Corporate Affairs Ministry to seek legal opinion on diversion from Companies Act

The Chhattisgarh government has sprung a unique and potentially illegal interpretation of the new Companies Act's mandatory Corporate Social Responsibility (CSR) provision on private sector players in the State, by asking firms to deposit their contributions to the Chief Minister Community Development Fund rather than undertake CSR projects on their own.

The new Companies Act makes it mandatory for profit making companies reporting Rs. 5 crore or more profits in the last three years to spend at least two percent of their average profits towards CSR activities. The new legislation could make India perhaps the first country to have CSR spending through a statutory provision.

The Chhattisgarh government has adapted this to set up a Chief Minister Community Development Fund “for the purpose of holistic development of affected districts/district related with the industries (specially the setting up of mega and ultra mega industrial projects)… with the amount to be obtained under Corporate Social Responsibility (CSR)… The abbreviated name of this policy is Corporate Social Responsibility Policy 2013.”

The policy published in the Gazette of Chhattisgarh on May 3, 2013, mandates that public/private companies with net profits (in the previous year) of less than Rs 500 crore will contribute 3% of their annual profits towards CSR to the Chief Minister Community Development Fund, while public/private enterprises with net profits above Rs. 500 crore will have to pay 2% of their annual profits towards CSR with a minimum threshold of Rs. 15 crore (see chart).

“This amount will be deposited by the industrial unit by 30th September every year by Chhatisgarh State Industrial Development Corporation (CSIDC) in the operated fund mandatorily through cheque or other mode (not cash). CSIDC will issue it to the concerned district every year according to the laid down procedure”.

Punishment for non-compliance

The policy further warns that “those industrial units which are obtaining facilities/grant from various departments of State of Chhattisgarh or according to the industrial policy prevailing at that time will have to compulsorily deposit the amount in Chief Minister Community Development Fund, otherwise the grant/facilities being provided by the administration can be taken back. However, they will be given an opportunity to hearing before taking the above action.”

The jurisdiction of this policy is limited to only those industrial units of Chhattisgarh that invest capital in mega industry category or above mega industry category (as defined in industrial policy). In special circumstances, the industrial units directed by the State level committee will also be included. Further, the amount spent under CSR will “always be separate from the amount paid by industrial units in the form of land compensation and the amount spent for rehabilitation (in case of settlement)”.

If it is not possible to calculate the dividend for the concerned industrial house/unit functioning in Chhattisgarh separately, the dividend will be calculated on the basis of proportional production capacity of the unit located in the State. For example, if there are two units in industrial house (A – in Chhattisgarh and B – if in any other state), then for the production done by unit A, the amount of CSR will be calculated on the basis of production percentage of A+B.

N. Baijendra Kumar, Principal Secretary, Commerce & Industry, Forest & Principal Secretary to Chief Minister, Chhattisgarh told The Hindu that roughly Rs. 1,000 crore could be generated through the new policy, though exact estimates had not been worked out.

Legal opposition

When contacted for its view on whether such an adaptation of a Central law by a State administration was permissible, sources in the Union Ministry of Corporate Affairs told The Hindu that the policy document would be sent to the Law Ministry for a legal opinion. “The Chhattisgarh government’s CSR policy document is a freewheeling, standalone adaptation which appears to sidestep the definition of CSR as laid down in the Companies Act. After obtaining a legal opinion we will work to tactfully ensure that all the States are brought on board with the provisions of the new Companies Act,” a senior ministry official said.

“The Chhattisgarh government mandating deposits of the amount computed towards CSR in the Chief Minister’s Community Development Fund appears to run counter to the very spirit of CSR, where the idea is to allow corporate houses to carry out welfare schemes in their vicinity for the benefit of the society. More importantly, this adaptation of the Companies Act appears to be in the nature of a tax or exaction, which can only be done through a legislative Act. And if it is to be in the nature of a tax or a fee, it has to reflect in suitable accountability of the State government towards the legislature, Sitesh Mukherjee, Partner, Trilegal told The Hindu.

Mr. Kumar, however, explained that if left entirely to corporates, CSR could become an escape route, leading to spending on promotional activities being masked as social spending which, in the absence of transparency or adequate verification by the state, could become a highly suspicious activity in the long run.

The policy itself documents its dissatisfaction with corporate delivery on CSR. It states: “At present there is no clear policy for CSR as such. Uncertainty with respect to its legal boundaries persists. Because of absence of a clear and comprehensive policy on CSR such tasks are carried out under CSR by various enterprises which are convenient in ad-hoc form. Many times there is lack of coordination between local community and industries with work related to industries. There is no monitoring system for this also at present. Due to this, the community of affected areas is deprived of getting desired facilities under CSR.”

Various big industrial firms like JSPL, JSW, Moser Baer, Lanco, Bhushan Power & Steel, Vandana, DB Power and others operate in Chhattisgarh. Despite this rap by the government, corporate sources based in the State admitted on condition of anonymity that they were examining the prospects of legally challenging the provisions of the new CSR Policy 2013.

CSR expanded

CSR has also been brought under the ambit of the Chhatisgarh Relief and Rehabilitation Policy 2007. “In this regard, with the mutual agreement of the administration department of the state government and the related industrial unit, 1 to 3 per cent of company’s annual profits will have to be spent and distributed according to the need keeping in mind the special conditions of the area of project and the project”.

CSR is also applicable for projects run under the Environmental Impact Assessment notification 2006 and amended notification 2009 of Ministry of Environment and Forests, Government of India.

The state points out certain special conditions are implemented in the Environment Acceptance Letter issued for the above mentioned units (industry, mining and other projects) in which community development, education, drinking water supply and social and economic development work in the health areas are accomplished by the industrial unit. Out of these, some Environment Clearance Letters do not determine the amount spent under CSR whereas in some environment clearance letters of certain large/medium projects the amount to be spent is specified which is in the form of Capital cost (mentioned as part of total invested amount) and annual recurring cost (which in the form of total invested amount or is related to production with reference to mines). “This is very clear and questionable legal provision in the case of CSR. It can be said that this condition of CSR, is very close to licence condition in the case of environment acceptance letter. In other words, environment acceptance letter is legal only when all its conditions are being met along with the special condition of CSR”. To address this, the CSR Policy specifies that “there should be a condition to deposit the fund obtained in environment clearance in CSR Fund, at the same time there should be a provision to deposit a fixed percentage of the amount of the profit, in case of profits, (whichever is higher) in Community Development Fund”.