While there is no way of knowing if companies are really spending 2% of their net profits, the Centre has removed critical disclosure norms, making CSR activities entirely opaque and unaccountable

Having diluted corporate social responsibility (CSR) spending of domestic and foreign companies by allowing them to divert funds to privately run, opaque and unaccountable PM CARES Fund, build statues, temples and redevelop religious places, the Centre has further undermined it by removing mandatory disclosure norms.

Very few took note of the changes that the September 20, 2022 amendments to the Companies (CSR) Rules of 2014 brought in. These amendments allow a company to omit critical details like (i) identity (ii) location (iii) duration (cumulative spending or impact) (iv) budget and (v) identity of implementing agency for each CSR project or activity as also (vi) reasons for not spending the mandatory requirement – 2% of three-year average net profit.

It also allows a company not to disclose (vii) average net profit in previous three financial years and (viii) “responsibility statement” from CSR committee declaring compliance with CSR objectives and policy of the company.

Why these disclosures are important?

Unless a CSR project is identified, there is no way of verifying the claims. Disclosing its location is important as the CSR law – Section 135 of the Company Act 2013 – says, among others, “company shall give preference to the local area and areas around it where it operates”. This is because the impact of a company’s plant/operation is felt by people (society) and environment (air, water and soil pollution) in its vicinity. A CRS project needs to be designed to mitigate specific adverse impacts of a company’s operations.

That is why the 2014 guidelines for CPSEs specifically asks CPSE directors to “define the scope of the ‘local area’ of their commercial units/plants/projects, keeping in view the nature of their commercial operations, the extent of the impact of their operations on society and environment, and the suggestions/demands of the key stakeholders, especially those who are directly impacted by the company’s commercial operations activities.”

Similarly, disclosing other details like, budget for each project, actual spending on it, identifying implementing agency, explaining why a part of the CSR budget remained unspent and a “responsibility statement” from CSR committee, are all integral to the transparency and accountability mechanism built into the Companies (CSR) Rules of 2014.

All these are now removed.

Instead, the new 2020 Rules of 2022 put more emphasis on “transfer” of the unspent amount.

It provides a format under which such transfers are to be classified: (a) transfer to a fund specified in Schedule VII under Section 135(5) of Company Act of 2013 and (b) under Section 135(6) of the same law.

What is the difference between these two sub-sections?

Sub-section 5 asks a company to specify the reasons for not spending the amount (which is not required under the 2022 Rules now) and unless it is meant for “ongoing” project, the unspent amount should be transferred it to a Schedule VII fund within six months of the “expiry” of the financial year.

Sub-section 6 says if the unspent amount is marked for “ongoing” project, it has to be transferred to a “special account” of the company in a scheduled bank, called “Unspent Corporate Social Responsibility Account”, within 30 days of the “end” of the financial year. If this amount remained unspent after that, it should be transferred to a Schedule VII fund within 30 days of the completion of the third financial year.

Simply put, it facilitates diversion of CSR fund for non-CSR purposes.

The Schedule VII funds are Swachh Bharat Kosh (SBK), Clean Ganga Fund (CGF), PM National Relief Fund (PMNRF), PM CARES Fund and any other central government fund. Now comes another opacity in reporting.

Curiously, the National CSR Portal of the Ministry of Corporate Affairs (MCA) doesn’t disclose how much money has been transferred to the PM CARES Fund, though it does for the SBK, CGF and PMNRF. Its data for seven years of FY15- FY21 (no data for FY22 yet) shows companies transferred Rs 8,195 crore from their CSR kitty to two unidentified funds: (i) “other central government funds” and (ii) “NEC/Not mentioned”.

There is no way of knowing what happened to this Rs 8,195 crore. Besides, Rs 3,258 crore was transferred to the two unidentified funds in FY20 and FY21. All of it could have gone to the PM CARES Fund (set up on March 27, 2020) because, until September 2021, when the PMO told the Delhi High Court that the trust which runs the fund is not a “public authority” and not subject to the RTI Act of 2005, it was sold as a “central government fund”.

The MCA issued an “office memorandum” on March 28, 2020, declaring that “the Government of India has set up the Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund” (PM CARES Fund) with the primary objective of…”

There are other ways in which the Centre is undermining transparency and accountability.

The MCA provides year-wise CSR spend but not what amount companies should be spending at 2% of their average net profits. Nor does it disclose what happens to the huge transfers of CSR money to unknown funds.

The net impact of all this is that there is no way of knowing what is really happening with the CSR projects and funds anymore.

Centre for Financial Accountability is now on Telegram. Click here to join our Telegram channel and stay tuned to the latest updates and insights on the economy and finance.