt the guise of a good corporate citizen. But even adopting a low-visibility approach, a company might find itself fending off disgruntled shareholders at the annual general meeting who demanded that all profit be returned to the owners – those, of course, being themselves. Gradually, the use of company income for CSR projects became subject to legislative control to ensure that funds spent did not raise concerns about conflicts of interest.

The spread of covid-19, however, with its unprecedented challenges and disruptions to normal life, has seen CSR being used increasingly to support official relief measures, or even to fill gaps where public services have been overwhelmed. Such a change to the role of CSR has posed particular challenges to in-house legal departments and private practitioners supplying legal services to businesses.

The Companies Ordinance, 2013 (Act), was a significant consolidating measure. As subsequently amended, under section 135, any company with net worth of at least INR5 billion (USD67 million) and turnover of INR10 billion or more, or making a net profit of INR50 million or more in any financial year, has to establish a CSR committee from the board.

The committee formulates and recommends to the board a CSR policy setting out the activities to be undertaken by the company, recommends the amount of expenditure to be incurred on those activities, and monitors the CSR policy of the company. The board must publicise these activities and shall ensure that the company spends, in every financial year, at least 2% of the average net profit of the company made during the three immediately preceding financial years to fulfil its CSR policy, giving preference to local areas. An amendment subsequently provided for forfeiture if this target was not met.

However, schedule VII to the act restricted CSR activities. The relevant categories are those relating to: Eradicating extreme hunger and poverty; promoting education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating HIV, AIDS, malaria and other diseases; ensuring environmental sustainability; increasing employment enhancing vocational skills; developing social business projects; contributing to the prime minister’s National Relief Fund or any other government or state fund for socio-economic development and relief for the welfare of the scheduled castes, the scheduled tribes, minorities and women; and, in a subsequent amendment by the Ministry of Corporate Affairs (MCA), disaster management including relief, rehabilitation and reconstruction.

When covid-19 struck hard in March 2021, and lockdowns became common, the corporate sector was anxious to help the country overcome the catastrophe. However, despite assurances from the MCA, companies were concerned that if they used their CSR funds for pandemic relief, they would be penalised for aiding programmes that did not fit into the schedule VII categories.

A major problem was that the existing CSR framework was predicated on the donation of money to organisations that would then carry out the specific programmes. The urgent need was for medical face masks and personal protective equipment (PPE), but the existing model did not cater to the producers and suppliers of physical items to get them to the places they were most needed.

Indeed, one of the first interventions by the MCA was an amendment circular to schedule VII to allow companies to contribute to the prime minister’s Citizen Assistance and Relief in Emergency Situations Fund (PM Cares Fund). The permission was deemed to have come into force on 28 March 2020, which was the beginning of the lockdown.

In August 2020, the MCA amended schedule VII to allow contributions, not just of funds, but to a number of academic and public institutions. At the same time any company engaged in research and development activity of new vaccines, drugs and medical devices in their normal course of business was allowed to undertake research and development activity of new vaccines, drugs and medical devices related to covid-19 for financial the years 2020-21, 2021-22 and 2022-23. Such research and development activities are to be carried out in collaboration with any of the institutes or organisations now added to schedule VII.

In May 2021, the MCA confirmed in a circular that the manufacture and supply of oxygen and other medical equipment to counter covid-19 was a permitted activity, and in July 2021, the MCA confirmed that companies could count the supply of vaccines to persons other than employees as a schedule VII activity under the headings of disease prevention and of disaster management. Both these circulars reiterated earlier guidance.

Finally, the MCA attempted to simplify the torrent of guidance and circulars by issuing yet another circular, in August 2021, to which was annexed 21 pages of answers to frequently asked questions. Question-and-answer four dealt with schedule VII but did not deal with much of the guidance that had previously been issued, including that contained in the two circulars referred to in the previous paragraph. The answers also appeared to confirm the restrictive nature of the permitted schedule VII activities.

In-house legal teams and legal practitioners have played important roles in attempting to understand this maze of rules, notifications and circulars, and to update colleagues as such rules, notifications and circulars increased in number and frequently changed what companies were permitted to do under the CSR framework.

The new CSR regime, even after clarifications, is open to interpretation and legal teams have performed magnificently to clear the fog and ensure compliance. For example, in January 2021, these teams had to advise colleagues and stakeholders that, under the CSR programmes, only awareness programmes on covid-19 vaccination were allowed, but not the actual vaccination drives.

The performance of legal teams, especially in the second wave of covid-19, enabled companies to change their strategy instantly, and gave them legal backing to justify the amount spent on activities under their CSR programmes.

Legal teams need to have close oversight over entire CSR programmes, from the planning and inception stages to the final stage of clear and transparent reporting. Under new rules, the legal team needs to ensure whether all implementing agencies are registered with the MCA, otherwise the CSR expenditure will be disqualified.

If companies are implementing projects directly, the responsibilities of the legal teams increase greatly, since there must be a proper accounting procedure to identify valid CSR expenditure claims. Under the amended rules, the annual report on CSR has become a detailed form that must include expenditure, excess amounts spent during the year, set-offs from a previous year, and so on.

If an amount is over the minimum that has to be spent during a financial year, there must be a proper record of prior approval of such expenditure from the CSR committee and the board, otherwise it cannot be set-off against the minimum spending requirements for the next year.

As the MCA extended the scope of CSR activities during the covid-19 pandemic, and provided much needed flexibility to rules to change the CSR programmes during the year, it produced generous contributions to the PM Cares Fund, and companies spent on covid-related relief programmes without hesitation. The support and donations given by companies in such critical times indicate how CSR activities were utilised to fill gaps in public expenditure, and allowed them to fulfil their social duties.

Signify, previously Philips Lighting and a world leader in lighting, had to grapple with the legal question of whether it could donate UV-C disinfecting products and technology, as it was not clear if these were schedule VII-compliant. Once the legal department had analysed the clarification circulars and given the go-ahead, Signify reacted promptly. The company’s products and technology have benefitted more than 300 hospitals and 20 elderly care institutions since the start of the pandemic.

Other companies that supported the cause under their CSR programmes found the inputs of their legal departments crucial in enabling them to stay within the constantly changing CSR framework and help the country meet the covid challenges. These companies included: Members of the Tata Group that manufactured and distributed covid-19 protection equipment and oxygen; the Aditya Birla Group, which made and distributed masks, PPE, ventilators and oxygen; Vedanta, which produced PPE kits for frontline workers; and Mahindra, which set up 50 oxygen plants for charitable and government hospitals across India.

The Indian CSR regime has matured in recent years, and many companies have promptly changed their CSR strategies to meet the crises. Most companies that previously donated funds now use their business expertise and technologies to support initiatives, which produced noticeable results during covid’s second wave. Robust CSR and legal teams are playing a pivotal role during the pandemic, as every day brings new challenges to solve and conquer.

Nitin Mittal is general counsel, India and Pacific Cluster, and Harvinder Kumar is manager, compliance and assistant company secretary at Signify India