COVID Expenses Classified as Corporate Social responsibility (CSR)

 

When a company integrates social and environmental trepidations into business operations and interactions it is called CSR or Corporate Social Responsibility. The International Organization for Standardization (ISO) defined CSR through its ISO 26000 standards as under.

“The responsibility of an organization for the impacts of its decisions and activities on society and the environment, resulting in ethical behaviour and transparency which contributes to sustainable development, including the health and well-being of society; takes into account the expectations of stakeholders; complies with current laws and is consistent with international standards of behavior; and is integrated throughout the organization and implemented in its relations.”

 

The advantages of CSR to employees are manifold, as its boosts employee morale and loyalty thereby developing collective interests in social predicaments and dilemmas.  India in April 2014, was the first country in the world to make CSR mandatory by amending the Companies Act, 2013. It was stated that for CSR compliance, companies were allowed to authorize a share of their profits in areas covering poverty, gender parity, hunger and education. Recently, the Ministry of Corporate Affairs after the onset of the COVID 19 pandemic, vide its General Circular No. 10/2020 dated 23rd March, 2020 clarified that spending of CSR funds for COVID-19 formed a part of CSR activity.

 

Since the Ministry of Corporate Affairs announced that the PM cares Fund would be considered as expenditure on Corporate Social Responsibility, many Corporates came forward to donate. It was clarified that, all contributions made to the PM Cares fund qualify as CSR expenditure under the Companies Act 2013. Nevertheless, donations to the PM Cares Fund get 100% tax deductions and were to be spent on activities related to COVID-19 as enlisted under item nos.

(i) eradicating extreme hunger and poverty and

 

(xii) disaster management, including relief, rehabilitation and reconstruction activities of Schedule VII appended to the Companies Act, 2013.

However, MCA has clarified that contributions made to the State’s Relief fund or CM’s Relief Fund does not account to CSR.

The CSR rules now mandate a Company to set aside 2% of their average profit to socially responsible expenses incase of companies with Rs. 5 crore net profit of Rs. 1,000 crore turnover or Rs. 500 crore net worth. However, with the onset of COVID our antiquated CSR will undergo tremendous change. Therefore,  on the contrary small NGOs maybe badly hit, as they may become redundant, as major companies may not fund them anymore, as now plunging into investing in CSR and concentrating on contributing to COVID situation extensively in the wake of all tax rebates, is the main goal. Companies are reducing salaries and taking over costs in order to stay afloat rather than publicising their contributions.

 

 

India has spent about Rs 7,537 crore as CSR obligations in 2 months in order to deal the Covid-19 pandemic, as per one of the studies published by CRISIL. The Prime Ministers Relief fund alone saw a Rs.4,316/- crore donations and Rs 3,221 crore was spent on other relief funds, food and ration donation, masks, sanitizers and protective gear kits. Thereby it’s indicative that 80% of the CSR in this financial year are directed towards the pandemic. Almost 130 big and medium companies have contributed towards CSR leaving behind a very small residue for the causes which the small NGOs have supported. In terms of state wise data, Maharashtra stands to be the leader in CSR contributions with almost 63% of the contributions being done in the state, as it was the most affected by the COVID pandemic. Therefore, it is apprehended that in the next fiscals the CSR budgets will transcend all passed figures.

From the available statistics it is seen that public sector companies represented only around 8 per cent of the companies engaged in CSR, but they contributed to nearly 28 per cent of the total amount contributed till date. On the contrary, even with a total share of 86 per cent, the private companies contributed much lower at around 65 percent of the CSR spend and of this the manufacturing companies contributed the most at 19.96%. The lowest contributing company is the telecom sector at 2.43% of the CSR.

 

Companies have started allocating funds for CSR but do not have a proper functioning structure in place, as a result there is a chance of fraud happening. A well-defined due diligence policy needs to be put in place, as there is a high dependence on third parties to execute CSR programs. Therefore, it is important to monitor the CSR programs and safeguard them against frauds. A committee can be formed to keep a check on the external partner who is implementing the CSR, thereby an outline can be made and regularly monitored to see that the funds for CSR are not misused. The committee can assess if the external partner is in a position to even implement the CSR process, thereby whether they can achieve the CSR target desired.

If the CSR process is not monitored there is a chance that scammers may prey on the public’s despair by selling personal protective equipment (PPE), masks, or may provide futile and untested cures for the coronavirus minus any medical backing. The other type scammers can defraud by floating programs established to benefit small companies, already struggling under the burden brought by COVID-19 slowdown. The prevailing situation may create a desperation to identify alternate purchasing  networks due to restrictions on imports and domestic transportation. This may increase the risk of fraudulent collusion between vendors and employees leading to unwarranted favours and bribes that may grind down the essence of CSR. Further, with stocks getting piled up at godowns there is a chance of them being vulnerable to theft, with reduced staff on account of social distancing to actually monitor the stock at the godowns.  Therefore, companies have to make an initiative to have a complete network of staff to monitor the CSR funding and implementation, thereby using the funds invested in CSR to the best that they can.